UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-04550
THE MAINSTAY FUNDS
(Exact name of Registrant as specified in charter)
51 Madison Avenue, New York, NY 10010
(Address of principal executive offices) (Zip code)
Robert A. Anselmi, Esq.
51 Madison Avenue
New York, New York 10010
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 576-7000
Date of fiscal year end: 10/31/03
Date of reporting period: 01/01/03-10/31/03
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay Convertible Fund
versus Credit Suisse First Boston(TM)
Convertible Securities Index and Inflation--
Class A, Class B, and Class C Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year and 10-Month Performance 6
Portfolio of Investments 9
Financial Statements 16
Notes to Financial Statements 22
Report of Independent Auditors 31
Trustees and Officers 32
The MainStay(R) Funds 35
</Table>
This page intentionally left blank
2
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
3
$10,000 Invested in MainStay Convertible
Fund versus Credit Suisse First Boston(TM)
Convertible Securities Index and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 11.94%, 5 Years 7.26%, 10 Years 7.93%
[PERFORMANCE LINE GRAPH]
<Table>
<Caption>
CREDIT SUISSE FIRST
MAINSTAY CONVERTIBLE BOSTON CONVERTIBLE
PERIOD END FUND SECURITIES INDEX1 INFLATION (CPI)2
- ---------- -------------------- ------------------- ----------------
10/31/93 $ 9,450.00 $ 10,000.00 $ 10,000.00
10/31/94 9,693.00 9,823.00 10,261.00
10/31/95 11,236.00 11,342.00 10,543.00
10/31/96 12,721.00 13,130.00 10,865.00
10/31/97 14,809.00 15,716.00 11,092.00
10/31/98 14,273.00 15,113.00 11,257.00
10/31/99 17,295.00 19,197.00 11,545.00
10/31/00 21,636.00 23,880.00 11,944.00
10/31/01 19,142.00 19,552.00 12,198.00
10/31/02 18,102.00 17,671.00 12,452.00
10/31/03 21,442.00 22,978.00 12,706.00
</Table>
CLASS B AND CLASS C SHARES
Class B Total Returns with Sales Charges: 1 Year 12.55%, 5 Years 7.41%, 10 Years
7.88%
Class C Total Returns with Sales Charges: 1 Year 16.55%, 5 Years 7.68%, 10 Years
7.88%
[PERFORMANCE LINE GRAPH]
<Table>
<Caption>
CREDIT SUISSE FIRST
MAINSTAY CONVERTIBLE BOSTON CONVERTIBLE
PERION ENDING FUND SECURITIES INDEX1 INFLATION (CPI)2
- ------------- -------------------- ------------------- ----------------
10/31/93 $ 10,000.00 $ 10,000.00 $ 10,000.00
10/31/94 10,257.00 9,823.00 10,261.00
10/31/95 11,822.00 11,342.00 10,543.00
10/31/96 13,319.00 13,130.00 10,865.00
10/31/97 15,403.00 15,716.00 11,092.00
10/31/98 14,741.00 15,113.00 11,257.00
10/31/99 17,741.00 19,197.00 11,545.00
10/31/00 22,030.00 23,880.00 11,944.00
10/31/01 19,350.00 19,552.00 12,198.00
10/31/02 18,156.00 17,671.00 12,452.00
10/31/03 21,342.00 22,978.00 12,706.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION, PLEASE VISIT WWW.MAINSTAYFUNDS.COM. Performance tables and
graphs do not reflect the deduction of taxes that a shareholder would pay on
distributions or Fund-share redemptions. Total returns include change in
share price, reinvestment of dividend and capital gain distributions, and
maximum applicable sales charges explained in this paragraph. The graphs
assume an initial investment of $10,000 and reflect deduction of all sales
charges that would have applied for the period of investment. Class A share
performance reflects the effect of the maximum 5.5% initial sales charge and
includes the historical performance of the Class B shares for periods from
the Fund's inception on 5/1/86 through 12/31/94. Performance figures for the
two classes vary after 12/31/94, based on differences in their sales charges
and expense structures. Class C share performance includes the historical
performance of the Class B shares for periods from the Fund's inception on
5/1/86 through 8/31/98. Class B shares would be subject to a contingent
deferred sales charge (CDSC) of up to 5% if redeemed within the first six
years of purchase, and Class C shares would be subject to a CDSC of 1% if
redeemed within one year of purchase.
1. The Credit Suisse First Boston(TM) Convertible Securities Index is an
unmanaged index that generally includes 250 to 300 issues. Convertibles
must have a minimum issue size of $50 million; bonds and preferreds must
be rated B- or better by S&P; and preferreds must have a minimum of
500,000 shares outstanding. Eurobonds are also included if they are issued
by U.S.-domiciled companies, are rated B- or higher by S&P, and have an
issue size of greater than $100 million. Results assume reinvestment of
all income and capital gains. An investment cannot be made directly into
an index.
2. 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. The rate of inflation does not represent an
investment return.
4
Portfolio Management Discussion and Analysis
The first 10 months of 2003 presented a number of challenges for equity
investors. In addition to facing the volatility associated with military action
in Iraq, investors had to contend with a constant stream of mixed economic
indicators, which added to the volatility and uncertainty of the stock market.
Although initial signs of an economic recovery began to take shape toward the
end of 2002, stocks declined through much of the first quarter of 2003. After
the stock market reached its year-to-date low in mid-March, stocks rallied
sharply through the end of the reporting period.
The Federal Reserve lowered the targeted federal funds rate by 25 basis points
in June 2003, its thirteenth easing move since the beginning of 2001. The latest
move brought the targeted federal funds rate to 1.0%, a four-decade low. Real
gross domestic product grew at a modest pace in the first quarter of 2003,
somewhat faster in the second, and quite rapidly in the third. According to
preliminary estimates by the Bureau of Economic Analysis, real gross domestic
product grew at a seasonally adjusted annual rate of 8.2% in the third quarter
of 2003, its fastest pace since the first quarter of 1984.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Convertible Fund returned
15.86% for Class A shares and 15.09% for Class B and Class C shares, excluding
all sales charges. All share classes underperformed the 20.49% return of the
average Lipper(1) convertible securities fund. All share classes also
underperformed the 21.78% return of the Credit Suisse First Boston(TM)
Convertible Securities Index(2) for the 10 months ended October 31, 2003.
As of October 31, 2003, Morningstar(3) rated MainStay Convertible Fund Class C
shares four stars overall out of 63 convertible funds. The Fund's Class C shares
were rated three stars out of 63 convertibles funds for the three-year period
then ended and four stars out of 54 convertibles funds for the five-year period
then ended.
STRONG PERFORMERS
The Fund had an eclectic group of strong-performing securities during the report
ing period. Many were direct beneficiaries of the improving economy. Auto and
truck manufacturer Navistar International performed well as signs of an up turn
in demand for heavy- and medium-duty trucks continued to emerge. Construction-
and agricultural-machinery company Caterpillar also contributed positively to
performance. Caterpillar sells construction equipment, and if the economy grows,
we believe that Caterpillar's stock will perform very well. Con versely, if the
economy falters the company's convertible bonds should provide a degree of
downside protection.
- -------
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 4 for more information about the Credit Suisse First
Boston(TM) Convertible Securities Index.
3. For each fund with at least a three-year history, Morningstar calculates a
Morningstar Rating(TM) based on a Morningstar Risk-Adjusted Return measure
that accounts for variation in a fund's monthly performance (including the
effects of sales charges, loads, and redemption fees), placing more emphasis
on downward variations and rewarding consistent performance. The top 10% of
funds in each category receive five stars, the next 22.5% receive four stars,
the middle 35% receive three stars, the next 22.5% receive two stars, and the
bottom 10% receive one star. The Overall Morning- star Rating(TM) for a fund
is derived from a weighted average of the performance figures associated with
its three-, five- and 10-year (if applicable) Morningstar Rating(TM) metrics.
5
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[BAR GRAPH]
<Table>
<Caption>
PERIOD END TOTAL RETURN %
- ---------- --------------
12/94 -1.34%
12/95 23.72
12/96 12.13
12/97 11.36
12/98 1.23
12/99 33.91
12/00 7.24
12/01 -4.01
12/02 -8.88
10/03 15.86
</Table>
Returns reflect the historical performance of the Class B shares for periods
through 12/94. See footnote on page 4 for more information on performance.
CLASS B AND CLASS C SHARES
[BAR GRAPH]
<Table>
<Caption>
PERIOD END TOTAL RETURN %
- ---------- --------------
12/92 13.11%
12/93 24.47
12/94 -1.34
12/95 23.02
12/96 11.39
12/97 10.67
12/98 0.53
12/99 32.90
12/00 6.51
12/01 -4.76
12/02 -9.50
10/03 15.09
</Table>
Class C share returns reflect the historical performance of the Class B shares
for periods through 8/98. See footnote on page 4 for more information on
performance.
A number of strong performers for the 10-month reporting period were in the
information technology sector. In particular, the portfolio benefited from its
overweighted position among semiconductor companies that provide back-end test
and assembly services. One holding in particular, ASE Test, does not make
semiconductors but does benefit from higher semiconductor unit volume. ASE Test,
as its name implies, tests semiconductors before they are sent to customers. The
driving force behind improving operating performance for these companies is
increasing demand for semiconductors. If the economy improves, semiconductor
unit production should increase. With the Fed cutting rates in November 2002
6
and June 2003, the market anticipated an economic recovery and pushed these
stocks higher.
Other semiconductor stocks that benefited during the period were Fairchild
Semiconductor and Cypress Semiconductor.
Generic drug maker Teva Pharmaceuticals was another strong contributor to
performance. Major pharmaceutical firms continue to struggle with earnings
problems and depressed stock prices, as their substantial revenue streams tend
to fall sharply when their drugs come off patent. Teva, a leader among generic
drug companies, was a beneficiary of these events as it continued to have its
generic drugs gain FDA approval, resulting in strong earnings and a rising stock
price.
Airline and travel stocks were very weak in 2002 as a result of the geopolitical
environment and the SARS outbreak. Consequently, the slightest improvement in
the economy led to strong results from many stocks in these areas. The Fund's
winners for the 10-month period included Continental Airlines as well as
Cendant, a company with exposure to the travel industry through interests in
travel agencies, hotels, and rental-car businesses.
Despite a weak holiday shopping season at the end of 2002, Gap Stores performed
well in 2003. The Gap had lost its customer base and was struggling to identify
its target market. With increased cash on its balance sheet, the company
implemented a "back to basics" strategy, and Gap Stores' stock appreciated and
enhanced the Fund's results.
WEAK PERFORMERS
While the portfolio had a few laggards, the underperformance of the Fund
relative to its peers stemmed primarily from its underweighted position among
speculative-grade convertibles. During the 10 months ended October 31, 2003, the
Merrill Lynch Investment Grade Convertible Index(4) returned 14.17% while the
Merrill Lynch Speculative Grade Convertible Index(5) gained 47.87%. We believe
that the strongest case to be made for investing in convertibles is that they
offer asymmetry of returns. Stocks go up and stocks go down. The attraction of
convertibles is that they may participate more on the upside than they do on the
downside. Our strategy to capture this asymmetry of returns is to invest in
securities that are not too equity sensitive and not too bond sensitive.
Instead, we seek convertibles that we believe will participate in a good portion
of the stock's rise, while participating to a lesser degree in the stock's
decline. To assure that the Fund's convertibles will provide risk management on
the downside we invest in better-quality corporate credits, which are usually
investment-grade companies. With the tremendous outperformance of the
speculative-grade index, however, our strategy hurt the Fund's relative
performance during the reporting period. Nevertheless, over the long term, we
believe that our strategy will allow the Fund to capture the value that
convertibles offer and will enable the Fund to post solid risk-adjusted returns.
- -------
4. The Merrill Lynch Investment Grade Convertible Index is an unmanaged index of
investment-grade convertible securities. Results assume reinvestment of all
income and capital gains. An investment cannot be made directly into an
index.
5. The Merrill Lynch Speculative Grade Convertible Index is an unmanaged index
of convertible securities rated below investment grade by major rating
agencies. Results assume reinvestment of all income and capital gains. An
investment cannot be made directly into an index.
7
The Fund did have some individual holdings with disappointing results. Tenet
Healthcare was the largest underperformer for the reporting period. Prior to
October 2002 when the FBI announced an investigation of the company for alleged
Medicare abuses, we believed that Tenet offered an attractive risk/reward
tradeoff, since the company generated substantial free cash flow, which we
thought would be deployed to buy back stock. Although Tenet did nothing illegal,
the situation escalated when HMOs tried to renegotiate their contracts with
Tenet on more favorable terms. After having sold a portion of the Fund's
position in November of 2002, we sold the remainder of the position at a loss in
June 2003.
New York Stock Exchange firm Labranche & Company also detracted from the Fund's
performance, when its stock fell on disappointing earnings. The Pepsi Bottling
Group, a manufacturer, seller, and distributor of Pepsi-Cola beverages also took
a toll on performance, as cold drinks suffered from unseasonably cold spring
weather. We sold the Fund's position in The Pepsi Bottling Group in May.
LOOKING AHEAD
As we look toward 2004, the market has continued to gain ground on positive
economic news. We expect the market to maintain its upward bias as the economy
continues to recover. If the latest GDP figures are any indication, we feel that
more good news on the economy may lie ahead. We continue to be fully invested,
and we believe that convertible securities may offer an attractive way to
participate in the market's rise, should it continue to climb. Since
convertibles also have a fixed-income component, they may offer a measure of
downside protection should the market decline.
Whatever the markets or the economy may bring, the Fund will continue to seek
capital appreciation together with current income.
Edward Silverstein
Edmund C. Spelman
Thomas Wynn
Portfolio Managers
MacKay Shields LLC
High-yield securities ("junk bonds") are generally considered speculative
because they present a greater risk of loss than higher-quality debt securities
and may be subject to greater price volatility.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8
Portfolio of Investments October 31, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
------------------------------
CONVERTIBLE SECURITIES (82.2%)+
CONVERTIBLE BONDS (63.6%)
AIRLINES (1.7%)
AirTran Holdings, Inc.
7.00%, due 7/1/23 (c).... $ 400,000 $ 739,500
Alaska Air Group, Inc.
3.64%, due 3/21/23 (d)... 4,470,000 5,872,686
Delta Air Lines, Inc.
8.00%, due 6/3/23 (c).... 3,705,000 3,566,062
------------
10,178,248
------------
BIOTECHNOLOGY (2.3%)
Genzyme Corp.
3.00%, due 5/15/21 (e)... 4,615,000 4,655,381
Invitrogen Corp.
2.00%, due 8/1/23 (c).... 3,220,000 3,779,475
2.25%, due 12/15/06
(e)...................... 4,920,000 5,012,250
------------
13,447,106
------------
BUILDING PRODUCTS (0.5%)
Masco Corp.
(zero coupon), due
7/20/31 (e).............. 6,150,000 2,782,875
------------
CAPITAL MARKETS (7.6%)
Affiliated Managers Group,
Inc.
(zero coupon), due 5/7/21
(e)(f)................... 3,650,000 3,659,125
JMH Finance Ltd.
4.75%, due 9/6/07
(c)(e)................... 5,000,000 5,287,500
Legg Mason, Inc.
(zero coupon), due 6/6/31
(e)(f)................... 6,620,000 4,427,125
Lehman Brothers Holdings,
Inc.
Series INDU
0.25%, due 10/2/07 (g)... 5,100,000 5,565,375
Merrill Lynch & Co., Inc.
(zero coupon), due
3/13/32 (d).............. 2,500,000 2,622,200
Series DOW
0.25%, due 5/17/10
(c)(g)................... 6,680,000 7,157,620
Series SPY
1.125%, due 4/4/10
(c)(g)................... 5,105,000 5,400,069
UBS AG Stamford
Connecticut Branch
Series NDQ
0.25%, due 4/14/08
(c)(g)................... 5,000,000 4,606,250
Series SPX
1.00%, due 4/12/06
(c)(g)................... 6,000,000 5,850,000
------------
44,575,264
------------
COMMERCIAL SERVICES & SUPPLIES (2.0%)
Cendant Corp.
(zero coupon), due
2/13/21 (e).............. 8,830,000 6,247,225
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
------------------------------
COMMERCIAL SERVICES & SUPPLIES (CONTINUED)
Waste Connections, Inc.
5.50%, due 4/15/06....... 765,000 821,419
World Color Press, Inc.
6.00%, due 10/1/07....... 4,840,000 4,936,800
------------
12,005,444
------------
COMMUNICATIONS EQUIPMENT (2.2%)
Brocade Communications
Systems, Inc.
2.00%, due 1/1/07........ $ 2,445,000 $ 2,185,219
CIENA Corp.
3.75%, due 2/1/08........ 4,335,000 3,803,962
Comverse Technology, Inc.
1.50%, due 12/1/05 (e)... 3,870,000 3,753,900
Extreme Networks, Inc.
3.50%, due 12/1/06 (e)... 2,260,000 2,132,875
Juniper Networks, Inc.
4.75%, due 3/15/07....... 1,220,000 1,253,550
------------
13,129,506
------------
CONSUMER FINANCE (0.3%)
Providian Financial Corp.
4.00%, due 5/15/08....... 1,330,000 1,541,138
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.2%)
At Home Corp.
4.75%, due 12/15/06
(h)...................... 9,147,056 1,280,588
CoreComm Ltd.
6.00%, due 10/1/06
(h)(i)................... 1,500,000 37,500
------------
1,318,088
------------
ELECTRICAL EQUIPMENT (0.2%)
SCI Systems, Inc.
3.00%, due 3/15/07 (e)... 1,180,000 1,097,400
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.2%)
Artesyn Technologies, Inc.
5.50%, due 8/15/10....... 810,000 1,035,788
------------
ENERGY EQUIPMENT & SERVICES (8.0%)
BJ Services Co.
0.3954%, due 4/24/22
(e)...................... 16,525,000 13,447,219
Cooper Cameron Corp.
1.75%, due 5/17/21 (e)... 5,860,000 5,728,150
Halliburton Co.
3.125%, due 7/15/23
(c)...................... 2,875,000 2,900,156
Lehman Brothers Holdings,
Inc.
Series HAL
0.25%, due 9/25/10 (g)... 11,530,000 11,414,700
Nabors Industries Ltd.
(zero coupon), due
2/5/21................... 5,250,000 3,432,188
Pride International, Inc.
2.50%, due 3/1/07 (e).... 8,390,000 9,784,837
------------
46,707,250
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
9
MainStay Convertible Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
------------------------------
CONVERTIBLE BONDS (CONTINUED)
FOOD & STAPLES RETAILING (1.3%)
Lehman Brothers Holdings,
Inc.
Series KR
0.625%, due 12/11/07
(g)...................... $ 1,390,000 $ 1,355,250
SUPERVALU, Inc.
(zero coupon), due
11/2/31 (f).............. 18,605,000 6,000,112
------------
7,355,362
------------
FOOD PRODUCTS (1.1%)
General Mills, Inc.
(zero coupon), due
10/28/22................. 2,850,000 2,002,125
Nestle Holding, Inc.
Series WW
3.00%, due 5/9/05........ 3,960,000 4,326,498
------------
6,328,623
------------
HEALTH CARE EQUIPMENT & SUPPLIES (2.6%)
ALZA Corp.
(zero coupon), due
7/28/20.................. 3,705,000 2,635,181
Fisher Scientific
International, Inc.
2.50%, due 10/1/23 (c)... 3,780,000 4,266,675
Medtronic, Inc.
1.25%, due 9/15/21....... 6,020,000 6,155,450
Wilson Greatbatch
Technologies, Inc.
2.25%, due 6/15/13 (c)... 1,935,000 2,193,806
------------
15,251,112
------------
HEALTH CARE PROVIDERS & SERVICES (2.0%)
Beverly Enterprises, Inc.
2.75%, due 11/1/33....... 2,230,000 2,430,700
Province Healthcare Co.
4.50%, due 11/20/05
(e)...................... 2,050,000 2,039,750
Quest Diagnostics, Inc.
1.75%, due 11/30/21...... 5,520,000 5,658,000
Universal Health Services,
Inc.
0.426%, due 6/23/20
(e)...................... 2,250,000 1,428,750
------------
11,557,200
------------
HOTELS, RESTAURANTS & LEISURE (2.9%)
Brinker International,
Inc.
(zero coupon), due
10/10/21................. 7,950,000 5,346,375
Goldman Sachs Group,
Inc.(The)
Series MCD
(zero coupon), due
8/27/09 (g).............. 5,380,000 5,198,425
GTECH Holdings Corp.
1.75%, due 12/15/21
(e)...................... 1,775,000 2,975,344
International Game
Technology
(zero coupon), due
1/29/33.................. 4,420,000 3,270,800
------------
16,790,944
------------
HOUSEHOLD PRODUCTS (1.4%)
Merrill Lynch & Co., Inc.
Series PG
0.40%, due 4/14/10
(c)(g)................... 7,785,000 8,059,032
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
------------------------------
INDUSTRIAL CONGLOMERATES (2.4%)
Tyco International Group
S.A.
Series A
2.75%, due 1/15/18....... $ 4,975,000 $ 5,516,031
Series B
3.125%, due 1/15/23...... 7,610,000 8,694,425
------------
14,210,456
------------
INSURANCE (3.2%)
American International
Group, Inc.
0.50%, due 5/15/07....... 8,120,000 7,673,400
Citigroup Global Markets
Holdings, Inc.
Series MET
0.50%, due 10/6/10 (g)... 8,510,000 8,914,225
USF&G Corp.
(zero coupon), due
3/3/09................... 2,690,000 2,152,000
------------
18,739,625
------------
IT SERVICES (0.5%)
DST Systems, Inc.
Series A
4.125%, due 8/15/23
(c)...................... 1,605,000 1,803,619
First Data Corp.
2.00%, due 3/1/08 (e).... 1,290,000 1,344,825
------------
3,148,444
------------
MACHINERY (4.1%)
Danaher Corp.
(zero coupon), due
1/22/21 (e)(f)........... 3,810,000 2,571,750
Lehman Brothers Holdings,
Inc.
Series CAT
0.25%, due 5/13/10 (g)... 3,340,000 4,095,675
Navistar Financial Corp.
4.75%, due 4/1/09 (e).... 6,970,000 7,091,975
Navistar International
Corp.
2.50%, due 12/15/07...... 1,245,000 1,702,538
SPX Corp.
(zero coupon), due 2/6/21
(f )..................... 6,625,000 4,289,687
Wabash National Corp.
3.25%, due 8/1/08 (c).... 3,060,000 4,303,125
------------
24,054,750
------------
MEDIA (5.2%)
Adelphia Communications
Corp.
3.25%, due 5/1/21 (h).... 2,110,000 917,850
Interpublic Group of Cos.,
Inc. (The)
4.50%, due 3/15/23....... 1,020,000 1,500,675
Lamar Advertising Co.
2.875%, due 12/31/10
(e)...................... 5,435,000 5,190,425
Lehman Brothers, Inc.
Series VIA
0.25%, due 9/30/10 (g)... 8,650,000 8,650,000
Liberty Media Corp.
0.75%, due 3/30/23....... 2,460,000 2,650,650
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
------------------------------
CONVERTIBLE BONDS (CONTINUED)
MEDIA (CONTINUED)
News America, Inc.
(zero coupon), due
2/28/21 (f).............. $ 9,410,000 $ 5,316,650
Omnicom Group, Inc.
(zero coupon), due 2/7/31
(f)...................... 4,880,000 4,916,600
Regal Entertainment Group
3.75%, due 5/15/08 (c)... 1,305,000 1,464,863
------------
30,607,713
------------
METALS & MINING (0.2%)
Placer Dome, Inc.
2.75%, due 10/15/23
(c)...................... 1,145,000 1,268,088
------------
MULTI-UTILITIES & UNREGULATED POWER (0.3%)
Reliant Resources, Inc.
5.00%, due 8/15/10
(c)(e)................... 1,940,000 1,685,375
------------
OIL & GAS (0.6%)
Citigroup Global Markets
Holdings, Inc.
Series XOI
0.25%, due 2/18/10 (g)... 3,115,000 3,277,291
------------
PAPER & FOREST PRODUCTS (3.2%)
International Paper Co.
(zero coupon), due
6/20/21.................. 6,705,000 3,620,700
Lehman Brothers Holdings,
Inc.
Series IP
0.25%, due 5/8/10 (g).... 10,540,000 11,198,750
Merrill Lynch & Co., Inc.
Series MWV
0.25%, due 7/28/10 (g)... 4,185,000 4,221,619
------------
19,041,069
------------
PHARMACEUTICALS (2.7%)
Citigroup Global Markets
Holdings, Inc.
Series K
0.75%, due 7/20/09 (g)... 3,220,000 3,416,742
Roche Holdings, Inc.
(zero coupon), due
1/19/15 (c)(f)........... 4,500,000 3,481,875
Teva Pharmaceutical
Finance N.V.
0.75%, due 8/15/21....... 6,585,000 9,021,450
------------
15,920,067
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
------------------------------
ROAD & RAIL (1.1%)
Citigroup Global Markets
Holdings, Inc.
Series UNP
0.25%, due 5/12/10 (g)... $ 2,935,000 $ 2,857,956
Goldman Sachs Group, Inc.
(The)
Series BNI
1.00%, due 10/30/07
(g)...................... 3,855,000 3,734,531
------------
6,592,487
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (2.1%)
Brooks Automation, Inc.
4.75%, due 6/1/08........ 1,365,000 1,301,869
ChipPAC, Inc.
2.50%, due 6/1/08 (c).... 2,040,000 2,672,400
Fairchild Semiconductor
International, Inc.
5.00%, due 11/1/08....... 3,640,000 3,826,550
Kulicke & Soffa
Industries, Inc.
4.75%, due 12/15/06...... 1,615,000 1,562,512
Micron Technology, Inc.
2.50%, due 2/1/10........ 1,605,000 2,251,012
Skyworks Solutions, Inc.
4.75%, due 11/15/07
(e)...................... 405,000 493,088
------------
12,107,431
------------
SPECIALTY RETAIL (0.8%)
Gap, Inc. (The)
5.75%, due 3/15/09....... 3,465,000 4,621,444
------------
TRANSPORTATION INFRASTRUCTURE (0.7%)
Morgan Stanley
Series CNI
(zero coupon), due
5/30/10 (g).............. 4,050,000 4,369,140
------------
Total Convertible Bonds
(Cost $361,536,407)...... 372,803,760
------------
<Caption>
SHARES
------------
CONVERTIBLE PREFERRED STOCKS (18.6%)
AEROSPACE & DEFENSE (1.0%)
Northrop Grumman Corp.
7.25% (e)(j)............. 56,140 5,664,526
------------
AIRLINES (0.3%)
Continental Air Finance
Trust II
6.00%.................... 62,800 1,915,400
------------
AUTOMOBILES (2.6%)
Ford Motor Co. Captital
Trust II
6.50%.................... 98,400 4,570,680
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
MainStay Convertible Fund
<Table>
<Caption>
SHARES VALUE
------------------------------
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
AUTOMOBILES (CONTINUED)
General Motors Corp.
5.25%, Series B.......... 86,300 $ 1,998,708
6.25%, Series C.......... 315,000 8,738,100
------------
15,307,488
------------
CAPITAL MARKETS (1.5%)
Affiliated Managers Group,
Inc.
6.00%.................... 143,200 3,501,240
DECS Trust IX
6.75%, Series LAB (e).... 53,000 694,300
Gabelli Asset Management,
Inc.
6.95% (e)................ 134,200 3,274,480
State Street Corp.
6.75%.................... 5,200 1,293,344
------------
8,763,364
------------
COMMERCIAL SERVICES & SUPPLIES (1.0%)
Cendant Corp.
7.75% (e)................ 118,200 5,720,880
------------
COMMUNICATIONS EQUIPMENT (0.9%)
Corning, Inc.
7.00%, Series C.......... 3,090 1,772,888
Lucent Technologies
Capital Trust I
7.75%.................... 3,490 3,801,308
------------
5,574,196
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.5%)
CenturyTel, Inc.
6.875%................... 103,300 2,926,489
------------
ELECTRIC UTILITIES (1.9%)
Dominion Resources, Inc.
9.50% (k)................ 41,600 2,354,560
FPL Group, Inc.
8.00%.................... 78,800 4,384,432
PPL Capital Funding Trust
I
7.75% (e)(l)............. 220,900 4,616,810
------------
11,355,802
------------
HEALTH CARE PROVIDERS & SERVICES (0.1%)
Anthem, Inc.
5.00%.................... 5,900 480,968
------------
INSURANCE (3.4%)
Chubb Corp. (The)
7.00%.................... 64,500 1,789,875
Hartford Financial
Services Group, Inc.
(The)
6.00%.................... 25,300 1,390,741
7.00%.................... 85,400 4,836,202
</Table>
<Table>
<Caption>
SHARES VALUE
------------------------------
INSURANCE (CONTINUED)
Prudential Financial, Inc.
6.75%.................... 115,120 $ 7,099,450
Travelers Property
Casualty Corp.
4.50%.................... 194,500 4,656,330
------------
19,772,598
------------
IT SERVICES (0.1%)
Electronic Data Systems
Corp.
7.875%................... 25,275 521,929
------------
MACHINERY (0.7%)
Cummins Capital Trust I
7.00% (e)................ 64,380 3,959,370
------------
MEDIA (0.6%)
Adelphia Communications
Corp.
7.50%, Series F (a)(h)... 89,300 183,065
Comcast Corp.
2.00% (m)................ 19,200 724,800
Equity Securities Trust I
6.50%, Series CVC........ 25,200 558,432
Equity Securities Trust II
6.25%, Series CVC........ 86,900 1,974,368
------------
3,440,665
------------
MULTI-UTILITIES & UNREGULATED POWER (0.3%)
Calpine Capital Trust
5.75%.................... 44,700 2,050,612
------------
OFFICE ELECTRONICS (0.3%)
Xerox Corp.
6.25%.................... 16,100 1,692,110
------------
OIL & GAS (1.1%)
Chesapeake Energy Corp.
6.00%.................... 22,600 1,545,275
Kerr-McGee Corp.
5.50%.................... 114,100 4,866,365
------------
6,411,640
------------
PAPER & FOREST PRODUCTS (1.3%)
Boise Cascade Corp.
7.50% (n)................ 96,670 4,503,855
International Paper
Capital Trust
5.25% (e)................ 62,600 3,098,700
------------
7,602,555
------------
SPECIALTY RETAIL (0.1%)
Toys "R" Us, Inc.
6.25%.................... 15,600 639,600
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
SHARES VALUE
------------------------------
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
THRIFTS & MORTGAGE FINANCE (0.5%)
PMI Group, Inc. (The)
5.875%................... 114,200 $ 2,934,940
------------
WIRELESS TELECOMMUNICATION SERVICES (0.4%)
Nextel Communications,
Inc.
(zero coupon)............ 3,100 1,771,650
Qwest Trends Trust
5.75% (c)................ 38,400 303,245
------------
2,074,895
------------
Total Convertible Preferred Stocks
(Cost $103,376,678)...... 108,810,027
------------
Total Convertible
Securities
(Cost $464,913,085)...... 481,613,787
------------
COMMON STOCKS (17.2%)
CAPITAL MARKETS (5.4%)
Bank of New York Co., Inc.
(The).................... 223,000 6,955,370
DIAMONDS Trust
Series I................. 84,500 8,278,465
Merrill Lynch & Co.,
Inc. .................... 148,100 8,767,520
Nasdaq-100 Shares
(a)(e)(o)................ 96,100 3,380,798
S&P 500 Depositary Receipt
(o)...................... 39,200 4,128,936
------------
31,511,089
------------
COMMERCIAL SERVICES & SUPPLIES (0.3%)
Moore Wallace, Inc. (a)... 131,700 1,883,310
------------
COMMUNICATIONS EQUIPMENT (0.7%)
Cisco Systems, Inc. (a)... 79,700 1,672,106
Motorola, Inc. ........... 139,300 1,884,729
Tellabs, Inc. (a)......... 53,800 405,114
------------
3,961,949
------------
COMPUTERS & PERIPHERALS (0.2%)
EMC Corp. (a)............. 91,500 1,266,360
------------
CONSTRUCTION & ENGINEERING (0.1%)
McDermott International,
Inc. (a)................. 52,800 390,720
------------
CONTAINERS & PACKAGING (1.6%)
Smurfit-Stone
Container Corp. (a)...... 619,100 9,596,050
------------
DIVERSIFIED FINANCIAL SERVICES (0.9%)
Citigroup, Inc. .......... 111,870 5,302,638
------------
</Table>
<Table>
<Caption>
SHARES VALUE
------------------------------
ENERGY EQUIPMENT & SERVICES (1.1%)
Halliburton Co. .......... 143,100 $ 3,417,228
Superior Energy Services,
Inc. (a)................. 67,600 604,344
Tidewater, Inc. .......... 26,700 731,847
Transocean, Inc. (a)...... 92,700 1,778,913
------------
6,532,332
------------
HEALTH CARE PROVIDERS & SERVICES (0.1%)
Beverly Enterprises, Inc.
(a)...................... 125,600 762,392
------------
HOTELS, RESTAURANTS & LEISURE (0.4%)
Brinker International,
Inc. (a)................. 67,600 2,151,708
Fine Host Corp. (a)(i).... 54,216 542
------------
2,152,250
------------
INTERNET SOFTWARE & SERVICES (0.1%)
Interwoven, Inc. (a)(e)... 232,200 880,038
------------
MEDIA (1.0%)
Clear Channel
Communications, Inc...... 80,600 3,290,092
Comcast Corp.
Class A (a).............. 48,000 1,565,760
Time Warner, Inc. (a)..... 58,700 897,523
------------
5,753,375
------------
OIL & GAS (0.5%)
Chesapeake Energy Corp.
(e)...................... 99,000 1,181,070
Valero Energy Corp........ 48,640 2,076,928
------------
3,257,998
------------
PAPER & FOREST PRODUCTS (1.8%)
Bowater, Inc. ............ 219,100 8,945,853
International Paper
Co. ..................... 36,000 1,416,600
------------
10,362,453
------------
PHARMACEUTICALS (0.1%)
Teva Pharmaceutical
Industries Ltd. ADR
(p)...................... 9,670 550,126
------------
REAL ESTATE (0.2%)
FelCor Lodging Trust, Inc.
(a)...................... 127,100 1,295,149
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (1.2%)
ASE Test Ltd. (a)......... 353,500 4,383,400
Fairchild Semiconductor
International, Inc.
Class A (a).............. 69,500 1,570,700
Taiwan Semiconductor
Manufacturing Co. Ltd.
ADR (a)(p)............... 108,108 1,195,675
------------
7,149,775
------------
SOFTWARE (1.0%)
Microsoft Corp............ 129,800 3,394,270
Quest Software, Inc.
(a)...................... 60,100 895,490
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
MainStay Convertible Fund
<Table>
<Caption>
SHARES VALUE
------------------------------
COMMON STOCKS (CONTINUED)
SOFTWARE (CONTINUED)
Siebel Systems, Inc.
(a)...................... 142,500 $ 1,794,075
------------
6,083,835
------------
SPECIALTY RETAIL (0.2%)
Limited Brands............ 50,800 894,080
------------
TRADING COMPANIES & DISTRIBUTORS (0.2%)
Quebecor World, Inc. ..... 63,500 1,083,310
------------
WIRELESS TELECOMMUNICATION SERVICES (0.1%)
AT&T Wireless Services,
Inc. (a)................. 57,763 418,782
------------
Total Common Stocks
(Cost $89,085,910)....... 101,088,011
------------
<Caption>
NUMBER OF
CONTRACTS (q)
-------------
PURCHASED PUT OPTION (0.0%) (b)
IT SERVICES (0.0%) (B)
First Data Corp.
Strike Price @ $45.00
Expire 11/28/03
(a)(r)(t)................ 126 117,180
------------
Total Purchased Put Option
(Cost $81,774)........... 117,180
------------
<Caption>
PRINCIPAL
AMOUNT
-------------
SHORT-TERM INVESTMENTS (12.1%)
COMMERCIAL PAPER (0.4%)
UBS Finance Delaware LLC
1.03%, due 11/3/03....... $ 2,145,000 2,144,877
------------
Total Commercial Paper
(Cost $2,144,877)........ 2,144,877
------------
<Caption>
SHARES
-------------
INVESTMENTS COMPANIES (0.9%)
AIM Institutional Funds
Group (s)................ 4,417,010 4,417,010
Merrill Lynch Premier
Institutional Fund....... 851,060 851,060
------------
Total Investment Companies
(Cost $5,268,070)........ 5,268,070
------------
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
MASTER NOTE (1.7%)
Banc of America Securities
1.1874%, due 11/3/03
(s)...................... $10,027,000 $ 10,027,000
------------
Total Master Note
(Cost $10,027,000)....... 10,027,000
------------
REPURCHASE AGREEMENTS (9.1%)
Countrywide Securities
Corp.
1.1424%, dated 10/31/03
due 11/3/03 (s)
Proceeds at Maturity
$13,331,252
(Collateralized by
Various Bonds with a
Principal Amount of
$15,735,589 and a Market
Value of $13,659,999).... 13,330,000 13,330,000
CS First Boston LLC
1.1124%, dated 10/31/03
due 11/3/03 (s)
Proceeds at Maturity
$9,611,879
(Collateralized by
Various Bonds with a
Principal Amount of
$8,930,692 and a Market
Value of $9,731,760)..... 9,611,000 9,611,000
Lehman Brothers, Inc.
1.1124%, dated 10/31/03
due 11/3/03 (s)
Proceeds at Maturity
$12,051,102
(Collateralized by
Various Bonds with a
Principal Amount of
$12,410,880 and a Market
Value of $12,268,148).... 12,050,000 12,050,000
Merrill Lynch & Co., Inc.
1.1424%, dated 10/31/03
due 11/3/03 (s)
Proceeds at Maturity
$18,364,724
(Collateralized by
Various Bonds with a
Principal Amount of
$17,717,479 and a Market
Value of $19,058,499).... 18,363,000 18,363,000
------------
Total Repurchase
Agreements
(Cost $53,354,000)....... 53,354,000
------------
Total Short-Term
Investments
(Cost $70,793,947)....... 70,793,947
------------
Total Investments
(Cost $624,874,716)
(u)...................... 111.5% 653,612,925(v)
Liabilities in Excess of
Cash and Other Assets.... (11.5) (67,233,916)
----------- ------------
Net Assets................ 100.0% $586,379,009
=========== ============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
Portfolio of Investments October 31, 2003 (continued)
<Table>
- -------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Floating rate. Rate shown is the rate in effect at
October 31, 2003.
(e) Represents a security, or a portion thereof, which is
out on loan.
(f) LYON-Liquid Yield Option Note: callable, zero coupon
securities priced at a deep discount from par. They
include a "put" feature that enables holders to redeem
them at a specific date, at a specific price. Put prices
reflect fixed interest rates, and therefore increase
over time.
(g) Synthetic Convertible -- An equity-linked security
issued by an entity other than the issuer of the
underlying equity instrument.
(h) Issuer in default.
(i) Fair valued security.
(j) Equity Units -- Each unit reflects 1 Senior Note plus 1
purchase contract to acquire shares of common stock at
$100.00 by November 16, 2004.
(k) PIES Units (Premium Income Equity Security
Units) -- Each unit reflects a Senior note plus 1
purchase contract to acquire shares of common stock at
$50.00 by November 16, 2004.
(l) PEPS Units (Premium Equity Participating Security
Units) -- Each unit reflects a Trust Preferred Security
plus 1 purchase contract to acquire shares of common
stock at $25.00 by May 18, 2004.
(m) ZONES -- Zero-premium Option Note Exchangeable Security.
(n) Equity Units -- Each unit reflects 1 share of a
preferred security of Boise Cascade Trust I plus 1
purchase contract to acquire shares of common stock at a
price based on the average trading price by December 16,
2004.
(o) Exchange Traded Fund -- Represents a basket of
securities that are traded on an exchange.
(p) ADR -- American Depositary Receipt.
(q) One contract relates to 100 shares.
(r) Options can be exercised into the underlying common
stock.
(s) Represents a security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(t) Fair valued security.
(u) The cost for federal income tax purposes is
$629,435,176.
(v) At October 31, 2003 net unrealized appreciation was
$24,177,749, 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 $41,128,907 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $16,951,158.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$624,874,716) including $65,280,301 market value of
securities loaned......................................... $ 653,612,925
Deposits with brokers for securities loaned................. 1,738
Cash........................................................ 6,156
Receivables:
Investment securities sold................................ 4,033,801
Dividends and interest.................................... 2,186,069
Fund shares sold.......................................... 1,180,879
Other assets................................................ 15,393
-------------
Total assets........................................ 661,036,961
-------------
LIABILITIES:
Securities lending collateral (Note 2)...................... 67,799,748
Payables:
Investment securities purchased........................... 5,216,316
NYLIFE Distributors....................................... 436,490
Fund shares redeemed...................................... 405,036
Manager................................................... 358,903
Transfer agent............................................ 292,284
Trustees.................................................. 6,227
Custodian................................................. 5,536
Accrued expenses............................................ 137,412
-------------
Total liabilities................................... 74,657,952
-------------
Net assets.................................................. $ 586,379,009
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 76,200
Class B................................................... 399,157
Class C................................................... 22,122
Additional paid-in capital.................................. 678,311,717
Accumulated undistributed net investment income............. 396,820
Accumulated net realized loss on investments................ (121,565,216)
Net unrealized appreciation on investments.................. 28,738,209
-------------
Net assets.................................................. $ 586,379,009
=============
CLASS A
Net assets applicable to outstanding shares................. $ 89,751,473
=============
Shares of beneficial interest outstanding................... 7,620,006
=============
Net asset value per share outstanding....................... $ 11.78
Maximum sales charge (5.50% of offering price).............. 0.69
-------------
Maximum offering price per share outstanding................ $ 12.47
=============
CLASS B
Net assets applicable to outstanding shares................. $ 470,548,910
=============
Shares of beneficial interest outstanding................... 39,915,707
=============
Net asset value and offering price per share outstanding.... $ 11.79
=============
CLASS C
Net assets applicable to outstanding shares................. $ 26,078,626
=============
Shares of beneficial interest outstanding................... 2,212,192
=============
Net asset value and offering price per share outstanding.... $ 11.79
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
----------- ------------
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 6,570,739 7,688,837
Interest.................................................. 7,864,135 13,470,787
Income from securities loaned--net........................ 164,241 --
----------- ------------
Total income............................................ 14,599,115 21,159,624
----------- ------------
Expenses:
Manager................................................... 3,239,824 4,141,953
Distribution--Class B..................................... 2,789,699 3,698,429
Distribution--Class C..................................... 123,319 107,087
Transfer agent............................................ 1,444,651 1,764,995
Service--Class A.......................................... 160,366 172,954
Service--Class B.......................................... 929,648 1,232,655
Service--Class C.......................................... 41,182 35,759
Shareholder communication................................. 112,975 141,923
Professional.............................................. 93,692 129,055
Recordkeeping............................................. 67,457 84,320
Custodian................................................. 54,501 70,009
Registration.............................................. 37,514 33,789
Trustees.................................................. 24,284 29,821
Miscellaneous............................................. 28,838 38,960
----------- ------------
Total expenses.......................................... 9,147,950 11,681,709
----------- ------------
Net investment income....................................... 5,451,165 9,477,915
----------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN
OPTION AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions..................................... (441,110) (55,559,038)
Written option transactions............................... -- 427,786
Foreign currency transactions............................. -- (13,479)
----------- ------------
Net realized loss on investments, written option and foreign
currency transactions..................................... (441,110) (55,144,731)
----------- ------------
Net change in unrealized appreciation (depreciation) on:
Security transactions..................................... 71,944,969 (14,537,684)
Translation of other assets and liabilities in foreign
currencies and foreign currency forward contracts....... -- (34)
----------- ------------
Net unrealized gain (loss) on investments and foreign
currency transactions..................................... 71,944,969 (14,537,718)
----------- ------------
Net realized and unrealized gain (loss) on investments,
written option and foreign currency transactions.......... 71,503,859 (69,682,449)
----------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ $76,955,024 $(60,204,534)
=========== ============
</Table>
- -------
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
Dividends recorded net of foreign withholding taxes of
(a) $6,135 and $498 for 2003 and 2002, respectively.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ------------- -------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 5,451,165 $ 9,477,915 $ 15,807,036
Net realized loss on investments, written option and
foreign currency transactions........................... (441,110) (55,144,731) (47,295,043)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency transactions........... 71,944,969 (14,537,718) (3,356,396)
------------ ------------- -------------
Net increase (decrease) in net assets resulting from
operations.............................................. 76,955,024 (60,204,534) (34,844,403)
------------ ------------- -------------
Dividends to shareholders:
From net investment income:
Class A................................................. (1,076,883) (1,580,733) (2,249,140)
Class B................................................. (3,667,253) (7,311,178) (13,720,759)
Class C................................................. (167,186) (219,203) (267,183)
------------ ------------- -------------
Total dividends to shareholders....................... (4,911,322) (9,111,114) (16,237,082)
------------ ------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 39,188,090 20,051,677 31,254,673
Class B................................................. 33,718,114 35,369,125 47,596,871
Class C................................................. 11,579,475 8,131,432 9,202,425
Net asset value of shares issued to shareholders in
reinvestment of dividends:
Class A................................................. 949,687 1,400,688 2,045,755
Class B................................................. 3,317,307 6,557,319 12,352,039
Class C................................................. 115,178 144,085 176,792
------------ ------------- -------------
88,867,851 71,654,326 102,628,555
Cost of shares redeemed:
Class A................................................. (27,482,132) (20,648,134) (24,599,134)
Class B................................................. (62,229,667) (107,229,635) (109,144,823)
Class C................................................. (3,553,098) (4,540,979) (3,195,716)
------------ ------------- -------------
Decrease in net assets derived from capital share
transactions........................................ (4,397,046) (60,764,422) (34,311,118)
------------ ------------- -------------
Net increase (decrease) in net assets................. 67,646,656 (130,080,070) (85,392,603)
NET ASSETS:
Beginning of period......................................... 518,732,353 648,812,423 734,205,026
------------ ------------- -------------
End of period............................................... $586,379,009 $ 518,732,353 $ 648,812,423
============ ============= =============
Accumulated undistributed net investment income
(distributions in excess of net investment income) at end
of period................................................. $ 396,820 $ (225,242) $ (563,301)
============ ============= =============
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
This page intentionally left blank
19
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
----------------------------------------------------------------------------
January 1,
2003
through Year ended December 31,
October 31, -----------------------------------------------------------
2003* 2002 2001 2000 1999 1998
----------- ------- ------- ------- ------- -------
Net asset value at beginning of period............. $ 10.31 $ 11.58 $ 12.45 $ 14.53 $ 12.49 $ 13.53
------- ------- ------- ------- ------- -------
Net investment income.............................. 0.16 0.25 0.36(d) 0.56 0.55 0.57
Net realized and unrealized gain (loss) on
investments....................................... 1.46 (1.27) (0.87)(d) 0.42 3.55 (0.38)
Net realized and unrealized gain (loss) on foreign
currency transactions............................. -- (0.00)(b) 0.00(b) 0.01 (0.00)(b) (0.02)
------- ------- ------- ------- ------- -------
Total from investment operations................... 1.62 (1.02) (0.51) 0.99 4.10 0.17
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income........................ (0.15) (0.25) (0.36) (0.57) (0.52) (0.57)
From net realized gain on investments............. -- -- -- (2.50) (1.54) (0.64)
------- ------- ------- ------- ------- -------
Total dividends and distributions.................. (0.15) (0.25) (0.36) (3.07) (2.06) (1.21)
------- ------- ------- ------- ------- -------
Net asset value at end of period................... $ 11.78 $ 10.31 $ 11.58 $ 12.45 $ 14.53 $ 12.49
======= ======= ======= ======= ======= =======
Total investment return (a)........................ 15.86% (8.88%) (4.01%) 7.24% 33.91% 1.23%
Ratios (to average net assets)/
Supplemental Data:
Net investment income........................... 1.85%+ 2.30% 2.97%(d) 3.63% 3.84% 3.74%
Expenses........................................ 1.38%+ 1.37% 1.29% 1.24% 1.29% 1.40%
Portfolio turnover rate............................ 73% 94% 175% 245% 374% 347%
Net assets at end of period (in 000's)............. $89,751 $66,871 $74,317 $70,915 $46,254 $42,376
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class C Shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
(b) Less than one cent per share.
(c) Less than one thousand.
(d) As required, effective January 1, 2001, the Fund has adopted
the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt
securities. The effect of this change for the year ended
December 31, 2001 is shown below. Per share ratios and
supplemental data for periods prior to January 1, 2001 have
not been restated to reflect this change in presentation.
</Table>
<Table>
<Caption>
CLASS A CLASS B CLASS C
------- ------- -------
Decrease net investment income.............................. ($0.00)(b) ($0.00)(b) ($0.00)(b)
Increase net realized and unrealized gains and losses....... 0.00(b) 0.00(b) 0.00(b)
Decrease ratio of net investment income..................... (0.07%) (0.07%) (0.07%)
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<Table>
<Caption>
Class B Class C
------------------------------------------------------------------ -------------------------------------------------
January 1, January 1,
2003 2003
through Year ended December 31, through Year ended December 31,
October 31, ---------------------------------------------------- October 31, -----------------------------------
2003* 2002 2001 2000 1999 1998 2003* 2002 2001 2000 1999
----------- -------- -------- -------- -------- -------- ----------- ------- ------- ------ ------
$ 10.33 $ 11.59 $ 12.46 $ 14.53 $ 12.49 $ 13.52 $ 10.33 $ 11.59 $ 12.46 $14.53 $12.49
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------ ------
0.10 0.17 0.27 (d) 0.45 0.44 0.46 0.10 0.17 0.27 (d) 0.45 0.44
1.45 (1.27) (0.87)(d) 0.43 3.55 (0.37) 1.45 (1.27) (0.87)(d) 0.43 3.55
-- (0.00)(b) 0.0 (b) 0.01 (0.00)(b) (0.02) -- (0.00)(b) 0.00 (b) 0.01 (0.00)(b)
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------ ------
1.55 (1.10) (0.60) 0.89 3.99 0.07 1.55 (1.10) (0.60) 0.89 3.99
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------ ------
(0.09) (0.16) (0.27) (0.46) (0.41) (0.46) (0.09) (0.16) (0.27) (0.46) (0.41)
-- -- -- (2.50) (1.54) (0.64) -- -- -- (2.50) (1.54)
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------ ------
(0.09) (0.16) (0.27) (2.96) (1.95) (1.10) (0.09) (0.16) (0.27) (2.96) (1.95)
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------ ------
$ 11.79 $ 10.33 $ 11.59 $ 12.46 $ 14.53 $ 12.49 $ 11.79 $ 10.33 $ 11.59 $12.46 $14.53
======== ======== ======== ======== ======== ======== ======= ======= ======= ====== ======
15.09% (9.50%) (4.76%) 6.51% 32.90% 0.53% 15.09% (9.50%) (4.76%) 6.51% 32.90%
1.10%+ 1.55% 2.22%(d) 2.88% 3.09% 2.99% 1.10%+ 1.55% 2.22%(d) 2.88% 3.09%
2.13%+ 2.12% 2.04% 1.99% 2.04% 2.15% 2.13%+ 2.12% 2.04% 1.99% 2.04%
73% 94% 175% 245% 374% 347% 73% 94% 175% 245% 374%
$470,549 $436,572 $561,254 $655,343 $658,197 $656,831 $26,079 $15,289 $13,241 $7,946 $1,329
<Caption>
Class C
-------------
September 1**
through
December 31,
1998
-------------
$12.64
------
0.26
0.47
0.02
------
0.75
------
(0.26)
(0.64)
------
(0.90)
------
$12.49
======
6.06%
2.99%+
2.15%+
347%
$ --(c)
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
MainStay Convertible Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
Convertible Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and within one year of purchase of Class C
shares. Distribution of Class B shares and Class C shares commenced on May 1,
1986 and September 1, 1998, respectively. Class A shares, Class B shares and
Class C shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares and Class C shares are subject to higher distribution fee rates.
Each class of shares bears distribution and/or service fee payments under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek capital appreciation together with
current income.
The Fund's principal investments include high yield securities (sometimes called
"junk bonds"), which are generally considered speculative because they present a
greater risk of loss, including default, than higher quality debt securities.
These securities pay a premium--a high interest rate or yield--because of the
increased risk of loss. These securities can also be subject to greater price
volatility.
The Fund also invests in foreign securities which carry certain risks that are
in addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. The ability of issuers of debt
securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
22
Notes to Financial Statements
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or brokers selected by the Fund's Manager, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques, if
such prices are deemed by the Fund's Manager to be representative of market
values, at the regular close of business of the New York Stock Exchange. Options
contracts are valued at the last posted settlement price on the market where
such options are principally traded. Temporary cash investments acquired over 60
days to maturity are valued using the latest bid prices or using valuations
based on a matrix system (which considers such factors as security prices,
yields, maturities, and ratings), both as furnished by independent pricing
services. Other temporary cash investments are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. Should the Manager or Subadvisor conclude that such events
may have effected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund, adjust the value of the local price to reflect the impact on the price of
such securities as a result of such events.
(B) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward 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 foreign currency forward
contracts primarily to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates.
The use of foreign currency 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
period end to credit loss in the event of a counterparty's failure to perform
its obligations.
23
MainStay Convertible Fund
(C) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted to
reflect the current value of the options written. Premiums received from writing
options which expire are treated as realized gains. Premiums received from
writing options which are exercised or are cancelled in closing purchase
transactions are added to the proceeds or netted against the amount paid on the
transaction to determine the realized gain or loss. By writing a covered call
option, the Fund foregoes in exchange for the premium the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security or foreign currency increase. By writing a covered put
option, the Fund, in exchange for the premium, accepts the risk of a decline in
the market value of the underlying security or foreign currency below the
exercise price. A call option may be covered by the call writer's owning the
underlying security throughout the option period. A call option may also be
covered by the call writer's maintaining liquid assets valued at greater than
the exercise price of the call written, in a segregated account with its
custodian.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security it anticipates purchasing. The Fund may purchase put options on its
securities to protect against a decline in the value of the security or to close
out covered written put positions. The Fund may also purchase options to seek to
enhance returns. Risks may arise from an imperfect correlation between the
change in market value of the securities held by the Fund and the prices of
options relating to the securities purchased or sold by the Fund and from the
possible lack of a liquid secondary market for an option. The maximum exposure
to loss for any purchased option is limited to the premium initially paid for
the option.
Written option activity for the ten months ended October 31, 2003 was as
follows:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
--------- ---------
Options outstanding at December 31, 2002.................... -- $ --
Options -- written.......................................... (402) (87,230)
Options -- exercised........................................ 402 87,230
------ ---------
Options outstanding at October 31, 2003..................... -- $ --
====== =========
</Table>
(D) 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 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.
24
Notes to Financial Statements (continued)
(E) SECURITIES LENDING. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are collateralized by cash or securities at
least equal at all times to the market value of the securities loaned. The Fund
may bear the risk of delay in recovery of, or loss of rights in, the securities
loaned should the borrower of the securities experience financial difficulty.
The Fund receives compensation for lending its securities in the form of fees or
it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(F) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(G) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current year reclassification between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from a permanent difference; net assets at October
31, 2003, are not effected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT LOSS ON
INCOME INVESTMENTS
- -------------- -------------
$82,219 $(82,219)
</Table>
The reclassification for the Fund is primarily due to premium amortization
adjustments.
(H) 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 as earned.
25
MainStay Convertible Fund
Discounts and premiums on securities, other than short-term securities,
purchased for the Fund are accreted and amortized, respectively, on the constant
yield method over the life of the respective securities or, in the case of a
callable security, over the period to the first date of call. Discounts and
premiums on short-term securities are accreted and amortized, respectively, on
the straight line method. Income from payment-in-kind securities is recorded
daily based on the effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(I) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
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 are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented. Accordingly, gains and losses from foreign currency
transactions are included in the reported net realized gain (loss) on investment
transactions.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward 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, other than investments, at period end
exchange rates are reflected in unrealized foreign exchange gains or losses.
(J) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(K) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
requires management to make estimates and assump-
26
Notes to Financial Statements (continued)
tions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
Through June 10, 2002 the Trust, on behalf of the Fund, paid the Manager a
monthly fee for services performed and the facilities furnished at an annual
rate of 0.72% of the Fund's average daily net assets. Effective June 11, 2002,
the Manager established contractual fee breakpoints for its management fee of
0.72% on assets up to $500 million, 0.67% on assets from $500 million to $1.0
billion and 0.62% on assets in excess of $1.0 billion. For the ten months ended
October 31, 2003 and year ended December 31, 2002, the Manager earned from the
Fund $3,239,824 and $4,141,953, respectively.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor through June 10, 2002 a monthly fee at
an annual rate of 0.36% of the average daily net assets of the Fund. Effective
June 11, 2002, the Manager pays the Subadvisor a monthly fee of 0.36% on assets
up to $500 million, 0.335% on assets from $500 million to $1.0 billion and 0.31%
on assets in excess of $1.0 billion.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC. (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Distribution Plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
27
MainStay Convertible Fund
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $31,412 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $46,568, $177,736 and $3,184, respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and year ended December 31, 2002 amounted to $1,444,651
and $1,764,995, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the Convertible
Fund only pays a portion of the fees identified above.
(F) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $11,435 for the ten months ended
October 31, 2003 and $11,215 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $67,457 for the ten months ended October
31, 2003 and $84,320 for the year ended December 31, 2002.
28
Notes to Financial Statements (continued)
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED NET ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
INVESTMENT INCOME AND OTHER LOSSES APPRECIATION LOSS
- ----------------- ------------------- ------------ -----------------
$610,697 $(117,218,633) $24,177,749 $(92,430,187)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals, interest written off and premium
amortization adjustments.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $117,218,633 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. 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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
- ----------------- --------
2009................................................... $ 50,394
2010................................................... 61,799
2011................................................... 5,026
--------
$117,219
========
</Table>
The tax character of distributions paid during the ten months ended October 31,
2003 and the years ended December 31, 2002, and December 31, 2001 shown in the
Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2003 2002 2001
---------- ---------- -----------
Distributions paid from ordinary income: $4,911,322 $9,111,114 $16,237,082
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $404,362 and $388,365, respectively.
As of October 31, 2003, the Fund had securities on loan with an aggregate market
value of $65,280,301. The Fund received $67,799,748 in cash as collateral for
securities on loan which was used to purchase highly liquid short-term
investments in accordance with the Fund's securities lending procedures.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder
29
MainStay Convertible Fund
redemption requests. The funds pay a commitment fee, at an annual rate of .075%
of the average commitment amount, regardless of usage, to The Bank of New York,
which acts as agent to the syndicate. Such commitment fees are allocated among
the funds based upon net assets and other factors. Interest on any revolving
credit loan is charged based upon the Federal Funds Advances rate. There were no
borrowings on the line of credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
JANUARY 1, YEAR ENDED DECEMBER 31,
THROUGH ----------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- ---------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- -------- ------- ------- -------
Shares sold.................. 3,571 3,067 1,048 1,852 3,267 744 2,612 3,978 768
Shares issued in reinvestment
of dividends and
distributions.............. 87 305 10 131 614 14 178 1,075 15
------ ------ ------ ------ ------- ---- ------ ------ ----
3,658 3,372 1,058 1,983 3,881 758 2,790 5,053 783
Shares redeemed.............. (2,521) (5,728) (326) (1,917) (10,024) (420) (2,067) (9,241) (279)
------ ------ ------ ------ ------- ---- ------ ------ ----
Net increase (decrease)...... 1,137 (2,356) 732 66 (6,143) 338 723 (4,188) 504
====== ====== ====== ====== ======= ==== ====== ====== ====
</Table>
- -------
* The fund changed its fiscal year end from December 31 to October 31.
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
30
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Convertible Fund
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 funds constituting The MainStay Funds, hereafter referred to as the "Fund")
at October 31, 2003, the results of its operations for the ten months ended
October 31, 2003 and the year ended December 31, 2002, the changes in its net
assets for the ten months ended October 31, 2003 and each of the two years in
the period ended December 31, 2002 and the financial highlights for each of the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
TAX INFORMATION (UNAUDITED)
The Fund intends to designate the maximum amount of dividends, qualified for the
reduced tax rate under The Jobs and Growth Tax Relief Reconciliation Act of
2003, allowable.
In addition, 100% of the ordinary income dividends paid during the ten months
ended October 31, 2003 qualify for the corporate dividends received deduction
under section 243 of the Internal Revenue Code.
31
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
32
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
33
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
34
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MacKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
McMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
35
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. McGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSC11- 12/03
NYLIM-A04376 05
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
Convertible Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY LOGO]
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay Capital
Appreciation Fund versus S&P 500(R) Index,
Russell 1000(R) Growth Index, and Inflation--
Class A, Class B, and Class C Shares 4
Portfolio Management Discussion and Analysis 6
Year-by-Year and 10-Month Performance 7
Portfolio of Investments 10
Financial Statements 13
Notes to Financial Statements 18
Report of Independent Auditors 24
Trustees and Officers 25
The MainStay(R) Funds 28
</Table>
This page intentionally left blank
2
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
3
$10,000 Invested in MainStay Capital
Appreciation Fund versus S&P 500(R) Index,
Russell 1000(R) Growth Index, and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 9.63%, 5 Years -4.55%, 10 Years 6.36%
[LINE GRAPH]
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
Period-end APPRECIATION FUND S&P 500 INDEX(1) INDEX(2) INFLATION (CPI)(3)
- ----------- ----------------- ----------------- ------------------- ------------------
10/31/93 $ 9,450.00 $ 10,000.00 $ 10,000.00 $ 10,000.00
10/31/94 9,722.00 10,387.00 10,536.00 10,261.00
10/31/95 12,543.00 13,133.00 13,613.00 10,543.00
10/31/96 14,943.00 16,297.00 16,615.00 10,865.00
10/31/97 18,493.00 21,531.00 21,678.00 11,092.00
10/31/98 22,100.00 26,266.00 27,020.00 11,257.00
10/31/99 29,009.00 33,008.00 36,273.00 11,545.00
10/31/00 32,617.00 35,018.00 39,658.00 11,944.00
10/31/01 20,074.00 26,297.00 23,816.00 12,198.00
10/31/02 15,972.00 22,325.00 19,144.00 12,452.00
10/31/03 18,530.00 26,968.00 23,321.00 12,706.00
</Table>
CLASS B AND CLASS C SHARES
Class B Total Returns with Sales Charges: 1 Year 10.08%, 5 Years -4.51%, 10
Years 6.31%
Class C Total Returns with Sales Charges: 1 Year 14.08%, 5 Years -4.22%, 10
Years 6.31%
[LINE GRAPH]
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
Period-end APPRECIATION FUND S&P 500 INDEX(1) INDEX(2) INFLATION (CPI)(3)
- ----------- ----------------- ---------------- ------------------- ------------------
10/31/93 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00
10/31/94 10,288.00 10,387.00 10,536.00 10,261.00
10/31/95 13,215.00 13,133.00 13,613.00 10,543.00
10/31/96 15,671.00 16,297.00 16,615.00 10,865.00
10/31/97 19,301.00 21,531.00 21,678.00 11,092.00
10/31/98 22,880.00 26,266.00 27,020.00 11,257.00
10/31/99 29,795.00 33,008.00 36,273.00 11,545.00
10/31/00 33,249.00 35,018.00 39,658.00 11,944.00
10/31/01 20,303.00 26,297.00 23,816.00 12,198.00
10/31/02 16,029.00 22,325.00 19,144.00 12,452.00
10/31/03 18,446.00 26,968.00 23,321.00 12,706.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION, PLEASE VISIT WWW.MAINSTAYFUNDS.COM. Performance tables and
graphs do not reflect the deduction of taxes that a shareholder would pay on
distributions or Fund-share redemptions. Total returns reflect change in
share price, reinvestment of dividend and capital gain distributions, and
maximum applicable sales charges explained in this paragraph. The graphs
assume an initial investment of $10,000 and reflect deduction of all sales
charges that would have applied for the period of investment. Class A share
performance reflects the effect of the maximum 5.5% initial sales charge and
includes the historical performance of the Class B shares for periods from
the Fund's inception on 5/1/86 through 12/31/94. Performance figures for the
two classes vary after 12/31/94, based on differences in their sales charges
and expense structures. Class C share performance includes the historical
performance of the Class B shares for periods from the Fund's inception on
5/1/86 through 8/31/98. Class B shares would be subject to a contingent
deferred sales charge (CDSC) of up to 5% if redeemed within the first six
years of purchase, and Class C shares would be subject to a CDSC of 1% if
redeemed within one year of purchase.
1. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume the reinvestment
of all income and capital gains. An investment cannot be made directly
into an index.
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
4
- -------
2. The Russell 1000(R) Growth Index is an unmanaged index that measures the
performance of those Russell 1000(R) companies with higher price-to-book
ratios and higher forecasted growth values. The Russell 1000(R) Index is
an unmanaged index that measures the performance of the 1,000 largest U.S.
companies based on total market capitalization. Results assume the
reinvestment of all income and capital gains. An investment cannot be made
directly into an index.
3. Inflation is measured 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. The rate of inflation does not represent an
investment return.
5
Portfolio Management Discussion and Analysis
The first 10 months of 2003 presented a number of challenges for equity
investors. In addition to facing the volatility associated with military action
in Iraq, investors had to contend with a constant stream of mixed economic
indicators, which added to the volatility and uncertainty of the stock market.
Looking back, early signs of an economic recovery began to take shape toward the
end of 2002, but these indicators declined through much of the first quarter of
2003. After the market reached its year-to-date low in mid-March, however,
stocks trended upward through the end of October 2003.
The Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points in June 2003, to a low 1.0%. Real gross domestic product grew at a
modest pace in the first quarter of 2003, somewhat faster in the second, and
quite rapidly in the third. According to preliminary estimates by the Bureau of
Economic Analysis, real GDP grew at a seasonally adjusted annual rate of 8.2% in
the third quarter of 2003, its fastest pace since the first quarter of 1984.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Capital Appreciation Fund
returned 21.12% for Class A shares and 20.33% for Class B and C shares,
excluding all sales charges. All share classes underperformed the 22.70% return
of the average Lipper(1) large-cap growth fund over the same period. All share
classes also underperformed the 21.21% return of the S&P 500(R) Index(2) and the
24.11% return of the Russell 1000(R) Growth Index(3) for the 10 months ended
October 31, 2003.
The Fund's underperformance relative to the Russell 1000 Growth Index was
confined to the first part of the reporting period, when low-quality stocks led
the rally and market volatility remained high. In recent months, quality growth
stocks have rallied strongly, which has contributed to the Fund's modest outper
formance in the second and third quarters of 2003.
STRONG AND WEAK PERFORMERS
The Fund's information technology holdings posted the strongest return for the
year, rising 50.64%(4) through October 31, versus a 42.79% gain for information
technology stocks in the Russell 1000 Growth Index. For the 10-month period, the
Fund's weighting in the information technology sector remained similar to that
of the Index. VERITAS Software (+130.99%) and Intel (+112.29%) stood out as the
Fund's top performers in the sector during the reporting period. VERITAS
Software is a leading provider of enterprise storage products and services, a
business that has proven to be one of the most successful subsectors in the
technology market this year. Other top-performing information technology stocks
in the Fund included Texas Instruments (+93.50%), Analog Devices (+85.71%),
- -------
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 4 for more information about the S&P 500 Index.
3. See footnote on page 5 for more information about the Russell 1000(R) Growth
Index.
4. Performance percentages for Fund holdings reflect the total return
performance of the indicated securities or sectors for the 10 months ended
October 31, 2003, or for the portion of the reporting period such securities
or sector holdings were held in the Fund, if shorter. Due to purchases and
sales, the performance of Fund holdings may differ from the performance of
the securities or sectors themselves.
6
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[LINE GRAPH]
<Table>
<Caption>
Period-end Total Return %
- ----------- --------------
12/94 -1.52
12/95 35.79
12/96 19.16
12/97 24.10
12/98 39.24
12/99 24.90
12/00 -11.17
12/01 -23.85
12/02 -31.56
10/03 21.12
</Table>
CLASS B SHARES
[LINE GRAPH]
<Table>
<Caption>
Period-end Total Return %
- ----------- --------------
12/94 -1.52
12/95 35.11
12/96 18.56
12/97 23.45
12/98 38.15
12/99 23.90
12/00 -11.85
12/01 -24.47
12/02 -32.07
10/03 20.33
</Table>
and Electronic Arts (+98.79%). The Fund's only technology holding that declined
during the reporting period was SunGard Data Systems, which fell less than 1%.
The Fund's holdings in the industrials sector gained 21.46% versus a 23.77% gain
for industrial stocks in the Russell 1000 Growth Index. Cendant (+94.94%), the
Fund's top-performing industrial stock, rose on strong sales trends in its real
estate business. Cendant, FedEx, Danaher, and United Technologies were all up
considerably for the period, fueled by the strengthening economy. Two industrial
stocks that detracted from the Fund's performance during the reporting period
were General Dynamics and Lockheed Martin. We sold General Dynamics and recently
reduced the Fund's position in Lockheed Martin.
7
-
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES), CONTINUED
CLASS C SHARES
[LINE GRAPH]
<Table>
<Caption>
Period-end Total Return %
- ---------- --------------
12/94 -1.52
12/95 35.11
12/96 18.56
12/97 23.45
12/98 38.15
12/99 23.90
12/00 -11.82
12/01 -24.46
12/02 -32.10
10/03 20.33
</Table>
Although basic materials stocks represented a small percentage (2.83%) of the
Fund's total holdings, the sector delivered strong returns during the reporting
period, rising 15.23% in the Fund and 34.34% in the Index. The Fund's two
holdings in this sector included Praxair, which rose 21.77%, and Air Products
and Chemicals, which returned 7.90%. Praxair's strength was driven by rising
optimism--similar to that seen in the industrials sector--that earnings growth
rates will increase as the economy recovers.
The Fund's holdings in the financials sector rose 17.86% during the 10-month
period versus an 18.24% increase for this portion of the Index. American
Express, Citigroup, and Morgan Stanley ranked as the Fund's top-three financial
performers during the reporting period, each rising roughly 30% or more. Since
the end of March, American Express has rallied on investors' belief that the
company's travel business and credit-card operations will benefit from an
economic rebound. The price of Morgan Stanley shares rose along with the equity
market, since the company's business is closely tied to market performance.
Citibank advanced on the view that commercial lending activity will likely
increase as the economy rebounds. Among the Fund's financial stocks, BB&T was
the biggest detractor from performance, and we sold the Fund's entire position.
The company was hurt by net interest margin compression and soft loan growth.
For the 10-month period, the Fund's health care holdings rose 7.97% versus an
11.00% gain for health care stocks in the Russell 1000 Growth Index.
Fortunately, the Fund was underweighted in this sector relative to the Index,
which helped to mute this relative underperformance. Baxter International and
Tenet Health Care were the two biggest laggards during the period. Johnson &
Johnson was weighed down by competitive concerns in its core business, while
Cardinal Health was
8
impacted by management's decision to lower the company's long-term earnings-
growth forecast. Among the Fund's winners were Amgen (+27.76%) and Genentech
(+147.20%). Genentech, in particular, had a stunning rise in May after the
company released positive data from a first-line colorectal-cancer trial for its
new drug, Avastin.
The Fund's consumer discretionary stocks rose 15.19% compared to a 35.33% rise
in consumer discretionary stocks within the Index. In the consumer staples
sector, the Fund's holdings rose 10.44% compared to 12.86% for related stocks in
the Index. Consumer discretionary holdings Harley-Davidson, Kohl's, and Viacom
turned in disappointing results. Harley-Davidson took the greatest toll on
performance, as the stock dropped on concerns about the company's lower-
than-expected production goals for 2004. Despite these concerns, we continue to
view Harley-Davidson, Kohl's, and Viacom as solid long-term holdings. Our top
performing consumer discretionary stocks included Lowe's (+57.50%), Target
(+33.22%), and Bed Bath & Beyond (+22.27%). Among the Fund's consumer staples
positions, Kraft Foods proved to be a dramatic underperformer, which prompted us
to sell the stock. The biggest gainer was Wal-Mart (+17.28%), and the company
continues to see strength in its retail sales as the economy rebounds.
While energy stocks represented only 2.82% of the Fund's holdings, the Fund's
energy stocks declined 7.27% for the period versus a 2.75% increase for the
energy stocks in the index. All of the Fund's energy holdings are in the energy
equipment & services industry, since we believe that high oil prices and the
recent decline in Iraqi production levels will prompt domestic producers to step
up their exploration and production efforts. While this trend has yet to emerge
in earnest, we continue to believe that it is only a matter of time.
LOOKING AHEAD
The market has continued to gain ground on positive economic news. We expect the
market to maintain its upward bias as the economy continues to recover. If the
latest gross domestic product figures are any indication, we believe that more
good news on the economy may lie ahead. As always, we will continue to focus on
high-quality growth companies with strong growth prospects.
Whatever the markets or the economy may bring, the Fund will continue to seek
long-term growth of capital, with dividend income, if any, as an incidental
consideration.
Rudolph C. Carryl
Edmund C. Spelman
Portfolio Managers
MacKay Shields LLC
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
9
MainStay Capital Appreciation Fund
<Table>
<Caption>
SHARES VALUE
-------------------------------
COMMON STOCKS (100.0%)+
AEROSPACE & DEFENSE (2.7%)
Lockheed Martin Corp. (c).... 319,700 $ 14,821,292
United Technologies Corp. ... 359,200 30,420,648
--------------
45,241,940
--------------
AIR FREIGHT & LOGISTICS (1.9%)
FedEx Corp. ................. 409,400 31,016,144
--------------
AUTOMOBILES (1.8%)
Harley-Davidson, Inc. (c).... 626,800 29,716,588
--------------
BEVERAGES (2.1%)
Coca-Cola Co. (The).......... 274,600 12,741,440
PepsiCo, Inc. ............... 456,500 21,829,830
--------------
34,571,270
--------------
BIOTECHNOLOGY (2.1%)
Amgen, Inc. (a)(c)........... 397,700 24,561,952
Genentech, Inc. (a)(c)....... 125,600 10,295,432
--------------
34,857,384
--------------
CAPITAL MARKETS (1.7%)
Morgan Stanley............... 502,400 27,566,688
--------------
CHEMICALS (2.9%)
Air Products & Chemicals,
Inc. ....................... 467,800 21,242,798
Praxair, Inc. (c)............ 384,700 26,767,426
--------------
48,010,224
--------------
COMMERCIAL BANKS (2.3%)
Bank of America Corp. ....... 284,000 21,507,320
Fifth Third Bancorp (c)...... 286,900 16,628,724
--------------
38,136,044
--------------
COMMERCIAL SERVICES & SUPPLIES (1.7%)
Cendant Corp. (a)(c)......... 1,330,900 27,190,287
--------------
COMMUNICATIONS EQUIPMENT (2.0%)
Cisco Systems, Inc. (a)...... 1,599,300 33,553,314
--------------
COMPUTERS & PERIPHERALS (5.0%)
Dell, Inc. (a)(c)............ 733,300 26,486,796
Hewlett-Packard Co. (c)...... 1,313,100 29,295,261
International Business
Machines Corp. ............. 304,000 27,201,920
--------------
82,983,977
--------------
CONSUMER FINANCE (2.0%)
American Express Co. ........ 700,300 32,865,079
--------------
DIVERSIFIED FINANCIAL SERVICES (1.6%)
Citigroup, Inc. ............. 568,600 26,951,640
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
-------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (1.2%)
Agilent Technologies, Inc.
(a)......................... 809,900 $ 20,182,708
--------------
ENERGY EQUIPMENT & SERVICES (1.6%)
Baker Hughes, Inc. .......... 294,300 8,316,918
BJ Services Co. (a).......... 305,600 10,026,736
Weatherford International
Ltd. (a).................... 222,500 7,731,875
--------------
26,075,529
--------------
FOOD & STAPLES RETAILING (4.7%)
Sysco Corp. (c).............. 720,400 24,248,664
Walgreen Co. (c)............. 761,400 26,511,948
Wal-Mart Stores, Inc. ....... 440,400 25,961,580
--------------
76,722,192
--------------
HEALTH CARE EQUIPMENT & SUPPLIES (3.7%)
Baxter International,
Inc. ....................... 529,575 14,076,104
Boston Scientific Corp.
(a)......................... 369,100 24,995,452
Medtronic, Inc. ............. 487,200 22,201,704
--------------
61,273,260
--------------
HEALTH CARE PROVIDERS & SERVICES (7.1%)
Cardinal Health, Inc. (c).... 417,800 24,792,252
Caremark Rx, Inc. (a)........ 336,300 8,424,315
HCA, Inc. ................... 639,300 24,453,225
UnitedHealth Group, Inc. .... 648,600 33,000,768
WellPoint Health Networks,
Inc. (a).................... 303,600 26,990,040
--------------
117,660,600
--------------
HOTELS, RESTAURANTS & LEISURE (0.2%)
International Game
Technology.................. 92,100 3,016,275
--------------
HOUSEHOLD DURABLES (0.5%)
Lennar Corp. Class A......... 93,400 8,578,790
--------------
HOUSEHOLD PRODUCTS (1.5%)
Colgate-Palmolive Co. (c).... 451,000 23,988,690
--------------
INDUSTRIAL CONGLOMERATES (1.6%)
General Electric Co. (c)..... 886,000 25,702,860
--------------
INSURANCE (1.3%)
Marsh & McLennan Cos.,
Inc. ....................... 491,700 21,020,175
--------------
INTERNET & CATALOG RETAIL (1.5%)
InterActiveCorp. (a)(c)...... 690,900 25,362,939
--------------
IT SERVICES (1.4%)
First Data Corp. (c)......... 658,900 23,522,730
--------------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
Portfolio of Investments October 31, 2003
<Table>
<Caption>
SHARES VALUE
-------------------------------
COMMON STOCKS (CONTINUED)
MACHINERY (3.6%)
Danaher Corp. (c)............ 356,700 $ 29,552,595
Illinois Tool Works, Inc. ... 393,400 28,934,570
--------------
58,487,165
--------------
MEDIA (6.1%)
Clear Channel Communications,
Inc. ....................... 635,760 25,951,723
Gannett Co., Inc. ........... 255,300 21,473,283
Omnicom Group, Inc. ......... 352,600 28,137,480
Viacom, Inc. Class B (c)..... 633,922 25,274,470
--------------
100,836,956
--------------
MULTILINE RETAIL (3.0%)
Kohl's Corp. (a)............. 446,600 25,040,862
Target Corp. (c)............. 619,500 24,618,930
--------------
49,659,792
--------------
PHARMACEUTICALS (6.5%)
Forest Laboratories, Inc.
(a)......................... 462,100 23,109,621
Johnson & Johnson (c)........ 577,800 29,080,674
Pfizer, Inc. ................ 1,008,800 31,878,080
Teva Pharmaceutical
Industries Ltd. ADR
(c)(d)...................... 412,300 23,455,747
--------------
107,524,122
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (9.5%)
Analog Devices, Inc.
(a)(c)...................... 700,200 31,039,866
Applied Materials, Inc.
(a)(c)...................... 1,023,400 23,916,858
Intel Corp. ................. 1,048,000 34,636,400
KLA-Tencor Corp. (a)......... 330,900 18,970,497
Maxim Integrated Products,
Inc. ....................... 349,800 17,388,558
Texas Instruments, Inc. ..... 1,063,000 30,741,960
--------------
156,694,139
--------------
SOFTWARE (8.8%)
Electronic Arts, Inc.
(a)(c)...................... 275,200 27,255,808
Microsoft Corp. ............. 1,312,200 34,314,030
Oracle Corp. (a)............. 2,247,200 26,876,512
Symantec Corp. (a)(c)........ 385,200 25,673,580
VERITAS Software Corp. (a)... 830,500 30,022,575
--------------
144,142,505
--------------
SPECIALTY RETAIL (5.0%)
Bed Bath & Beyond, Inc.
(a)(c)...................... 667,900 28,212,096
Lowe's Cos., Inc. (c)........ 466,600 27,496,738
TJX Cos., Inc. (The)......... 1,240,300 26,033,897
--------------
81,742,731
--------------
THRIFTS & MORTGAGE FINANCE (1.4%)
Fannie Mae (c)............... 316,000 22,654,040
--------------
Total Common Stocks
(Cost $1,511,778,815)....... 1,647,508,777
--------------
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
SHORT-TERM INVESTMENTS (13.8%)
COMMERCIAL PAPER (2.4%)
Bavaria Universal Funding
1.1162%, due 11/7/03 (e).... $27,500,000 $ 27,494,958
UBS Finance Delaware LLC
1.03%, due 11/3/03.......... 12,400,000 12,399,290
--------------
39,894,248
--------------
Total Commercial Paper
(Cost $39,894,248).......... 39,894,248
--------------
<Caption>
SHARES
-----------
INVESTMENT COMPANY (0.0%) (B)
AIM Institutional Funds Group
(e)......................... 192,933 192,933
--------------
Total Investment Company
(Cost $192,933)............. 192,933
--------------
<Caption>
PRINCIPAL
AMOUNT
-----------
MASTER NOTE (4.3%)
Banc of America Securities
LLC
1.1874%, due 11/3/03 (e).... $70,502,000 70,502,000
--------------
Total Master Note
(Cost $70,502,000).......... 70,502,000
--------------
REPURCHASE AGREEMENTS (5.6%)
Banc One Capital Markets,
Inc.
1.1799%, dated 10/31/03
due 11/3/03 (e)
Proceeds at Maturity
$7,000,679
(Collateralized by Various
Bonds with a Principal
Amount of $8,221,681 and a
Market Value of
$7,350,000)................. 7,000,000 7,000,000
--------------
Countrywide Securities Corp.
1.1424%, dated 10/31/03
due 11/3/03 (e)
Proceeds at Maturity
$49,654,662
(Collateralized by Various
Bonds with a Principal
Amount of $58,610,053 and a
Market Value of
$50,879,139)................ 49,650,000 49,650,000
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
MainStay Capital Appreciation Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
SHORT-TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENTS (CONTINUED)
CS First Boston LLC
1.1124%, dated 10/31/03
due 11/3/03 (e)
Proceeds at Maturity
$3,206,293
(Collateralized by Various
Bonds with a Principal
Amount of $2,979,065 and a
Market Value of
$3,246,283)................. $3,206,000 $ 3,206,000
--------------
Lehman Brothers, Inc.
1.1124%, dated 10/31/03
due 11/3/03 (e)
Proceeds at Maturity
$5,357,490
(Collateralized by Various
Bonds with a Principal
Amount of $5,517,434 and a
Market Value of
$5,453,981)................. 5,357,000 5,357,000
--------------
Merrill Lynch & Co., Inc.
1.1424%, dated 10/31/03
due 11/3/03 (e)
Proceeds at Maturity
$25,780,420
(Collateralized by Various
Bonds with a Principal
Amount of $24,871,816 and a
Market Value of
$26,754,342)................ 25,778,000 25,778,000
--------------
Total Repurchase Agreements
(Cost $90,991,000).......... 90,991,000
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
YANKEE CERTIFICATE OF DEPOSIT (1.5%)
Natexis Banque NY
1.1124%, due 12/15/03
(e)(f)...................... $25,000,000 $ 25,000,000
--------------
Total Yankee Certificate of
Deposit
(Cost $25,000,000).......... 25,000,000
--------------
Total Short-Term Investments
(Cost $226,580,181)......... 226,580,181
--------------
Total Investments
(Cost $1,738,358,996) (g)... 113.8% 1,874,088,958(h)
Liabilities in Excess of
Cash and Other Assets....... (13.8) (227,295,259)
----------- --------------
Net Assets................... 100.0% $1,646,793,699
=========== ==============
</Table>
<Table>
- --------------------------------------------------------------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) Represents a security, or a portion thereof, which is out
on loan.
(d) ADR-American Depositary Receipt.
(e) Represents a security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(f) Yankee certificate of deposit (CD)--dollar-denominated CD
issued in the United States by foreign banks and
corporations.
(g) The cost for federal income tax purposes is
$1,740,969,727.
(h) At October 31, 2003 net unrealized appreciation was
$133,119,231, based on cost for federal income tax
purposes. This consisted of aggregate gross unrealized
appreciation for all investments on which there was an
excess of market value over cost of $225,350,518 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $92,231,287.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$1,738,358,996) including $207,099,004 market value of
securities loaned......................................... $1,874,088,958
Deposit with broker for securities loaned................... 4,696
Cash........................................................ 3,204
Receivables:
Investment securities sold................................ 12,273,553
Fund shares sold.......................................... 2,615,929
Dividends and interest.................................... 1,127,381
Other assets................................................ 22,362
--------------
Total assets........................................ 1,890,136,083
--------------
LIABILITIES:
Securities lending collateral............................... 214,185,587
Payables:
Investment securities purchased........................... 23,467,316
Fund shares redeemed...................................... 2,400,099
NYLIFE Distributors....................................... 1,174,425
Transfer agent............................................ 1,040,627
Manager................................................... 784,830
Trustees.................................................. 18,593
Custodian................................................. 11,659
Accrued expenses............................................ 259,248
--------------
Total liabilities................................... 243,342,384
--------------
Net assets.................................................. $1,646,793,699
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 123,179
Class B................................................... 513,525
Class C .................................................. 4,135
Additional paid-in capital.................................. 1,776,638,480
Accumulated net realized loss on investments................ (266,215,582)
Net unrealized appreciation on investments.................. 135,729,962
--------------
Net assets.................................................. $1,646,793,699
==============
CLASS A
Net assets applicable to outstanding shares................. $ 335,484,175
==============
Shares of beneficial interest outstanding................... 12,317,867
==============
Net asset value per share outstanding....................... $ 27.24
Maximum sales charge (5.50% of offering price).............. 1.59
--------------
Maximum offering price per share outstanding................ $ 28.83
==============
CLASS B
Net assets applicable to outstanding shares................. $1,300,834,822
==============
Shares of beneficial interest outstanding................... 51,352,514
==============
Net asset value and offering price per share outstanding.... $ 25.33
==============
CLASS C
Net assets applicable to outstanding shares................. $ 10,474,702
==============
Shares of beneficial interest outstanding................... 413,505
==============
Net asset value and offering price per share outstanding.... $ 25.33
==============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002.
<Table>
<Caption>
2003* 2002
------------- -------------
INVESTMENT INCOME:
Income:
Dividends................................................. $ 10,353,684 $ 13,868,073
Interest.................................................. 25,134 230,667
Income from securities loaned-net......................... 259,728 156,374
------------ -------------
Total income............................................ 10,638,546 14,255,114
------------ -------------
Expenses:
Distribution--Class B..................................... 7,487,101 11,527,264
Distribution--Class C..................................... 61,459 99,915
Manager................................................... 7,020,528 11,199,351
Transfer agent............................................ 5,261,405 6,974,080
Service--Class A.......................................... 623,447 870,621
Service--Class B.......................................... 2,495,700 3,842,421
Service--Class C.......................................... 20,487 33,305
Shareholder communication................................. 268,165 481,360
Professional.............................................. 164,724 268,225
Recordkeeping............................................. 147,796 216,522
Custodian................................................. 113,870 174,704
Trustees.................................................. 61,554 89,983
Registration.............................................. 51,605 51,295
Miscellaneous............................................. 38,798 59,344
------------ -------------
Total expenses before waiver............................ 23,816,639 35,888,390
Fees waived by Manager...................................... -- (816,657)
------------ -------------
Net expenses............................................ 23,816,639 35,071,733
------------ -------------
Net investment loss......................................... (13,178,093) (20,816,619)
------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
WRITTEN OPTIONS:
Net realized gain (loss) from:
Security transactions..................................... (31,763,736) (121,014,006)
Written option transactions............................... -- 1,758,109
------------ -------------
Net realized loss on investments and written option
transactions.............................................. (31,763,736) (119,255,897)
------------ -------------
Net change in unrealized appreciation (depreciation) on
investments............................................... 328,438,794 (606,013,572)
------------ -------------
Net realized and unrealized gain (loss) on investments and
written option transactions............................... 296,675,058 (725,269,469)
------------ -------------
Net increase (decrease) in net assets resulting from
operations................................................ $283,496,965 $(746,086,088)
============ =============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001.
<Table>
<Caption>
2003* 2002 2001
-------------- -------------- ---------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss....................................... $ (13,178,093) $ (20,816,619) $ (28,605,448)
Net realized loss on investments and written option
transactions............................................ (31,763,736) (119,255,897) (115,195,949)
Net change in unrealized appreciation (depreciation) on
investments............................................. 328,438,794 (606,013,572) (710,017,154)
-------------- -------------- ---------------
Net increase (decrease) in net assets resulting from
operations.............................................. 283,496,965 (746,086,088) (853,818,551)
-------------- -------------- ---------------
Distributions to shareholders:
From net realized gain on investments:
Class A................................................. -- -- (3,272,641)
Class B................................................. -- -- (14,973,415)
Class C................................................. -- -- (136,801)
-------------- -------------- ---------------
Total distributions to shareholders................... -- -- (18,382,857)
-------------- -------------- ---------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 86,054,368 122,521,377 166,042,126
Class B................................................. 81,141,359 120,012,435 206,267,785
Class C................................................. 943,485 1,696,548 4,408,518
-------------- -------------- ---------------
Net asset value of shares issued to shareholders in
reinvestment of distributions:
Class A................................................. -- -- 3,115,514
Class B................................................. -- -- 14,552,594
Class C................................................. -- -- 110,942
-------------- -------------- ---------------
168,139,212 244,230,360 394,497,479
-------------- -------------- ---------------
Cost of shares redeemed:
Class A................................................. (86,356,395) (153,190,672) (170,552,204)
Class B................................................. (168,974,203) (352,883,911) (403,175,817)
Class C................................................. (2,118,140) (4,788,461) (6,677,860)
-------------- -------------- ---------------
Decrease in net assets derived from capital share
transactions........................................ (89,309,526) (266,632,684) (185,908,402)
-------------- -------------- ---------------
Net increase (decrease) in net assets................. 194,187,439 (1,012,718,772) (1,058,109,810)
NET ASSETS:
Beginning of period......................................... 1,452,606,260 2,465,325,032 3,523,434,842
-------------- -------------- ---------------
End of period............................................... $1,646,793,699 $1,452,606,260 $ 2,465,325,032
============== ============== ===============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
-----------------------------------------------------------------------
January 1,
2003
through Year ended December 31,
October 31, --------------------------------------------------------
2003* 2002 2001 2000 1999 1998
----------- -------- -------- -------- -------- --------
Net asset value at beginning of period.................. $ 22.49 $ 32.86 $ 43.46 $ 57.12 $ 48.74 $ 36.60
-------- -------- -------- -------- -------- --------
Net investment loss (a)................................. (0.09) (0.13) (0.15) (0.33) (0.24) (0.14)
Net realized and unrealized gain (loss) on
investments............................................ 4.84 (10.24) (10.22) (6.16) 12.22 14.42
-------- -------- -------- -------- -------- --------
Total from investment operations........................ 4.75 (10.37) (10.37) (6.49) 11.98 14.28
-------- -------- -------- -------- -------- --------
Less distributions:
From net realized gain on investments.................. -- -- (0.23) (7.17) (3.60) (2.14)
-------- -------- -------- -------- -------- --------
Net asset value at end of period........................ $ 27.24 $ 22.49 $ 32.86 $ 43.46 $ 57.12 $ 48.74
======== ======== ======== ======== ======== ========
Total investment return (b)............................. 21.12% (31.56%) (23.85%) (11.17%) 24.90% 39.24%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss.................................. (0.45%)+ (0.48%) (0.41%) (0.59%) (0.47%) (0.34%)
Expenses............................................. 1.30%+ 1.28% 1.29% 1.19% 1.19% 1.23%
Net Expenses (after waiver).......................... 1.30%+ 1.23% 1.10% 0.99% 1.00% 1.04%
Portfolio turnover rate................................. 19% 69% 44% 38% 41% 29%
Net assets at end of period (in 000's).................. $335,484 $277,526 $442,526 $590,366 $587,633 $394,848
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<Table>
<Caption>
Class B Class C
---------------------------------------------------------------------------- -----------
January 1, January 1,
2003 2003
through Year ended December 31, through
October 31, -------------------------------------------------------------- October 31,
2003* 2002 2001 2000 1999 1998 2003*
----------- ---------- ---------- ---------- ---------- ---------- -----------
$ 21.05 $ 30.99 $ 41.34 $ 55.15 $ 47.54 $ 36.02 $ 21.05
---------- ---------- ---------- ---------- ---------- ---------- -------
(0.23) (0.32) (0.39) (0.72) (0.61) (0.45) (0.23)
4.51 (9.62) (9.73) (5.92) 11.82 14.11 4.51
---------- ---------- ---------- ---------- ---------- ---------- -------
4.28 (9.94) (10.12) (6.64) 11.21 13.66 4.28
---------- ---------- ---------- ---------- ---------- ---------- -------
-- -- (0.23) (7.17) (3.60) (2.14) --
---------- ---------- ---------- ---------- ---------- ---------- -------
$ 25.33 $ 21.05 $ 30.99 $ 41.34 $ 55.15 $ 47.54 $ 25.33
========== ========== ========== ========== ========== ========== =======
20.33% (32.07%) (24.47%) (11.85%) 23.90% 38.15% 20.33%
(1.20%)+ (1.23%) (1.16%) (1.34%) (1.22%) (1.09%) (1.20%)+
2.05%+ 2.03% 2.04% 1.94% 1.94% 1.98% 2.05%+
2.05%+ 1.98% 1.85% 1.74% 1.75% 1.79% 2.05%+
19% 69% 44% 38% 41% 29% 19%
$1,300,835 $1,165,260 $2,004,638 $2,905,828 $3,486,486 $2,753,012 $10,475
<Caption>
Class C
-----------------------------------------------------
September 1**
Year ended December 31, through
------------------------------------- December 31,
2002 2001 2000 1999 1998
------- ------- ------- ------- -------------
$ 31.00 $ 41.35 $ 55.15 $ 47.54 $36.15
------- ------- ------- ------- ------
(0.32) (0.39) (0.72) (0.61) (0.10)
(9.63) (9.73) (5.91) 11.82 13.63
------- ------- ------- ------- ------
(9.95) (10.12) (6.63) 11.21 13.53
------- ------- ------- ------- ------
-- (0.23) (7.17) (3.60) (2.14)
------- ------- ------- ------- ------
$ 21.05 $ 31.00 $ 41.35 $ 55.15 $47.54
======= ======= ======= ======= ======
(32.10%) (24.46%) (11.82%) 23.90% 37.66%
(1.23%) (1.16%) (1.34%) (1.22%) (1.09%)+
2.03% 2.04% 1.94% 1.94% 1.98% +
1.98% 1.85% 1.74% 1.75% 1.79% +
69% 44% 38% 41% 29%
$ 9,819 $18,162 $27,241 $23,238 $1,600
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
MainStay Capital Appreciation Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
Capital Appreciation Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and within one year of purchase of Class C
shares. Distribution of Class B shares and Class C shares commenced on May 1,
1986 and September 1, 1998, respectively. Class A shares, Class B shares and
Class C shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares and Class C shares are subject to higher distribution fee rates.
Each class of shares bears distribution and/or service fee payments under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek long-term growth of capital. Dividend
income, if any, is an incidental consideration.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
(B) SECURITIES LENDING. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are collateralized by cash or securities at
least equal at all times to the market value of the
18
Notes to Financial Statements
securities loaned. The Fund may bear the risk of delay in recovery of, or loss
of rights in, the securities loaned should the borrower of the securities
experience financial difficulty. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
(C) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay any
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current year reclassifications between net
investment loss and additional paid-in-capital arising from permanent
differences; net assets at October 31, 2003, are not affected.
<Table>
<Caption>
NET INVESTMENT ADDITIONAL
LOSS PAID-IN CAPITAL
- -------------- ---------------
$13,178,093 $(13,178,093)
</Table>
The reclassification for the Fund is due to net operating losses.
(E) 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 as earned.
Discounts and premiums on short-term securities are accreted and amortized,
respectively, on the straight line method.
19
MainStay Capital Appreciation Fund
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(F) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(G) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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.
Certain amounts have been reclassified to conform to current year presentation.
Such reclassifications had no effect on the Fund's net income or capital.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
Through March 11, 2002, the Trust, on behalf of the Fund, paid the Manager a
monthly fee for services performed and the facilities furnished at an annual
rate of 0.72% of the Fund's average daily net assets and had voluntarily
established fee breakpoints of 0.65% on assets in excess of $200 million and
0.50% on assets in excess of $500 million. Effective March 12, 2002, the Manager
established contractual fee breakpoints for its management fee of 0.72% annually
on assets up to $200 million, 0.65% annually on assets from $200 million to $500
million and 0.50% on assets in excess of $500 million. For the ten months ended
October 31, 2003 the Manager earned from the Fund $7,020,528. For the year ended
December 31, 2002, the Manager earned from the Fund $11,199,351 and waived
$816,657 of its fees.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor through March 11, 2002, a monthly fee
at an annual rate of 0.36% of the average daily net assets of the Fund. To the
extent that the Manager had voluntarily established fee
20
Notes to Financial Statements (continued)
breakpoints, the Subadvisor had voluntarily agreed to do so proportionately.
Effective March 12, 2002, the Manager pays the Subadvisor a monthly fee at an
annual rate of 0.36% on assets up to $200 million, 0.325% on assets from $200
million to $500 million and 0.25% on assets in excess of $500 million.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC ("the Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Distribution Plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $7,580 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $20,796, $605,895 and $1,100, respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and the year ended December 31, 2002, amounted to
$5,261,405 and $6,974,080 respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting and $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage
21
MainStay Capital Appreciation Fund
Committee and Operations Committee attended, respectively. The Trust allocates
trustees fees in proportion to the net assets of the respective Funds. Thus the
Capital Appreciation Fund only pays a portion of the fees identified above.
(F) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $31,501 for the ten months ended
October 31, 2003 and $35,647 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $147,796 for the ten months ended October
31, 2003 and $216,522 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
- ------------------- ------------ -----------------
$(263,604,851) $133,119,231 $(130,485,620)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $263,604,851 were available as shown in the table below, to the extent
provided by regulations to offset future realized gains of the Fund through the
years indicated. To the extent that these carryforwards are used to offset
future capital gains, it is probable that the capital gains so offset will not
be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS
AVAILABLE THROUGH AMOUNT (000'S)
- ----------------- --------------
2009.................................................... $109,823
2010.................................................... 104,708
2011.................................................... 49,074
--------
$263,605
========
</Table>
Distributions to shareholders from net realized gains, shown in the Statement of
Changes in Net Assets, represent tax based distributions from long term capital
gains of $18,382,857 for the year ended December 31, 2001.
22
Notes to Financial Statements (continued)
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $291,376 and $361,597, respectively.
As of October 31, 2003, the Fund had securities on loan with an aggregate market
value of $207,099,004. The Fund received $214,185,587 in cash as collateral for
securities on loan which was used to purchase highly liquid short-term
investments in accordance with the Fund's securities lending procedures.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
JANUARY 1, THROUGH DECEMBER 31,
OCTOBER 31, ---------------------------------------------------------
2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold.............. 3,545 3,603 42 4,496 4,679 65 4,741 6,060 126
Shares issued in
reinvestment of
dividends and
distributions.......... -- -- -- -- -- -- 104 482 4
------ ------ --- ------ ------- ---- ------ ------- ----
3,545 3,603 42 4,496 4,679 65 4,845 6,542 130
Shares redeemed.......... (3,569) (7,609) (94) (5,623) (14,004) (185) (4,960) (12,143) (203)
------ ------ --- ------ ------- ---- ------ ------- ----
Net decrease............. (24) (4,006) (52) (1,127) (9,325) (120) (115) (5,601) (73)
====== ====== === ====== ======= ==== ====== ======= ====
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
</Table>
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
23
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Capital Appreciation Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Capital Appreciation Fund
(one of the funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
24
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
25
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
26
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
27
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
D/B/A MERCURY ADVISORS
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
28
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29
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30
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY FUNDS LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSCA11-12/03
NYLIM-A04339 04
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R) Capital Appreciation Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY FUNDS LOGO]
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay Blue Chip Growth
Fund versus S&P 500 Index(R) and
Inflation--Class A, Class B, and Class C
Shares 4
Portfolio Management Discussion and Analysis 6
Year-by-Year and 10-Month Performance 7
Portfolio of Investments 11
Financial Statements 13
Notes to Financial Statements 18
Report of Independent Auditors 24
Trustees and Officers 25
The MainStay(R) Funds 28
</Table>
This page intentionally left blank
2
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
3
$10,000 Invested in MainStay
Blue Chip Growth Fund versus
S&P 500(R) Index and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 12.95%, 5 Years -2.27%, Since Inception
(6/1/98) -2.41%
<Table>
<Caption>
MAINSTAY BLUE CHIP
Period-end GROWTH FUND S&P 500 INDEX(1) INFLATION (CPI)(2)
- ---------- ------------------ ---------------- ----------------
6/1/98 $ 9,450.00 $ 10,000.00 $ 10,000.00
10/31/98 9,289.00 10,133.00 10,080.00
10/31/99 13,466.00 12,734.00 10,338.00
10/31/00 15,479.00 13,510.00 10,695.00
10/31/01 9,445.00 10,146.00 10,923.00
10/31/02 7,332.00 8,613.00 11,150.00
10/31/03 8,821.00 10,404.00 11,378.00
</Table>
CLASS B SHARES
Total Returns with Sales Charges: 1 Year 13.52%, 5 Years -2.30%, Since Inception
(6/1/98) -2.29%
<Table>
<Caption>
MAINSTAY BLUE CHIP
Period-end GROWTH FUND S&P 500 INDEX(1) INFLATION (CPI)(2)
- ---------- ------------------ ---------------- ------------------
6/1/98 $ 10,000.00 $ 10,000.00 $ 10,000.00
10/31/98 9,810.00 10,133.00 10,080.00
10/31/99 14,120.00 12,734.00 10,338.00
10/31/00 16,110.00 13,510.00 10,695.00
10/31/01 9,752.00 10,146.00 10,923.00
10/31/02 7,515.00 8,613.00 11,150.00
10/31/03 8,818.00 10,404.00 11,378.00
</Table>
CLASS C SHARES
Total Returns with Sales Charges: 1 Year 17.52%, 5 Years -1.91%, Since Inception
(6/1/98) -2.11%
<Table>
<Caption>
MAINSTAY BLUE CHIP
Period-end GROWTH FUND S&P 500 INDEX(1) INFLATION (CPI)(2)
- ---------- ------------------ ---------------- -----------------
6/1/98 $ 10,000.00 $ 10,000.00 $ 10,000.00
10/31/98 9,810.00 10,133.00 10,080.00
10/31/99 14,120.00 12,734.00 10,338.00
10/31/00 16,110.00 13,510.00 10,695.00
10/31/01 9,752.00 10,146.00 10,923.00
10/31/02 7,515.00 8,613.00 11,150.00
10/31/03 8,907.00 10,404.00 11,378.00
</Table>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION PLEASE VISIT WWW.MAINSTAYFUNDS.COM.
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
4
- -------
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect change in share price, reinvestment of dividend and capital
gain distributions, and maximum applicable sales charges explained in this
paragraph. The graphs assume an initial investment of $10,000 and reflect
deduction of all sales charges that would have applied for the period of
investment. Class A share performance reflects the effect of the maximum 5.5%
initial sales charge. Class B shares are subject to a contingent deferred
sales charge (CDSC) of up to 5% if shares are redeemed within the first six
years of purchase. Class B share performance reflects a CDSC of 1%, which
would apply for the period shown. Class C share performance includes the
historical performance of the Class B shares for periods from 6/1/98 through
8/31/98. Class C shares would be subject to a CDSC of 1% if redeemed within
one year of purchase.
1. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume reinvestment of
all income and capital gains. An investment cannot be made directly into
an index.
2. Inflation is measured 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. The rate of inflation does not represent an
investment return.
5
Portfolio Management Discussion and Analysis
The S&P 500(R) Index(1) optimistically bolted higher in the first two weeks of
the new year only to roll over as investors gave in to fears of terrorism, an
increasing threat of war with Iraq, a SARS epidemic, and higher fuel prices. The
U.S. stock market remained volatile throughout the first quarter, ending the
three months with negative returns.
Economic data began to improve during the second quarter. Once major combat
operations had ended in Iraq corporate profit growth began to improve and the
equity market moved back into positive territory. During the third quarter,
investors saw increasing evidence of an economic recovery. Indeed, according to
preliminary estimates from the Bureau of Economic Analysis, real gross domestic
product grew at a seasonally adjusted annual rate of 8.2% in the third quarter
of 2003--the fastest growth since the first quarter of 1984. A weaker U.S.
dollar helped exports. With support from tax cuts, consumer spending remained
strong, and as mortgage rates reached multiyear lows, residential construction
remained active. Business investment, which grew at an 11% annualized rate for
the third quarter, was the strongest it had been since early 2000.
This positive news translated into improving corporate profits, and the stock
market moved higher during the third quarter. In October, the S&P 500 Index
produced single-digit gains. The biggest disappointment from January through
October was the lack of job growth.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Blue Chip Growth Fund
returned 23.80% for Class A shares and 22.90% for Class B and Class C shares,
excluding all sales charges. All share classes outperformed the 19.16% return of
the average Lipper(2) large-cap core fund over the same period. All shares
classes also outperformed the S&P 500 Index, which returned 21.21% for the 10
months ended October 31, 2003.
The Fund's relative performance was primarily due to its positions in the
information technology, telecommunication services, and energy sectors, each of
which outperformed the S&P 500 Index. Effective stock selection in the consumer
discretionary and financials sectors also added to Fund performance for the
period. The reduction in tax rates for both capital gains and corporate
dividends may also have contributed to better performance during the second
quarter of 2003. Four of the Fund's holdings--Microsoft, Clear Channel, Viacom,
and QUALCOMM--decided to start paying dividends for the first time. Another 13
Fund holdings increased dividend payments by 20% or more by the end of October.
Yet another 18 Fund holdings boosted dividend payments by 4% to 19% during the
reporting period.
- -------
1. See footnote on page 5 for more information about the S&P 500 Index.
2. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
6
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[LINE GRAPH]
<Table>
<Caption>
PERIOD-END TOTAL RETURN %
- ---------- --------------
12/98 16.40%
12/99 41.75
12/00 -9.89
12/01 -23.77
12/02 -33.91
10/03 23.80
</Table>
CLASS B AND CLASS C SHARES
[LINE GRAPH]
<Table>
<Caption>
PERIOD-END TOTAL RETURN %
- ---------- --------------
12/98 16.00%
12/99 40.78
12/00 -10.55
12/01 -24.42
12/02 -34.36
10/03 22.90
</Table>
STRONG AND WEAK PERFORMERS
The portfolio's best performer for the 10 months ended October 31, 2003, was
VERITAS Software, which was purchased in July. The company's shares rose 131%(3)
from their depressed levels in March of 2003. The company significantly beat
earnings estimates in each of the first three quarters of 2003, as sales of its
enterprise storage software products increased with the rebound in information
technology spending.
Coach, the luxury leather-goods retailer, saw its shares rise 115% during the
10-month period. We purchased the Coach securities in February 2003. The
3. Unless otherwise indicated, percentages reflect the price performance of
the indicated securities for the 10 months ended October 31, 2003. Due to
purchases and sales, the performance of Fund holdings may differ from the
performance of the securities themselves.
7
company's strong earnings were driven primarily by sales to domestic department
stores and to Japan, where the economy is rebounding.
Shares of Intel, the world's largest semiconductor company, rose 112% during the
reporting period. Stronger-than-expected personal-computer sales drove demand
for Intel's microprocessor chips, and the company also had strong sales of its
newly launched Centrino chip, which is designed for wireless connectivity.
Shares of wireless telecommunications carrier Nextel Communications rose 109%,
as the company continued to sign up more customers than analysts expected,
largely as a result of its popular "Push to Talk" cell-phone feature. Nextel
shares were purchased in July. Shares of video-game producer Electronic Arts
rose 99% since we purchased them in July. This company enjoyed robust sales of
its industry-leading video-game products, including such hits as Madden NFL,
NCAA Football, FIFA Soccer, James Bond 007: Nightfire, and Tiger Woods PGA Tour.
During the first 10 months of 2003, the worst-performing stocks in the Fund
included Marsh & McLennan. The company's mutual-fund arm, Putnam Investments,
saw depressed assets after the three-year bear market. Later, the company became
the subject of an ongoing SEC probe into illegal and/or unethical mutual-fund
trading practices.
The share price of Cintas, the largest U.S. supplier of uniforms, declined after
the company reduced its fiscal 2003 sales forecast, citing workforce reductions
among its customers. Cintas shares were purchased after this decline in late
February, in anticipation of an eventual job recovery. Shares of Johnson &
Johnson, the health care giant, declined. The company was affected by a federal
investigation into some its drug-marketing practices and by the discovery of
negative side effects from two of its products.
Shares of media behemoth Viacom ended the period in slightly negative territory,
primarily as a result of lowered full-year profit forecasts that stemmed from
weakness in local advertising.
Medtronic shares spent most of the fiscal period in positive territory before be
ginning a descent precipitated when the company missed its sales target for its
defibrillator heart devices.
STRATEGIC POSITIONING
In light of the less-than-certain economic and geopolitical conditions in the
first quarter of 2003, we did not make major changes to the Fund's sector
weightings at that time. We trimmed some of the Fund's largest holdings to
establish several smaller new positions. New holdings included Coca-Cola,
Proctor & Gamble, General Electric, eBay, Whole Foods Market, and Cintas. We
eliminated Abbott Laboratories and Wyeth from the Fund.
During the second quarter, our procyclical tilt--investing in sectors that we
believed would benefit from improvements in economic growth--finally paid
8
off. The Fund's strongest stocks during the quarter were found among finan
cials, information technology, retailing, and media. We eliminated General
Electric, Lockheed Martin, and Northrop Grumman from the portfolio. We sold
General Electric after it rose over 20% from our purchase in the prior quarter.
The other stocks were sold to accommodate new holdings of Harley-Davidson,
Coach, Citigroup, American Express, Xilinx, and Microchip Technology.
During the third quarter, the Fund's sizable investment in information
technology, with particular exposure to the semiconductors & semiconductor
equipment industry, helped portfolio performance the most. Of the Fund's 10
holdings in the semiconductors & semiconductor equipment industry, nine
outperformed the S&P 500 Index during the quarter. We also added several new
names to the portfolio. The rising tide of "spam" and the growing threat of
computer viruses led us to Symantec, the leading provider of antivirus and
related Internet security software. We added Electronic Arts, Nextel
Communications, VERITAS, and Target to the portfolio during the third quarter as
well. We eliminated holdings in Kohl's, the specialty retailer and department
store operator, and in Janus Capital Group, which became the subject of an
investigation of alleged improper mutual-fund trading.
For the 10-month period overall, we increased the Fund's weightings in
information technology, health care, energy, and telecommunication services. We
decreased the Fund's weightings in the consumer discretionary sector,
particularly in the media industry, and we also reduced the Fund's weighting in
the financials sector. We generally maintained the Fund's weightings in consumer
staples and industrials.
LOOKING AHEAD
Positive returns in the U.S. stock market over the 10-month period have
certainly been a welcome turnabout from the prior three years. In our view,
however, the stock market has developed a tendency to overreact to every data
point released. The market can change direction in a violent heave if some
preliminary survey of dubious origin fails to meet expectations.
That said, we are finally seeing an improvement in global economic conditions,
and a number of blue-chip companies have recently reported improving business
conditions. Toward the end of the reporting period, unemployment claims fell to
their lowest level in eight months. This followed a report that the U.S. economy
added 57,000 jobs in September. We expect the Federal Reserve to stay on hold
until the economy is on firmer footing and is able to generate more jobs,
perhaps next year. In the meantime, the combination of rising corporate profits,
low interest rates, lower tax rates on dividends and capital gains, and high
investor cash levels may point to more good news for the U.S. equity market.
9
We temper this bullish view with the realization that share prices have already
moved sharply higher during the last 10 months, but we are particularly
optimistic for several industries. We have seen rising demand for information
technology from both the consumer and corporate sectors. Cell phone sales are
increasing. Semiconductor-chip sales have grown. Advertising has continued to
firm, with the exception of sluggish local radio spots. Enhancing the profit
outlook for many retailers is the better-than-expected back-to-school shopping
season and still-robust consumer spending. Many financial services companies
should benefit from heightened activity in the capital markets and from a rising
broad equity market.
Whatever the market or the economy brings, the Fund will continue to seek
capital appreciation by investing primarily in securities of
large-capitalization companies. Current income will remain a secondary
investment objective.
Howard F. Ward
Portfolio Manager
Gabelli Asset Management Company
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
10
Portfolio of Investments October 31, 2003
<Table>
<Caption>
SHARES VALUE
----------------------------
COMMON STOCKS (99.6%)+
AEROSPACE & DEFENSE (3.6%)
General Dynamics Corp. ........ 50,700 $ 4,243,590
L-3 Communications Holdings,
Inc. (a)...................... 110,000 5,141,400
United Technologies Corp. ..... 5,000 423,450
------------
9,808,440
------------
AUTOMOBILES (0.8%)
Harley-Davidson, Inc. ......... 45,000 2,133,450
------------
BEVERAGES (1.9%)
Coca-Cola Co. (The)............ 5,000 232,000
PepsiCo, Inc. ................. 100,000 4,782,000
------------
5,014,000
------------
BIOTECHNOLOGY (3.3%)
Amgen, Inc. (a)................ 145,800 9,004,608
------------
CAPITAL MARKETS (10.8%)
Charles Schwab Corp. (The)..... 209,300 2,838,108
Goldman Sachs Group, Inc.
(The)......................... 28,800 2,704,320
Mellon Financial Corp. ........ 78,900 2,356,743
Merrill Lynch & Co., Inc. ..... 116,700 6,908,640
Northern Trust Corp. .......... 109,900 5,104,855
State Street Corp. ............ 173,400 9,079,224
------------
28,991,890
------------
COMMERCIAL SERVICES & SUPPLIES (0.5%)
Cintas Corp. .................. 30,000 1,279,800
------------
COMMUNICATIONS EQUIPMENT (3.6%)
Cisco Systems, Inc. (a)........ 219,400 4,603,012
Nokia Corp. ADR (b)............ 147,000 2,497,530
QUALCOMM, Inc. ................ 56,400 2,679,000
------------
9,779,542
------------
COMPUTERS & PERIPHERALS (1.5%)
Dell, Inc. (a)................. 109,800 3,965,976
------------
CONSUMER FINANCE (0.9%)
American Express Co. .......... 50,000 2,346,500
------------
DIVERSIFIED FINANCIAL SERVICES (3.0%)
Citigroup, Inc. ............... 170,000 8,058,000
------------
ENERGY EQUIPMENT & SERVICES (1.2%)
Schlumberger Ltd. ............. 70,000 3,287,900
------------
</Table>
<Table>
<Caption>
SHARES VALUE
----------------------------
FOOD & STAPLES RETAILING (5.4%)
Sysco Corp. ................... 120,000 $ 4,039,200
Wal-Mart Stores, Inc. ......... 45,000 2,652,750
Walgreen Co. .................. 185,000 6,441,700
Whole Foods Market, Inc. (a)... 25,000 1,481,000
------------
14,614,650
------------
HEALTH CARE EQUIPMENT & SUPPLIES (3.0%)
Medtronic, Inc. ............... 180,000 8,202,600
------------
HEALTH CARE PROVIDERS & SERVICES (2.9%)
UnitedHealth Group, Inc. ...... 155,000 7,886,400
------------
HOTELS, RESTAURANTS & LEISURE (1.7%)
Cheesecake Factory (The) (a)... 45,000 1,797,300
Starbucks Corp. (a)............ 90,000 2,844,000
------------
4,641,300
------------
HOUSEHOLD PRODUCTS (0.2%)
Procter & Gamble Co. (The)..... 5,000 491,450
------------
INDUSTRIAL CONGLOMERATES (0.1%)
3M Co. ........................ 5,000 394,350
------------
INSURANCE (2.0%)
American International Group,
Inc. ......................... 10,000 608,300
Marsh & McLennan Cos., Inc. ... 114,200 4,882,050
------------
5,490,350
------------
INTERNET & CATALOG RETAIL (0.4%)
eBay, Inc. (a)................. 20,000 1,118,800
------------
MEDIA (11.8%)
Clear Channel Communications,
Inc. ......................... 164,000 6,694,480
General Motors Corp. Class H
(a)........................... 146,400 2,405,352
McGraw-Hill Cos., Inc. (The)... 49,400 3,307,330
Omnicom Group, Inc. ........... 32,500 2,593,500
Time Warner, Inc. (a).......... 665,900 10,181,611
Viacom, Inc. Class B........... 163,028 6,499,926
------------
31,682,199
------------
MULTILINE RETAIL (0.6%)
Target Corp. .................. 40,000 1,589,600
------------
OIL & GAS (4.0%)
Apache Corp. .................. 30,500 2,126,460
Murphy Oil Corp. .............. 77,000 4,541,460
Occidental Petroleum Corp. .... 120,000 4,231,200
------------
10,899,120
------------
</Table>
- -------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
MainStay Blue Chip Growth Fund
<Table>
<Caption>
SHARES VALUE
----------------------------
COMMON STOCKS (CONTINUED)
PHARMACEUTICALS (5.1%)
Johnson & Johnson.............. 83,200 $ 4,187,456
Lilly (Eli) & Co. ............. 39,100 2,604,842
Pfizer, Inc. .................. 216,950 6,855,620
------------
13,647,918
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (14.6%)
Analog Devices, Inc. (a)....... 104,500 4,632,485
Applied Materials, Inc. (a).... 120,000 2,804,400
Intel Corp. ................... 204,300 6,752,115
KLA-Tencor Corp. (a)........... 45,000 2,579,850
Linear Technology Corp. ....... 100,000 4,261,000
Microchip Technology, Inc. .... 145,000 4,742,950
Taiwan Semiconductor
Manufacturing Co. Ltd.
ADR(a)(b)..................... 333,600 3,689,616
Texas Instruments, Inc. ....... 201,400 5,824,488
Xilinx, Inc. (a)............... 125,000 3,962,500
------------
39,249,404
------------
SOFTWARE (7.1%)
Electronic Arts, Inc. (a)...... 50,000 4,952,000
Microsoft Corp. ............... 305,200 7,980,980
Symantec Corp. (a)............. 70,000 4,665,500
VERITAS Software Corp. (a)..... 40,000 1,446,000
------------
19,044,480
------------
SPECIALTY RETAIL (6.1%)
Bed Bath & Beyond, Inc. (a).... 60,000 2,534,400
Home Depot, Inc. (The)......... 173,450 6,429,792
Tiffany & Co. ................. 155,300 7,368,985
------------
16,333,177
------------
TEXTILES, APPAREL & LUXURY GOODS (0.1%)
Coach, Inc. (a)................ 10,000 354,700
------------
WIRELESS TELECOMMUNICATION SERVICES (3.4%)
Nextel Communications, Inc.
Class A (a)................... 195,000 4,719,000
Vodafone Group PLC ADR (b)..... 214,700 4,540,905
------------
9,259,905
------------
Total Common Stocks
(Cost $272,852,822)........... 268,570,509
------------
<Caption>
PRINCIPAL
AMOUNT VALUE
----------------------------
SHORT-TERM INVESTMENT (1.1%)
REPURCHASE AGREEMENT (1.1%)
State Street Bank and Trust
Co., 0.94%, dated 10/31/03,
due 11/3/03 Proceeds at
maturity $3,036,238
(Collateralized by $3,090,000
U.S. Treasury Note, 1.50%, due
2/28/05, market value
including accrued interest
$3,099,696)................... $3,036,000 $ 3,036,000
------------
Total Short-Term Investment
(Cost $3,036,000)............. 3,036,000
------------
Total Investments
(Cost $275,888,822) (c)....... 100.7% 271,606,509(d)
Liabilities in Excess of
Cash and Other Assets......... (0.7) (1,995,834)
---------- ------------
Net Assets..................... 100.0% $269,610,675
========== ============
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) ADR-American Depositary Receipt.
(c) The cost for federal income tax purposes is
$277,293,578.
(d) At October 31, 2003 net unrealized depreciation was
$5,687,069, 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 $28,458,497 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $34,145,566.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$275,888,822)............................................. $ 271,606,509
Cash........................................................ 820
Receivables:
Investment securities sold................................ 1,032,244
Dividends and interest.................................... 201,182
Fund shares sold.......................................... 177,380
Other assets................................................ 15,100
-------------
Total assets........................................ 273,033,235
-------------
LIABILITIES:
Payables:
Investment securities purchased........................... 1,941,568
Fund shares redeemed...................................... 652,574
Transfer agent............................................ 292,614
Manager................................................... 224,866
NYLIFE Distributors....................................... 183,600
Custodian................................................. 5,423
Trustees.................................................. 2,969
Accrued expenses............................................ 118,946
-------------
Total liabilities................................... 3,422,560
-------------
Net assets.................................................. $ 269,610,675
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 73,096
Class B................................................... 223,817
Class C................................................... 11,940
Additional paid-in capital.................................. 454,067,748
Accumulated net realized loss on investments................ (180,483,613)
Net unrealized depreciation on investments.................. (4,282,313)
-------------
Net assets.................................................. $ 269,610,675
=============
CLASS A
Net assets applicable to outstanding shares................. $ 65,810,873
=============
Shares of beneficial interest outstanding................... 7,309,576
=============
Net asset value per share outstanding....................... $ 9.00
Maximum sales charge (5.50% of offering price).............. 0.52
-------------
Maximum offering price per share outstanding................ $ 9.52
=============
CLASS B
Net assets applicable to outstanding shares................. $ 193,478,272
=============
Shares of beneficial interest outstanding................... 22,381,702
=============
Net asset value and offering price per share outstanding.... $ 8.64
=============
CLASS C
Net assets applicable to outstanding shares................. $ 10,321,530
=============
Shares of beneficial interest outstanding................... 1,194,009
=============
Net asset value and offering price per share outstanding.... $ 8.64
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
------------- -------------
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 1,662,338 $ 2,071,638
Interest.................................................. 26,911 37,185
------------- -------------
Total income............................................ 1,689,249 2,108,823
------------- -------------
Expenses:
Manager................................................... 1,955,981 2,797,493
Transfer agent............................................ 1,472,301 1,879,124
Distribution--Class B..................................... 1,056,296 1,538,489
Distribution--Class C..................................... 57,713 97,422
Service--Class A.......................................... 117,659 154,070
Service--Class B.......................................... 352,099 512,829
Service--Class C.......................................... 19,238 32,474
Shareholder communication................................. 86,872 120,413
Professional.............................................. 54,455 63,612
Recordkeeping............................................. 41,771 54,643
Registration.............................................. 35,029 35,098
Custodian................................................. 26,588 35,635
Trustees.................................................. 11,706 16,445
Miscellaneous............................................. 20,919 26,289
------------- -------------
Total expenses.......................................... 5,308,627 7,364,036
------------- -------------
Net investment loss......................................... (3,619,378) (5,255,213)
------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments............................ (50,420,499) (96,051,320)
Net change in unrealized depreciation on investments........ 104,224,698 (20,903,747)
------------- -------------
Net realized and unrealized gain (loss) on investments...... 53,804,199 (116,955,067)
------------- -------------
Net increase (decrease) in net assets resulting from
operations................................................ $ 50,184,821 $(122,210,280)
============= =============
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
(a) Dividends recorded net of foreign withholding taxes of $16,766 and $15,141
for 2003 and 2002, respectively.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ------------- -------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss....................................... $ (3,619,378) $ (5,255,213) $ (6,863,281)
Net realized loss on investments.......................... (50,420,499) (96,051,320) (22,453,537)
Net change in unrealized appreciation (depreciation) on
investments............................................. 104,224,698 (20,903,747) (97,419,155)
------------ ------------- -------------
Net increase (decrease) in net assets resulting from
operations.............................................. 50,184,821 (122,210,280) (126,735,973)
------------ ------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 18,011,660 24,856,805 28,516,964
Class B................................................. 23,662,198 33,040,173 55,081,324
Class C................................................. 4,543,423 3,142,593 6,110,014
------------ ------------- -------------
46,217,281 61,039,571 89,708,302
Cost of shares redeemed:
Class A................................................. (15,959,787) (24,744,474) (35,884,473)
Class B................................................. (26,217,013) (51,653,418) (68,099,834)
Class C................................................. (5,619,503) (5,099,636) (4,718,905)
------------ ------------- -------------
Decrease in net assets derived from capital share
transactions........................................ (1,579,022) (20,457,957) (18,994,910)
------------ ------------- -------------
Net increase (decrease) in net assets................. 48,605,799 (142,668,237) (145,730,883)
NET ASSETS:
Beginning of period......................................... 221,004,876 363,673,113 509,403,996
------------ ------------- -------------
End of period............................................... $269,610,675 $ 221,004,876 $ 363,673,113
============ ============= =============
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
------------------------------------------------------------------------------------
January 1, 2003 June 1**
through Year ended December 31, through
October 31, -------------------------------------------------- December 31,
2003* 2002 2001 2000 1999 1998
--------------- -------- -------- -------- -------- ------------
Net asset value at beginning of period..... $ 7.27 $ 11.00 $ 14.43 $ 16.50 $ 11.64 $ 10.00
-------- -------- -------- -------- -------- --------
Net investment loss (a).................... (0.08) (0.11) (0.13) (0.14) (0.13) (0.07)
Net realized and unrealized gain (loss) on
investments............................... 1.81 (3.62) (3.30) (1.49) 4.99 1.71
-------- -------- -------- -------- -------- --------
Total from investment operations........... 1.73 (3.73) (3.43) (1.63) 4.86 1.64
-------- -------- -------- -------- -------- --------
Less distributions to shareholders:
From net realized gain on investments..... -- -- -- (0.39) -- --
In excess of net realized gain on
investments............................. -- -- -- (0.05) -- --
-------- -------- -------- -------- -------- --------
Total distributions to shareholders........ -- -- -- (0.44) -- --
-------- -------- -------- -------- -------- --------
Net asset value at end of period........... $ 9.00 $ 7.27 $ 11.00 $ 14.43 $ 16.50 $ 11.64
======== ======== ======== ======== ======== ========
Total investment return (b)................ 23.80% (33.91%) (23.77%) (9.89%) 41.75% 16.40%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss..................... (1.28%)+ (1.29%) (1.10%) (0.87%) (1.02%) (1.66%)+
Expenses................................ 2.14%+ 2.05% 1.81% 1.66% 1.76% 2.34%+
Portfolio turnover rate.................... 40% 32% 27% 46% 43% 21%
Net assets at end of period (in 000's)..... $ 65,811 $ 51,258 $ 77,548 $114,088 $ 66,326 $ 19,361
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of Operations.
*** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<Table>
<Caption>
Class B Class C
-------------------------------------------------------------------------- ---------------
January 1, 2003 June 1** January 1, 2003
through Year ended December 31, through through
October 31, ----------------------------------------- December 31, October 31,
2003* 2002 2001 2000 1999 1998 2003*
--------------- -------- -------- -------- -------- ------------ ---------------
$ 7.03 $ 10.71 $ 14.17 $ 16.33 $ 11.60 $ 10.00 $ 7.03
-------- -------- -------- -------- -------- -------- --------
(0.13) (0.19) (0.21) (0.26) (0.23) (0.10) (0.13)
1.74 (3.49) (3.25) (1.46) 4.96 1.70 1.74
-------- -------- -------- -------- -------- -------- --------
1.61 (3.68) (3.46) (1.72) 4.73 1.60 1.61
-------- -------- -------- -------- -------- -------- --------
-- -- -- (0.39) -- -- --
-- -- -- (0.05) -- -- --
-------- -------- -------- -------- -------- -------- --------
-- -- -- (0.44) -- -- --
-------- -------- -------- -------- -------- -------- --------
$ 8.64 $ 7.03 $ 10.71 $ 14.17 $ 16.33 $ 11.60 $ 8.64
======== ======== ======== ======== ======== ======== ========
22.90% (34.36%) (24.42%) (10.55%) 40.78% 16.00% 22.90%
(2.03%)+ (2.04%) (1.85%) (1.62%) (1.77%) (2.41%)+ (2.03%)+
2.89%+ 2.80% 2.56% 2.41% 2.51% 3.09%+ 2.89%+
40% 32% 27% 46% 43% 21% 40%
$193,478 $160,249 $268,947 $373,652 $222,904 $ 38,478 $ 10,322
<Caption>
Class C
----------------------------------------------------------
September 1***
Year ended December 31, through
----------------------------------------- December 31,
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------------
$ 10.71 $ 14.17 $ 16.33 $ 11.60 $ 8.60
-------- -------- -------- -------- -------
(0.19) (0.21) (0.26) (0.23) (0.06)
(3.49) (3.25) (1.46) 4.96 3.06
-------- -------- -------- -------- -------
(3.68) (3.46) (1.72) 4.73 3.00
-------- -------- -------- -------- -------
-- -- (0.39) -- --
-- -- (0.05) -- --
-------- -------- -------- -------- -------
-- -- (0.44) -- --
-------- -------- -------- -------- -------
$ 7.03 10.71 $ 14.17 $ 16.33 $ 11.60
======== ======== ======== ======== =======
(34.36%) (24.42%) (10.55%) 40.78% 34.88%
(2.04%) (1.85%) (1.62%) (1.77%) (2.41%)+
2.80% 2.56% 2.41% 2.51% 3.09%+
32% 27% 46% 43% 21%
$ 9,498 $ 17,178 $ 21,664 $ 7,133 $ 120
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
MainStay Blue Chip Growth Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and is comprised of twenty-four funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to MainStay
Blue Chip Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and within one year of purchase
of Class C shares. Class A shares, Class B shares and Class C shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions except that the Class B shares and
Class C shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek capital appreciation by investing
primarily in securities of large-capitalization companies. Current income is a
secondary investment objective.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
(B) REPURCHASE AGREEMENTS. The Fund's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market
18
Notes to Financial Statements
basis to determine that the value, including accrued interest, exceeds the
repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(C) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay any
dividends quarterly and capital gains distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current year reclassification between
accumulated net investment loss and paid-in-capital arising from permanent
differences; net assets at October 31, 2003, are not affected.
<Table>
<Caption>
ACCUMULATED
NET INVESTMENT ADDITIONAL
LOSS PAID-IN CAPITAL
-------------- ---------------
$3,619,378 $(3,619,378)
</Table>
The reclassification for the Fund is due to net operating losses.
(E) 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 as earned.
19
MainStay Blue Chip Growth Fund
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(F) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(G) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, record-keeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. Gabelli
Asset Management Company (the "Subadvisor") is responsible for the day-to-day
portfolio management of the Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 1.00% of the Fund's
average daily net assets. For the ten months ended October 31, 2003, the Manager
earned from the Fund $1,955,981. For the year ended December 31, 2002, the
Manager earned from the Fund $2,797,493.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and the
Subadvisor, the Manager paid the Subadvisor a monthly fee at an annual rate of
0.50% of the average daily net assets of the Fund.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"). The
Fund, with respect to each class of shares, has adopted distribution plans (the
"Plans") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives a monthly fee from the
Fund at an annual rate of 0.25% of the average daily net assets of the Fund's
Class A shares, which is an expense
20
Notes to Financial Statements (continued)
of the Class A shares of the Fund for distribution or service activities as
designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Distribution Plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $1,945 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $1,628, $216,659 and $1,980, respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003, and year ended December 31, 2002, amounted to
$1,472,301, and $1,879,124, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the Blue Chip
Growth Fund only pays a portion of the fees identified above.
(F) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $4,945 for the ten months ended October
31, 2003 and $5,302 for the year ended December 31, 2002.
21
MainStay Blue Chip Growth Fund
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $41,771 for the ten months ended October
31, 2003 and $54,643 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES DEPRECIATION LOSS
- ------------------- ------------ -----------------
$(179,078,857) $(5,687,069) $(184,765,926)
</Table>
The difference between book-basis and tax-basis unrealized depreciation is
primarily due to wash sales deferrals.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $179,078,857 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains through the years
indicated. 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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
- ----------------- --------
2009................................................... $ 26,377
2010................................................... 99,424
2011................................................... 53,278
--------
$179,079
========
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than securities subject to repurchase transactions and short-term
securities, were $93,260 and $98,057, respectively.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other
22
Notes to Financial Statements (continued)
factors. Interest on any revolving credit loan is charged based upon the Federal
Funds Advances rate. There were no borrowings on the line of credit during the
ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
JANUARY 1, YEAR ENDED DECEMBER 31,
THROUGH ---------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold............... 2,309 3,123 637 2,849 3,888 377 2,387 4,702 504
Shares redeemed........... (2,047) (3,547) (795) (2,850) (6,192) (629) (3,243) (5,970) (429)
------ ------ ---- ------ ------ ----- ------ ------ ----
Net increase (decrease)... 262 (424) (158) (1) (2,304) (252) (856) (1,268) 75
====== ====== ==== ====== ====== ===== ====== ====== ====
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
23
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Blue Chip Growth Fund
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 Blue Chip Growth Fund (one
of the funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
24
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
25
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
26
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
27
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
D/B/A/ MERCURY ADVISORS
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
28
This page intentionally left blank
This page intentionally left blank
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY FUNDS LOGO]
MainStay is a division of New York Life Investment
Management LLC, the investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSBC11- 12/03
NYLIM-A04328 18
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
Blue Chip Growth Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY FUNDS LOGO]
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay Mid Cap
Growth Fund versus Russell 2500(TM) Growth
Index, S&P MidCap 400(R) Index, and
Inflation--
Class A, Class B, and Class C Shares 4
Portfolio Management Discussion and Analysis 6
Year-by-Year and 10-Month Performance 7
Portfolio of Investments 10
Financial Statements 12
Notes to Financial Statements 16
Report of Independent Auditors 22
Trustees and Officers 23
The MainStay(R) Funds 26
</Table>
This page intentionally left blank
2
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
3
$10,000 Invested in MainStay Mid Cap Growth Fund versus Russell 2500(TM) Growth
Index, S&P MidCap 400(R) Index, and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 24.24%, Since Inception (1/2/01) -8.49%
[CLASS A SHARES PERFORMANCE LINE GRAPH]
<Table>
<Caption>
Period-End MainStay Mid Cap Growth Fund Russell 2500 Growth Index(1)
- ----------
1/2/01 $ 9,450.00 $ 10,000.00
10/31/01 7,078.00 7,781.00
10/31/02 5,916.00 6,175.00
10/31/03 7,777.00 8,938.00
<Caption>
Period-End S&P MidCap 400 Index(2) Inflation (CPI)(3)
- ----------
1/2/01 $ 10,000.00 $ 10,000.00
10/31/01 8,797.00 10,172.00
10/31/02 8,377.00 10,384.00
10/31/03 10,941.00 10,596.00
</Table>
CLASS B SHARES
Total Returns with Sales Charges: 1 Year 25.47%, Since Inception (1/2/01) -8.36%
[CLASS B SHARES PERFORMANCE LINE GRAPH]
<Table>
<Caption>
Period-End MainStay Mid Cap Growth Fund Russell 2500 Growth Index(1)
- ----------
1/2/01 $ 10,000.00 $ 10,000.00
10/31/01 7,440.00 7,781.00
10/31/02 6,170.00 6,175.00
10/31/03 7,809.00 8,938.00
<Caption>
Perod-End S&P MidCap 400 Index(2) Inflation (CPI)(3)
- ---------
1/2/01 $ 10,000.00 $ 10,000.00
10/31/01 8,797.00 10,172.00
10/31/02 8,377.00 10,384.00
10/31/03 10,941.00 10,596.00
</Table>
CLASS C SHARES
Total Returns with Sales Charges: 1 Year 29.47%, Since Inception (1/2/01) -7.37%
[CLASS C SHARES PERFORMANCE LINE GRAPH]
<Table>
<Caption>
Period-End MainStay Mid Cap Growth Fund Russell 2500 Growth Index(1)
- ----------
1/2/01 $ 10,000.00 $ 10,000.00
10/31/01 7,440.00 7,781.00
10/31/02 6,170.00 6,175.00
10/31/03 8,050.00 8,938.00
<Caption>
Period-End S&P MidCap 400 Index(2) Inflation (CPI)(3)
- ----------
1/2/01 $ 10,000.00 $ 10,000.00
10/31/01 8,797.00 10,172.00
10/31/02 8,377.00 10,384.00
10/31/03 10,941.00 10,596.00
</Table>
- ----------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS
THAN THAT SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, UPON REDEMPTION, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR
MORE CURRENT PERFORMANCE INFORMATION PLEASE VISIT WWW.MAINSTAYFUNDS.COM.
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
4
- -------
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect change in share price, reinvestment of dividend and capital gain
distributions, and maximum applicable sales charges, as explained in this
paragraph. The graphs assume an initial investment of $10,000 and reflect
deduction of all sales charges that would have applied for the period of
investment. Class A share performance reflects the effect of the maximum 5.5%
initial sales charge. Class B shares are subject to a contingent deferred sales
charge (CDSC) of up to 5% if shares are redeemed within the first six years of
purchase. Class B share performance reflects a CDSC of 3%, which would apply for
the period shown. Class C shares would be subject to a CDSC of 1% if redeemed
within one year of purchase.
1. The Russell 2500(TM) Growth Index is an unmanaged index that measures the
performance of those Russell 2500(TM) companies with higher price-to-book
ratios and higher forecasted growth values. The Russell 2500(TM) Index is an
unmanaged index that measures the performance of the 2,500 smallest companies
in the Russell 3000(R) Index, which, in turn, is an unmanaged index that
measures the performance of the 3,000 largest U.S. companies based on total
market capitalization. Results assume reinvestment of all income and capital
gains. An investment cannot be made directly into an index.
2. The S&P MidCap 400(R) Index is an unmanaged, market-value weighted index that
consists of 400 domestic stocks chosen for market size, liquidity, and
industry group representation. The Index is widely regarded as the standard
for measuring the market for domestic midcap stocks. Results assume
reinvestment of all income and capital gains. An investment cannot be made
directly into an index.
3. Inflation is measured 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. The rate of inflation does not represent an investment
return.
5
Portfolio Management Discussion and Analysis
The 10 months ended October 31, 2003, presented several challenges to equity
investors. Not only did they have to endure the volatility associated with
military action in Iraq, but they also had to contend with a constant stream of
mixed economic indicators, which added to market volatility and uncertainty.
Looking back, early signs of an economic recovery began to take shape toward the
end of 2002, but these indicators declined through much of the first quarter of
2003. After the stock market reached its year-to-date low in mid-March, stocks
rallied sharply through the end of the reporting period.
The Federal Reserve lowered the targeted federal funds rate by 25 basis points
in June 2003, its thirteenth easing move since the beginning of 2001. The latest
move brought short-term rates to 1.0%--a four-decade low. Real gross domes tic
product grew at a modest pace in the first quarter of 2003, somewhat faster in
the second, and quite rapidly in the third. According to preliminary estimates
by the Bureau of Economic Analysis, real gross domestic product grew at a
seasonally adjusted annual rate of 8.2% in the third quarter of 2003, its
fastest pace since the first quarter of 1984.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Mid Cap Growth Fund returned
40.44% for Class A shares and 39.51% for Class B and Class C shares, excluding
all sales charges. All share classes outperformed the 32.29% return of the
average Lipper(1) mid-cap growth fund, but slightly underperformed the 41.38%
return of the Russell 2500(TM) Growth Index.(2) All share classes significantly
outper formed the 28.76% return of the S&P MidCap 400(R) Index(3) for the 10
months ended October 31, 2003.
STRONG AND WEAK PERFORMERS
During the reporting period, many of the Fund's best-performing stocks were in
the consumer discretionary sector. Since consumer income and spending remained
at healthy levels, the Fund benefited from its investments in key consumer-
related areas such as housing and retail.
The most significant positive contributors to Fund results were homebuilding
companies D.R. Horton and MDC Holdings. Other notable performers included
luxury-goods manufacturer and retailer Coach, retailers Fred's and Chico's FAS,
home builders Lennar and KB Home, and audio and video equipment maker Harman
International Industries. Each of these stocks posted double- or triple-digit
gains over the period.
- -------
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 5 for more information about the Russell 2500(TM) Growth
Index.
3. See footnote on page 5 for more information about the S&P MidCap 400(R)
Index.
6
7
-
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[LINE GRAPH]
<Table>
<Caption>
Period-end Total Return %
- ---------- --------------
12/01 -17.50
12/02 -28.97
10/03 40.44
</Table>
CLASS B AND CLASS C SHARES
<Table>
<Caption>
Period-end Total Return %
- ---------- --------------
12/01 -18.20
12/02 -29.46
10/03 39.51
</Table>
Continued positive trends in the housing market, including historically low
mortgage rates, rising household formation, and a favorable pricing environment,
bolstered the financial results of homebuilding companies. Coach was the
beneficiary of strong performance from handbags and small leather goods. Harman
International Industries' stock rose as the company set sales and earnings
records. These advances were partly attributable to the successful creation of
audio products for high-end German automakers Mercedes-Benz, BMW, Porsche, and
Audi. Fred's performed well on news of growth in same-store sales during the
reporting period, especially in the third quarter of 2003.
The Fund's holdings in the financials sector also strengthened performance
during the reporting period. Low interest rates, a rising equity market, and
7
strong demand for mortgages benefited many banks and financial-services
organizations. Notable performers in the portfolio included Capital One
Financial, New York Community Bancorp, and UCBH Holdings.
The Fund's underweighted position in the information technology sector ad
versely affected its performance during the reporting period. While many of the
Fund's stocks in the sector posted positive absolute returns, the lack of
representation in certain companies hindered performance. The Fund's relative
results were particularly hurt by not having a large exposure to many richly
valued, money-losing companies whose stock prices soared during the first
10-months of 2003. The Fund's largest contributor to performance in the
information technology sector was Qlogic. Other strong performers included
communications equipment company UTStarcom, computer peripherals provider
Avocent, and software and programming firm Symantec. One holding that
experienced a significant decline was The BISYS Group, a computer-services firm.
We eliminated the stock from the Fund's portfolio in April 2003. Other
detractors within the information technology sector were Tech Data, Cabot
Microelectronics, and SERENA Software--all of which were eliminated from the
Fund's portfolio.
The Fund's health care holdings also detracted considerably from relative per
formance. Not only did the Fund hold an overweighted position in this under
performing sector, but our stock selection was also detrimental. The largest
negative contributors were pharmaceutical drug makers Biovail and MedImmune,
drug distributor AmerisourceBergen, and health care facilities providers Accredo
Health and Triad Hospitals. Although the sector was a net detractor from
performance, a few health care stocks enhanced the Fund's results. Among them
were medical equipment maker Cooper Companies, managed health care players
Coventry Health Care and Mid Atlantic Medical Services, and generic drug maker
Barr Laboratories.
SECTOR WEIGHTINGS
A few adjustments were made to the portfolio during the reporting period. The
Fund added to its information technology holdings, while reducing its weighting
in consumer discretionary and health care stocks. As of October 31, 2003, the
Fund was significantly overweighted in the consumer discretionary sector and
slightly overweighted in health care relative to the Russell 2500 Growth Index.
Underweighted sectors at the end of the reporting period included energy,
information technology, consumer staples, materials, and telecommunications. The
Fund was slightly underweighted in financials and utilities and held a market
weight in the industrials sector.
8
LOOKING AHEAD
We believe that the key to sustained gains in the equity markets lies in further
improvement in the economy. Based on the latest gross domestic product figures,
we are maintaining a positive outlook in this regard. We will continue to invest
in high-quality mid-cap growth companies in major sectors that we believe are
poised for further growth, including information technology, consumer, health
care, industrials, and financials.
Whatever the markets or the economy may bring, the Fund will continue to seek
long-term growth of capital.
Rudolph C. Carryl
Edmund C. Spelman
Portfolio Managers
MacKay Shields LLC
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
9
MainStay Mid Cap Growth Fund
<Table>
<Caption>
SHARES VALUE
--------------------------
COMMON STOCKS (99.8%)+
AEROSPACE & DEFENSE (4.5%)
Alliant Techsystems, Inc. (a)... 11,250 $ 582,300
Empresa Brasileira de
Aeronautica S.A. ADR (a)(b).... 30,100 781,095
L-3 Communications Holdings,
Inc. (a)....................... 13,100 612,294
United Defense Industries, Inc.
(a)............................ 20,700 670,680
-----------
2,646,369
-----------
AIRLINES (3.9%)
JetBlue Airways Corp. (a)....... 18,000 1,038,240
Ryanair Holdings PLC ADR
(a)(b)......................... 13,200 679,800
SkyWest, Inc. .................. 30,900 571,341
-----------
2,289,381
-----------
AUTOMOBILES (1.6%)
Winnebago Industries, Inc. ..... 16,100 938,630
-----------
BIOTECHNOLOGY (1.2%)
Gilead Sciences, Inc. (a)....... 12,600 687,708
-----------
COMMERCIAL BANKS (2.2%)
UCBH Holdings, Inc. ............ 19,200 685,632
Westcorp........................ 16,400 620,248
-----------
1,305,880
-----------
COMMERCIAL SERVICES & SUPPLIES (3.5%)
Apollo Group, Inc. Class A
(a)............................ 10,700 679,771
Career Education Corp. (a)...... 13,100 701,505
Education Management Corp.
(a)............................ 10,400 657,072
-----------
2,038,348
-----------
COMMUNICATIONS EQUIPMENT (4.9%)
Avocent Corp. (a)............... 18,300 691,740
Emulex Corp. (a)................ 20,100 569,232
QLogic Corp. (a)................ 17,700 992,085
UTStarcom, Inc. (a)............. 19,300 607,950
-----------
2,861,007
-----------
COMPUTERS & PERIPHERALS (0.9%)
Storage Technology Corp. (a).... 21,900 527,790
-----------
CONSTRUCTION & ENGINEERING (2.0%)
Fluor Corp. .................... 16,300 604,404
Jacobs Engineering Group, Inc.
(a)............................ 12,600 583,632
-----------
1,188,036
-----------
CONSUMER FINANCE (1.9%)
Capital One Financial Corp. .... 12,000 729,600
Providian Financial Corp. (a)... 37,000 411,070
-----------
1,140,670
-----------
</Table>
<Table>
<Caption>
SHARES VALUE
--------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (3.4%)
Amphenol Corp. Class A (a)...... 10,000 $ 587,500
CDW Corp. ...................... 10,300 618,515
Garmin Ltd. (a)................. 15,500 775,465
-----------
1,981,480
-----------
HEALTH CARE EQUIPMENT & SUPPLIES (3.4%)
Cooper Cos., Inc. (The)......... 19,700 855,965
Cytyc Corp. (a)................. 44,300 572,799
St. Jude Medical, Inc. (a)...... 9,400 546,704
-----------
1,975,468
-----------
HEALTH CARE PROVIDERS & SERVICES (11.9%)
AmerisourceBergen Corp. ........ 9,300 527,961
Anthem, Inc. (a)................ 10,922 747,392
Caremark Rx, Inc. (a)........... 27,800 696,390
Coventry Health Care, Inc.
(a)............................ 13,900 761,025
Health Management Associates,
Inc. Class A................... 25,900 573,685
Henry Schein, Inc. (a).......... 9,800 608,090
Mid Atlantic Medical Services,
Inc. (a)....................... 12,500 730,000
Oxford Health Plans, Inc. (a)... 14,600 591,300
Patterson Dental Co. (a)........ 9,300 595,014
Pharmaceutical Product
Development, Inc. (a).......... 18,900 568,323
Quest Diagnostics, Inc. (a)..... 9,100 615,615
-----------
7,014,795
-----------
HOUSEHOLD DURABLES (14.7%)
Centex Corp. ................... 8,000 780,000
D.R. Horton, Inc. .............. 35,300 1,404,940
Harman International Industries,
Inc. .......................... 6,500 833,300
Hovnanian Enterprises, Inc.
Class A (a).................... 8,000 650,240
KB Home......................... 15,900 1,088,991
Lennar Corp. Class A............ 12,200 1,120,570
Lennar Corp. Class B............ 1,450 125,932
M.D.C. Holdings, Inc. .......... 18,300 1,231,956
Ryland Group, Inc. (The)........ 7,000 622,300
Toro Co. (The).................. 16,100 800,170
-----------
8,658,399
-----------
IT SERVICES (1.1%)
Affiliated Computer Services,
Inc. Class A (a)............... 13,700 670,341
-----------
LEISURE EQUIPMENT & PRODUCTS (0.5%)
Brunswick Corp. ................ 10,200 302,634
-----------
MACHINERY (0.1%)
Oshkosh Truck Corp. ............ 1,000 45,830
-----------
METALS & MINING (0.1%)
Massey Energy Co. .............. 5,600 77,840
-----------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
Portfolio of Investments October 31, 2003
<Table>
<Caption>
SHARES VALUE
--------------------------
COMMON STOCKS (CONTINUED)
MULTILINE RETAIL (2.2%)
99 Cents Only Stores (a)........ 21,200 $ 631,124
Fred's, Inc. ................... 17,900 674,472
-----------
1,305,596
-----------
PHARMACEUTICALS (5.6%)
American Pharmaceutical
Partners, Inc. (a)............. 25,200 613,620
Barr Laboratories, Inc. (a)..... 10,100 775,377
Endo Pharmaceuticals Holdings,
Inc. (a)....................... 30,000 490,800
Eon Labs, Inc. (a).............. 14,000 589,540
SICOR, Inc. (a)................. 29,700 795,960
-----------
3,265,297
-----------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (7.4%)
Altera Corp. (a)................ 31,600 639,268
ATI Technologies, Inc. (a)...... 45,000 643,950
Integrated Circuit Systems, Inc.
(a)............................ 17,200 577,404
Novellus Systems, Inc. (a)...... 16,500 681,285
NVIDIA Corp. (a)................ 36,900 652,392
Semtech Corp. (a)............... 30,600 679,320
Silicon Laboratories, Inc.
(a)............................ 8,500 458,830
-----------
4,332,449
-----------
SOFTWARE (7.5%)
Activision, Inc. (a)............ 39,950 602,846
Amdocs Ltd. (a)................. 25,700 551,522
Autodesk, Inc. ................. 33,600 646,800
FactSet Research Systems,
Inc. .......................... 15,100 658,964
Siebel Systems, Inc. (a)........ 49,300 620,687
Symantec Corp. (a).............. 11,400 759,810
Synopsys, Inc. (a).............. 18,200 577,304
-----------
4,417,933
-----------
SPECIALTY RETAIL (6.7%)
Abercrombie & Fitch Co. Class A
(a)............................ 1,600 45,600
AutoZone, Inc. (a).............. 9,100 874,510
</Table>
<Table>
<Caption>
SHARES VALUE
--------------------------
SPECIALTY RETAIL (CONTINUED)
Chico's FAS, Inc. (a)........... 28,400 $ 1,066,136
Claire's Stores, Inc. .......... 16,600 642,420
Michaels Stores, Inc. .......... 15,400 731,038
Pier 1 Imports, Inc. ........... 26,100 602,910
-----------
3,962,614
-----------
TEXTILES, APPAREL & LUXURY GOODS (3.0%)
Coach, Inc. (a)................. 27,800 986,066
Columbia Sportswear Co. (a)..... 2,500 145,600
Liz Claiborne, Inc. ............ 16,900 623,441
-----------
1,755,107
-----------
THRIFTS & MORTGAGE FINANCE (5.6%)
Doral Financial Corp. .......... 8,000 404,000
IndyMac Bancorp, Inc. .......... 20,800 611,520
New Century Financial Corp. .... 18,200 674,856
New York Community Bancorp,
Inc. .......................... 23,700 857,940
PMI Group, Inc. (The)........... 20,100 768,423
-----------
3,316,739
-----------
Total Investments
(Cost $44,130,052) (c)......... 99.8% 58,706,341(d)
Cash and Other Assets,
Less Liabilities............... 0.2 104,285
-------- -----------
Net Assets...................... 100.0% $58,810,626
======== ===========
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) ADR-American Depositary Receipt.
(c) The cost for federal income tax purposes is $44,342,122.
(d) At October 31, 2003, net unrealized appreciation was
$14,364,219, 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 $17,768,847 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $3,404,628.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$44,130,052).............................................. $ 58,706,341
Cash........................................................ 63,489
Receivables:
Investment securities sold................................ 1,056,708
Fund shares sold.......................................... 291,314
Dividends and interest.................................... 2,132
Other assets................................................ 7,645
------------
Total assets........................................ 60,127,629
------------
LIABILITIES:
Payables:
Investment securities purchased........................... 1,073,755
Fund shares redeemed...................................... 121,265
Transfer agent............................................ 37,321
NYLIFE Distributors....................................... 25,159
Shareholder communication................................. 19,752
Manager................................................... 4,144
Custodian................................................. 3,054
Accrued expenses............................................ 32,553
------------
Total liabilities................................... 1,317,003
------------
Net assets.................................................. $ 58,810,626
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 43,083
Class B................................................... 26,313
Class C................................................... 2,668
Additional paid-in capital.................................. 59,561,667
Accumulated net realized loss on investments................ (15,399,394)
Net unrealized appreciation on investments.................. 14,576,289
------------
Net assets.................................................. $ 58,810,626
============
CLASS A
Net assets applicable to outstanding shares................. $ 35,473,188
============
Shares of beneficial interest outstanding................... 4,308,280
============
Net asset value and offering price per share outstanding.... $ 8.23
Maximum sales charge (5.50% of offering price).............. 0.48
------------
Maximum offering price per share outstanding................ $ 8.71
============
CLASS B
Net assets applicable to outstanding shares................. $ 21,189,158
============
Shares of beneficial interest outstanding................... 2,631,331
============
Net asset value and offering price per share outstanding.... $ 8.05
============
CLASS C
Net assets applicable to outstanding shares................. $ 2,148,280
============
Shares of beneficial interest outstanding................... 266,761
============
Net asset value and offering price per share outstanding.... $ 8.05
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
----------- ------------
INVESTMENT INCOME:
Income:
Dividends................................................. $ 87,982 $ 80,033
Interest.................................................. 3,200 4,437
----------- ------------
Total income............................................ 91,182 84,470
----------- ------------
Expenses:
Manager................................................... 235,968 225,245
Transfer agent............................................ 166,222 131,670
Distribution--Class B..................................... 73,864 54,703
Distribution--Class C..................................... 7,738 5,186
Service--Class A.......................................... 51,455 55,119
Service--Class B.......................................... 24,621 18,234
Service--Class C.......................................... 2,580 1,729
Professional.............................................. 34,045 23,194
Registration.............................................. 30,166 20,314
Shareholder communication................................. 20,364 18,343
Recordkeeping............................................. 13,343 13,347
Custodian................................................. 11,839 11,184
Pricing service........................................... 5,621 7,057
Trustees.................................................. 4,017 5,116
Miscellaneous............................................. 14,074 14,228
----------- ------------
Total expenses before reimbursement..................... 695,917 604,669
Expense reimbursement by Manager and Subadvisor............. (142,380) (94,291)
----------- ------------
Net expenses............................................ 553,537 510,378
----------- ------------
Net investment loss......................................... (462,355) (425,908)
----------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments............................ (1,756,946) (6,946,950)
Net change in unrealized appreciation (depreciation) on
investments............................................... 15,761,181 (3,025,659)
----------- ------------
Net realized and unrealized gain (loss) on investments...... 14,004,235 (9,972,609)
----------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ $13,541,880 $(10,398,517)
=========== ============
</Table>
- -------
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
----------- ------------ -----------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss....................................... $ (462,355) $ (425,908) $ (294,173)
Net realized loss on investments.......................... (1,756,946) (6,946,950) (6,695,498)
Net change in unrealized appreciation (depreciation) on
investments............................................. 15,761,181 (3,025,659) 1,840,767
----------- ------------ -----------
Net increase (decrease) in net assets resulting from
operations.............................................. 13,541,880 (10,398,517) (5,148,904)
----------- ------------ -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 12,367,959 3,979,306 28,574,669
Class B................................................. 11,727,874 7,151,208 6,368,736
Class C................................................. 1,041,539 1,014,803 358,382
Cost of shares redeemed:
Class A................................................. (4,281,113) (1,072,848) (949,395)
Class B................................................. (2,673,803) (1,794,153) (628,342)
Class C................................................. (207,215) (108,797) (52,643)
----------- ------------ -----------
Increase in net assets derived from capital share
transactions........................................ 17,975,241 9,169,519 33,671,407
----------- ------------ -----------
Net increase (decrease) in net assets................. 31,517,121 (1,228,998) 28,522,503
NET ASSETS:
Beginning of period......................................... 27,293,505 28,522,503 --
----------- ------------ -----------
End of period............................................... $58,810,626 $ 27,293,505 $28,522,503
=========== ============ ===========
</Table>
- -------
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A Class B Class C
---------------------------------- ---------------------------------- -----------
January 1, January 1, January 1,
2003 Year ended 2003 Year ended 2003
through December 31, through December 31, through
October 31, -------------------- October 31, -------------------- October 31,
2003* 2002 2001 2003* 2002 2001 2003*
----------- ------- ------- ----------- ------- ------- -----------
Net asset value at beginning of
period............................. $ 5.86 $ 8.25 $ 10.00 $ 5.77 $ 8.18 $ 10.00 $ 5.77
------- ------- ------- ------- ------- ------- ------
Net investment loss (a)............. (0.07) (0.09) (0.09) (0.11) (0.13) (0.14) (0.11)
Net realized and unrealized gain
(loss) on investments.............. 2.44 (2.30) (1.66) 2.39 (2.28) (1.68) 2.39
------- ------- ------- ------- ------- ------- ------
Total from investment operations.... 2.37 (2.39) (1.75) 2.28 (2.41) (1.82) 2.28
------- ------- ------- ------- ------- ------- ------
Net asset value at end of period.... $ 8.23 $ 5.86 $ 8.25 $ 8.05 $ 5.77 $ 8.18 $ 8.05
======= ======= ======= ======= ======= ======= ======
Total investment return (b)......... 40.44% (28.97%) (17.50%) 39.51% (29.46%) (18.20%) 39.51%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss............... (1.21%)+ (1.22%) (1.01%) (1.96%)+ (1.97%) (1.76%) (1.96%)+
Net expenses...................... 1.50%+ 1.50% 1.50% 2.25%+ 2.25% 2.25% 2.25%+
Expenses (before reimbursement)... 1.95%+ 1.81% 1.87% 2.70%+ 2.56% 2.62% 2.70%+
Portfolio turnover rate............. 42% 188% 127% 42% 188% 127% 42%
Net assets at end of period (in
000's)............................. $35,473 $18,523 $22,965 $21,189 $ 7,899 $ 5,299 $2,148
<Caption>
Class C
--------------------
Year ended
December 31,
--------------------
2002 2001
------- -------
Net asset value at beginning of
period............................. $ 8.18 $ 10.00
------- -------
Net investment loss (a)............. (0.13) (0.14)
Net realized and unrealized gain
(loss) on investments.............. (2.28) (1.68)
------- -------
Total from investment operations.... (2.41) (1.82)
------- -------
Net asset value at end of period.... $ 5.77 $ 8.18
======= =======
Total investment return (b)......... (29.46%) (18.20%)
Ratios (to average net assets)/
Supplemental Data:
Net investment loss............... (1.97%) (1.76%)
Net expenses...................... 2.25% 2.25%
Expenses (before reimbursement)... 2.56% 2.62%
Portfolio turnover rate............. 188% 127%
Net assets at end of period (in
000's)............................. $ 871 $ 258
</Table>
- -------
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
+ Annualized.
Per share data based on average shares outstanding during
(a) the period.
Total return is calculated exclusive of sales charges and is
(b) not annualized.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
MainStay Mid Cap Growth Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay Mid
Cap Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. On December 29, 2000, the
Fund sold Class A, Class B and Class C shares to NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), at a net asset value of $10.00. The Fund commenced
investment operations the following business day on January 2, 2001. Class A
shares are offered at net asset value per share plus an initial sales charge. No
sales charge applies on invest-ments of $1 million or more (and certain other
qualified purchases) in Class A shares, but a contingent deferred sales charge
is imposed on certain redemptions of such shares within one year of the date of
purchase. Class B shares and Class C shares are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase of Class B shares and within one
year of purchase of Class C shares. Class A shares, Class B shares and Class C
shares bear the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and conditions except that the Class B
shares and Class C shares are subject to higher distribution fee rates. Each
class of shares bears distribution and/or service fee payments under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek long-term growth of capital.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
16
Notes to Financial Statements
(B) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay any
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current period reclassification between
accumulated net investment loss and paid-in capital arising from permanent
differences; net assets at October 31, 2003, are not affected.
<Table>
<Caption>
ACCUMULATED
NET INVESTMENT ADDITIONAL
LOSS PAID-IN CAPITAL
- -------------- ---------------
$462,355 $(462,355)
</Table>
The reclassification for the Fund is due to net operating losses.
(D) 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 as earned.
Discounts and premiums on short-term securities are accreted and amortized,
respectively, on the straight line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distributions plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the
17
MainStay Mid Cap Growth Fund
expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(F) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life, serves as
the Fund's manager. The Manager provides offices, conducts clerical,
recordkeeping and bookkeeping services, and keeps the financial and accounting
records required for the Fund. The Manager also pays the salaries and expenses
of all personnel affiliated with the Fund and all the operational expenses that
are not the responsibility of the Fund. MacKay Shields LLC (the "Subadvisor"), a
registered investment advisor and indirect wholly-owned subsidiary of New York
Life, is responsible for the day-to-day portfolio management of the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.75% of the Fund's
average daily net assets. The Manager has voluntarily agreed to reimburse the
expenses of the Fund to the extent that operating expenses would exceed on an
annualized basis 1.50%, 2.25% and 2.25% of the average daily net assets of the
Class A, Class B and Class C shares, respectively. For the ten months ended
October 31, 2003 and year ended December 31, 2002, the Manager earned from the
Fund $235,968 and $225,245, respectively. For the ten months ended October 31,
2003 and year ended December 31, 2002, the Manager reimbursed the Fund $142,380
and $94,291, respectively.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and the
Subadvisor, the Manager pays the Subadvisor a monthly fee at an annual rate of
0.375% of the average daily net assets of the Fund. To the extent the Manager
has agreed to reimburse expenses of the Fund, the Subadvisor has voluntarily
agreed to do so proportionately.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with the NYLIFE Distributors LLC (Distributor). The Fund,
with respect to each class of shares, has adopted distribution plans (the
"Plans") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives a monthly fee from the
Fund at an annual rate of 0.25% of the average daily net assets of the Fund's
Class A shares, which is an expense of the Class A shares of the Fund for
distribution or service activities as designated by the Distributor. Pursuant to
the Class B and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the
18
Notes to Financial Statements (continued)
Class B and Class C shares of the Fund, at the annual rate of 0.75% of the
average daily net assets of the Fund's Class B and Class C shares. The
Distribution Plans provide that the Class B and Class C shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B or Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $1,237 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $66, $9,432 and $9, respectively, for the ten months ended October 31,
2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued for the ten months ended October
31, 2003 and year ended December 31, 2002, amounted to $166,222 and $131,670,
respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated NYLIM, are
paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for each
Committee meeting and $500 for each Valuation Subcommittee telephonic meeting
attended plus reimbursement for travel and out-of pocket expenses. The Lead
Non-Interested Trustee is also paid an annual fee of $20,000. Beginning January
1, 2003, the Audit Committee Chairman receives an additional $2,000 for each
meeting of the Audit Committee attended. Also, beginning January 1, 2003, the
Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the Mid Cap Growth
Fund only pays a portion of the fees identified above.
(F) CAPITAL. At October 31, 2003, New York Life held shares of Class A with a
value of $20,575,000 which represents 58.0% of the Class A net assets and 35.0%
of the Fund's total net assets at period end.
(G) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $886 for the ten months ended October
31, 2003 and $600 for the year ended December 31, 2002.
19
MainStay Mid Cap Growth Fund
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate, 1/20 of 1% for the first $20
million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $13,343 for the ten months ended October
31, 2003 and $13,347 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
- --------------------- ------------ -----------------
$(15,187,324) $14,364,219 $(823,105)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is due
to wash sales deferrals.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $15,187,324 were available as shown in the table below, to the extent
provided by the regulations, to offset future realized gains through the years
indicated. 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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
----------------- -------
2009................................................. $ 5,878
2010................................................. 6,598
2011................................................. 2,711
-------
$15,187
=======
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $33,400 and $15,947, respectively.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive share-holder redemption requests.
The funds pay a commitment fee, at an annual rate of .075% of the aver-age
commitment amount, regardless of usage, to The Bank of New York, which acts as
agent to the syndicate. Such commitment fees are allocated among the funds based
upon net assets and other factors. Interest on any revolving credit loan is
charged based upon the Federal Funds Advances rate. There were no borrowings on
the line of credit during the ten months ended October 31, 2003.
20
Notes to Financial Statements (continued)
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
JANUARY 1 THROUGH ---------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold........... 1,724 1,670 149 528 976 136 2,892 724 38
Shares redeemed....... (576) (408) (33) (151) (255) (16) (109) (76) (7)
----- ----- --- ---- ---- --- ----- --- --
Net increase.......... 1,148 1,262 116 377 721 120 2,783 648 31
===== ===== === ==== ==== === ===== === ==
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31, to October 31.
</Table>
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
21
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Mid Cap Growth Fund
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 Mid Cap Growth Fund (one
of the funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
22
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
23
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
24
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
25
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
26
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY FUNDS LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSMG11-12/03
NYLIM-A04346 11
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
Mid Cap Growth Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY FUNDS LOGO]
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay MAP Fund versus
S&P 500(R) Index, Russell Midcap(R) Index,
and Inflation--Class I, Class A, Class B, and
Class C Shares 4
Portfolio Management Discussion and Analysis 6
Year-by-Year and 10-Month Performance 7
Portfolio of Investments 14
Financial Statements 19
Notes to Financial Statements 24
Report of Independent Auditors 31
Trustees and Officers 32
The MainStay(R) Funds 35
</Table>
This page intentionally left blank
2
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
3
$10,000 Invested in MainStay MAP Fund
versus S&P 500(R) Index, Russell Midcap(R) Index, and Inflation
CLASS I SHARES
Total Returns with Sales Charges: 1 Year 29.96%, 5 Years 7.92%, 10 Years 13.43%
<Table>
<Caption>
RUSSELL MIDCAP
Period-ending MAINSTAY MAP FUND S&P 500 INDEX(2) INFLATION (CPI)(3) INDEX(1)
- ------------- ----------------- ---------------- ------------------ --------------
10/31/93 $ 9,525.00 $ 10,000.00 $ 10,000.00 $ 10,000.00
94 9,918.00 10,387.00 10,261.00 10,234.60
95 11,493.00 13,133.00 10,543.00 12,619.80
96 14,800.00 16,297.00 10,865.00 15,099.60
97 19,791.00 21,531.00 11,092.00 19,444.20
98 22,942.00 26,266.00 11,257.00 20,311.20
99 26,560.00 33,008.00 11,545.00 23,789.00
00 31,754.00 35,018.00 11,944.00 29,433.60
01 31,101.00 26,297.00 12,198.00 24,129.70
02 27,132.00 22,325.00 12,452.00 22,193.60
10/31/03 35,262.00 26,968.00 12,706.00 30,157.00
</Table>
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 22.49%, Since Inception (6/9/99) 4.94%
<Table>
<Caption>
RUSSELL MIDCAP
Period-ending MAINSTAY MAP FUND S&P 500 INDEX(2) INFLATION (CPI)(3) INDEX(1)
- ------------- ----------------- ---------------- ------------------ --------------
6/9/99 $ 9,450.00 $ 10,000.00 $ 10,000.00 $ 10,000.00
10/31/99 9,407.00 10,395.00 10,127.00 9,748.00
00 11,215.00 11,028.00 10,476.00 10,903.00
01 10,959.00 8,282.00 10,699.00 10,753.00
02 9,538.00 7,031.00 10,922.00 10,434.00
10/31/03 12,364.00 8,493.00 11,145.00 12,412.00
</Table>
CLASS B SHARES
Total Returns with Sales Charges: 1 Year 23.72%, Since Inception (6/9/99) 5.14%
<Table>
<Caption>
RUSSELL MIDCAP
Period-ending MAINSTAY MAP FUND S&P 500 INDEX(2) INFLATION (CPI)(3) INDEX(1)
- ------------- ----------------- ---------------- ------------------ --------------
6/9/99 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00
10/31/99 9,929.00 10,395.00 10,127.00 9,748.00
00 11,757.00 11,028.00 10,476.00 10,903.00
01 11,395.00 8,282.00 10,699.00 10,753.00
02 9,840.00 7,031.00 10,922.00 10,434.00
10/31/03 1,2467.00 8,493.00 11,145.00 12,412.00
</Table>
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
4
CLASS C SHARES
Total Returns: 1 Year 27.72%, Since Inception (6/9/99) 5.52%
<Table>
<Caption>
RUSSELL MIDCAP
Period-Ending MAINSTAY MAP FUND S&P 500 INDEX(2) INFLATION (CPI)(3) INDEX(1)
- ------------- ----------------- ---------------- ------------------ --------------
6/9/99 $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00
10/31/99 9,929.00 10,395.00 10,127.00 9,748.00
00 11,757.00 11,028.00 10,476.00 10,903.00
01 11,395.00 8,282.00 10,699.00 10,753.00
02 9,840.00 7,031.00 10,922.00 10,434.00
10/31/03 12,667.00 8,493.00 11,145.00 12,412.00
</Table>
- -------
On 6/9/99, MAP-Equity Fund was reorganized as MainStay MAP Equity Fund Class
I shares. As of June 10, 2002, MainStay MAP Equity Fund was renamed MainStay
MAP Fund.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION PLEASE VISIT WWW.MAINSTAYFUNDS.COM. Performance tables and graphs
do not reflect the deduction of taxes that a shareholder would pay on
distributions or Fund-share redemptions. Total returns reflect change in
share price, reinvestment of dividend and capital gain distributions, and
maximum applicable sales charges explained in this paragraph. The graphs
assume an initial investment of $10,000 and reflect deduction of all sales
charges that would have applied for the period of investment. Class A share
performance reflects the effect of the maximum 5.5% initial sales charge.
Class B shares are subject to a contingent deferred sales charge (CDSC) of up
to 5% if shares are redeemed within the first six years of purchase. Class B
share performance reflects a CDSC of 2%, which would apply for the period
shown. Class C shares would be subject to a CDSC of 1% if redeemed within one
year of purchase. Class I share performance includes the historical
performance of MAP-Equity Fund from the Fund's inception on 1/21/71 through
6/8/99. Prior to the reorganization, shares of MAP-Equity Fund were subject
to a maximum 4.75% initial sales charge. Class I shares are subject to no
initial or contingent deferred sales charges.
1. The Russell Midcap(R) Index is an unmanaged index that measures the
performance of the 800 smallest companies in the Russell 1000(R) Index,
which, in turn, is an unmanaged index that measures the performance of the
1,000 largest U.S. companies based on total market capitalization. Results
assume reinvestment of all income and capital gains. An investment cannot
be made directly into an index.
2. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume reinvestment of
all income and capital gains. An investment cannot be made directly into
an index.
3. Inflation is measured 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. The rate of inflation does not represent an
investment return.
5
Portfolio Management Discussion and Analysis
In a welcome turnabout from the past three years, U.S. equities at all
capitalization levels gained ground for the 10 months ended October 31, 2003.
From mid-January through early March, U.S. stocks suffered as geopolitical
pressures mounted and investors considered the potential economic impact of a
war in Iraq. In mid-March, however, the stock market reversed course and began a
relatively steady climb as coalition troops amassed in Kuwait and the war
finally got underway. On May 1, 2003, President Bush declared an end to major
combat operations in Iraq. As geopolitical uncertainties eased and oil prices
declined, tolerance for risk increased, and investors moved the broader equity
markets steadily higher during the second quarter.
The equity-market rally continued into the third quarter, before losing some
ground in September on concerns about the falling U.S. dollar, rising oil
prices, and uncertain corporate earnings. Optimism returned to the equity
markets in October with the release of positive economic data, including job
growth and lower unemployment claims. There was evidence of expansion in the
manufacturing sector, and according to preliminary estimates by the Bureau of
Economic Analysis, real gross domestic product grew at a seasonally adjusted
annual rate of 8.2% in the third quarter, the fastest growth since early 1984.
While the equity rally was rather broadly based, small-cap stocks outperformed
mid-cap and large-cap issues during the first 10 months of 2003. According to
data from Barra, value stocks outperformed growth stocks in the large- and
mid-cap sectors, while the reverse was true in the small-cap sector.(1)
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay MAP Fund returned 27.96% for
Class I shares. Class A shares returned 27.74% and Class B and Class C shares
returned 26.97%, excluding all sales charges. All share classes outperformed the
23.39% return of the average Lipper(2) multi-cap core fund for the same period.
All share classes also outperformed the 21.21% return of the S&P 500(R) Index
but underperformed the 32.27% performance of the Russell Midcap(R) Index(3) for
the first 10 months of 2003.
As of October 31, 2003, Morningstar(4) rated MainStay MAP Fund Class I shares
four stars overall out of 209 mid-cap blend funds. As of that date, the Fund's
Class I shares were rated four stars out of 209 mid-cap blend funds for the
three-year period then ended, three stars out of 138 mid-cap blend funds for the
five-year period then ended, and five stars out of 42 mid-cap blend funds for
the 10-year period ended October 31, 2003.
- -------
1. See footnote on page 5 for more information about the S&P 500(R) Index. The
S&P MidCap 400 Index is an unmanaged index that measures the performance of
mid-cap stocks. The S&P SmallCap 600 Index is an unmanaged index that
measures the performance of small-cap stocks. For each of these indices, the
corresponding S&P/Barra Growth Index is an unmanaged index consisting of
those stocks in the index with lower book-to-price ratios and the
corresponding S&P/Barra Value Index is an unmanaged index consisting of
those stocks in the index with higher book-to-price ratios. Results assume
the reinvestment of all income and capital gains. An investment cannot be
made directly into an index. Source: Barra.
2. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
3. See footnote on page 5 for more information about the Russell Midcap(R)
Index.
4. For each fund with at least a three-year history, Morningstar calculates a
Morningstar Rating(TM) based on a Morningstar Risk-Adjusted Return measure
that accounts for variation in a fund's monthly performance (including the
effects of sales charges, loads, and redemption fees), placing more emphasis
on downward variations and rewarding consistent performance. The top 10% of
the funds in each category receive five stars, the next 22.5% receive four
stars, the middle 35% receive three stars, the next 22.5% receive two stars,
and the bottom 10% receive one star. The Overall Morningstar Rating(TM) for a
fund is derived from a weighted average of the performance figures associated
with its three-, five-, and 10-year (if applicable) Morningstar Rating(TM)
metrics.
6
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS I SHARES
<Table>
<Caption>
Perion-ending Total Return %
- ------------- --------------
12/94 2.76
12/95 32.50
12/96 23.82
12/97 27.99
12/98 24.23
12/99 12.18
12/00 16.88
12/01 2.36
12/02 -19.81
10/03 27.96
</Table>
CLASS A SHARES
<Table>
<Caption>
Perion-ending Total Return %
- ------------- --------------
12/99 7.53
12/00 16.67
12/01 2.11
12/02 -20.04
10/03 27.74
</Table>
PORTFOLIO STRATEGIES--MARKSTON INTERNATIONAL LLC
During the 10 months ended October 31, 2003, the portion of the Fund's portfolio
managed by Markston International LLC significantly outperformed the S&P 500
Index. The primary reason for the strong 10-month performance was effective
stock selection. Some of the stocks we selected were rooted in our deep interest
in the intellectual capital represented by American companies involved in
information technology and biotechnology.
7
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES), CONTINUED
CLASS B AND C SHARES
<Table>
<Caption>
Period-end Total Return %
- ---------- --------------
12/99 7.23
12/00 15.72
12/01 1.29
12/02 -20.63
10/03 26.97
</Table>
Another positive area of stock selection for the first 10 months of 2003 was the
generic-drug industry, where the Fund purchased shares of several companies
after seeing insider buying. At one point, insider buying reached levels that
suggested a positive group phenomenon. The portion of the Fund's portfolio that
we managed owned positions in IVAX, Mylan Laboratories, Alpharma, American
Pharmaceutical Partners, and Andrx. We have believed for some time that there is
a cultural shift occurring in the United States that will result in lower-cost
medicine. Several individual generic-drug manufacturers appreciated by more than
50% from the beginning of the year--or since the Fund's purchase date--through
October 31, 2003.(5)
For the 10 months ended October 31, 2003, the best performers in the portion of
the Fund's portfolio we manage were primarily stocks of large, rapidly growing
companies. Each saw its share price advance by more than 100% over the reporting
period.
Yahoo! is one of four leading Internet portals. We invested in Yahoo! after the
stock had declined materially from its peak price of $250 per share. Our average
cost at the start of 2003 was $13.10 per share. We had seen insider buying by
officers, stock repurchase by the company, and substantial restructuring. In
addition, the company had a sizeable tax-loss carryforward, which promised
significant cash flows when the company returned to profitability. Yahoo!'s new
management focused the company and made it profitable, and the stock
subsequently appreciated.
Genentech is one of the leading biotechnology manufacturers in the world. We had
seen company officers exercise stock options, and the company itself repurchased
shares. There had also been some management changes months before we invested.
When we bought Genentech, it had two major cancer
- -------
5. Performance percentages reflect total returns of the securities mentioned for
the 10 months ended October 31, 2003, or for the portion of the reporting
period such securities were held in the Fund, if shorter. Due to purchases
and sales, the performance of Fund holdings may differ from the performance
of the securities themselves.
8
drugs on the market. It also had several drug candidates in the late stages of
development, including entries for asthma, psoriasis, and colorectal cancer. Two
of the new entries were subsequently approved by the Food and Drug
Administration (FDA). Research results for the colorectal-cancer drug were
surprisingly positive, and the FDA granted it fast-track approval. This strong
product line drove Genentech's stock significantly higher over the 10-month
period.
Another strong performer for the Fund was a 5.50% 2007 convertible-bond
obligation of Akamai Technologies. The company had substantial cash and was
restructuring, moving toward positive cash flow, and becoming a leader in
Internet caching. The bonds more than doubled in price during the first 10
months of 2003.
During the reporting period, strong-performing stocks in the portion of the Fund
we manage included RadioShack, Chiron, and Novell. RadioShack benefited from
advances in cell-phone technology and competition among cell-phone providers.
The company also benefited from strategies put into effect by its new chief
financial officer. Chiron is an old-line biotechnology supplier that had seen
insider buying around the time we had established a position for the Fund.
Chiron's stock appreciated due to noticeable management changes and superior
earnings results. Novell is a cash-rich software supplier with an extensive
worldwide customer base that uses the company's aging but well-established
Netware product. The decision of Novell management to move the company's
development toward Linux positioned Novell to broaden its customer base for the
first time in years.
We also made several other opportunistic purchases for the Fund during the
reporting period. Among the positions we initiated or increased were Agilent
Technologies, TriQuint Semiconductor, Vitesse Semiconductor, and Applied Micro
Circuits. When we added these communications semiconductor suppliers to the
portfolio, they were benefiting from firmer demand in their end-markets and
lower inventories among manufacturing intermediaries.
Of course, a few holdings had weak performance. Eastman Chemical is a low-
growth chemical conglomerate that uses natural gas as a feed stock. The
company's common stock suffered as the price of natural gas appreciated. Enzon
Pharmaceuticals collects royalties from Schering-Plough for the use of
proprietary technology. When the Schering product that uses Enzon
Pharmaceutical's technology encountered competition, however, earnings
expectations for Enzon Pharmaceuticals were lowered. Raytheon has an excellent
defense-industry position in electronics and missiles. Raytheon spent most of
the period completing independent-power projects that its engineering subsidiary
had underbid before the subsidiary was sold to Morrison Knudsen (now called The
Washington Group). We continued to hold Eastman Chemical, Enzon Pharmaceuticals,
and Raytheon in the portfolio.
9
LOOKING AHEAD
We believe we have entered a substantially more difficult period in the equity
markets. At Markston, we have compiled a list of alpha generators--or
characteristics of stocks whose volatility is issue specific rather than market
related. We may seek some of these issues in upcoming purchases for the Fund.
Our list of alpha generators includes insider buying by officers and directors,
stock repurchase by the company, management change, the presence of tax-loss
carryforwards, industry consolidation, and corporate restructuring that might
include the sale or spin-off of a division.
At the end of the 10-months ended October 31, 2003, the portion of the Fund we
manage had overweighted positions in health care, information technology,
industrials, materials, energy, and utilities. This portion Fund had
underweighted positions in telecommunication services, financials, consumer
discretionary, and consumer staples.
We intend to keep the portion of the Fund's portfolio that we manage diversified
and to select securities that we believe are likely to increase in value over
time. We will continue to seek long-term appreciation of capital, and as a
secondary objective, to earn income.
Roger Lob
Christopher Mullarkey
Michael J. Mullarkey
Portfolio Managers
Markston International, LLC
10
PORTFOLIO STRATEGIES--JENNISON ASSOCIATES LLC
The first quarter of 2003 was challenging at all capitalization levels for
bottom-up stock pickers. Geopolitics drove the equity markets, and mid-cap
stocks in particular lagged, as investors favored large-cap growth stocks. Since
the 10-month market low in mid-March 2003, mid-cap stocks have been playing
catch-up, narrowing the performance differential between the portion of the Fund
we manage and the S&P 500 Index. The fundamentals of the mid-cap stocks in the
Fund's portfolio continued to be attractive, and the equity market has
subsequently rewarded them.
During the 10-months ended October 31, 2003, overall, positive performance in
the portion of the Fund's portfolio that we manage came primarily from effective
stock selection in the health care sector as well as from a significantly
underweighted position in the consumer staples sector. We took profits during
the reporting period in many of the Fund's top performers in the information
technology sector, largely based on our valuation discipline as fundamentals
continued to improve. Having built up the Fund's position in the information
technology sector during the bear market of 2002, information technology
constituted the largest sector exposure in our portion of the Fund's portfolio
at the start of 2003. As of October 31, 2003, information technology was in the
bottom half of our sector weightings.
Stock selection in the energy and materials sectors had a negative impact on
performance, as did a significant underweighted position in the financials
sector. We added to the portfolio's oil services stocks, however, because we
like the secular aspects of the energy markets. We established a position in
Rowan Companies, a driller of oil and gas wells, and increased a position in
Weatherford International, an oil services company that provides essential
products and services to the drilling industry.
Strong-performing individual stocks came from diverse industries over the
reporting period. Pharmaceutical company Sepracor rose on reports that first-
quarter 2003 earnings were significantly above expectations. The earnings
improvements were largely based on rising sales and profit margins on the
company's asthma drug Xopenex. Sepracor continued to be priced higher, as
acceptance of its new sleep-disorder drug, Estorra, increased and the market
assigned value to the rest of the company's drug pipeline. Still, we sold the
Fund's position in Sepracor during the period, taking profits in the stock on
strength.
Another winner for the Fund was EchoStar Communications, a leader in the
broadcasting and cable TV industry. EchoStar performed well as positive
sentiment followed the successful termination of its proposed acquisition of
Hughes Electronics. The company incurred limited penalties and gained valuable
insight into its main satellite competitor. EchoStar also announced a surprise
11
repurchase of over 10% of its outstanding shares from Vivendi Universal. We sold
the Fund's position in EchoStar during the reporting period and took profits in
the stock on strength.
The Fund also benefited from holdings in Merrill Lynch and Everest Re Group, two
financial services firms. Merrill Lynch stock rose with the strong equity market
overall and on better-than-expected earnings. We continued to hold the Fund's
position in Merrill Lynch.
Everest Re Group, a large property and casualty insurance and reinsurance
provider, reported first-quarter 2003 earnings results significantly above
consensus estimates. The company's management also increased full-year guidance
for 2003, as revenue growth and underwriting metrics helped to improve
profitability. We sold about half of the Fund's position in Everest Re Group on
concerns about credibility when its management announced an equity issue one day
after a conference call in which they specifically said they had no need for new
capital. We subsequently sold the other half of the Fund's position in Everest
Re Group, taking profits on the stock when we became worried about the
suggestion that moderating pricing could appear in insurance companies'
quarterly earnings announcements. For that same reason, we reduced the Fund's
position in Ace, another property and casualty insurer, toward the end of June.
These insurance stocks had produced strong returns for the Fund, and we felt it
appropriate to take some profits.
Semiconductor company Agere Systems was another strong performer for the Fund,
benefiting from an analyst upgrade, a large new contract for mobile-telephone
chipsets, and a successful effort to cut costs. Together these factors helped
bring the company closer to profitability during the first quarter of 2003. We
subsequently reduced the Fund's position in Agere Systems, taking some profits
in the stock on strength.
On the other hand, shares of health care equipment company Baxter International
declined on the announcement of reduced sales and earnings targets. Prices for
Baxter's plasma protein product fell, and health care centers' inventories of
the company's recombinant Factor VIII, a protein-free therapy used in hemophilia
treatment, were drawn down by larger-than-expected amounts. We sold the Fund's
position in Baxter International as these fundamentals deteriorated.
Specialty chemicals company Cambrex was another poor performer for the Fund.
Cambrex reported quarterly earnings that were less than analysts' expectations.
This shortfall was due in part to the loss of a significant customer contract,
which exemplified the trend toward less outsourcing throughout the
pharmaceuticals industry. We reduced the Fund's holdings in Cambrex, but
maintained a modest position based on the stock's compelling valuation.
12
Another disappointment for the Fund was Circuit City Stores. This computer and
electronics retailer suffered from slow wage growth and rising energy costs in
the economy-at-large that culminated in a generally weaker-than-hoped-for
holiday retail season. The company also experienced weakness in its credit-card
financing, and we sold the Fund's position in the stock because of the company's
deteriorating fundamentals.
Network Associates, a maker of software that includes the McAfee anti-virus
product, performed poorly during the reporting period, as the company met profit
estimates but missed sales expectations due to the weak economy in the first
quarter. We reduced the Fund's exposure to Network Associates based on the
company's changing risk/reward profile.
The Fund's performance was also negatively impacted by its holding in publisher
and printer Scholastic. Scholastic disappointed the market with a downward
revision to earnings guidance for the second half of its 2003 fiscal year.
Christmas sales for booksellers were weak, leaving high inventories that
remained a problem after lackluster sales in January 2003. We significantly
reduced the Fund's position in Scholastic, once the stock rebounded with the
market.
LOOKING AHEAD
In our view, the unwinding of the bull market of the 1990s, which focused
primarily on technology and large-capitalization stocks, has finally set the
stage for a return to true stock picking. We believe that as expectations become
muted, investors will shift their attention from relative to absolute returns
and may prefer active management over passive investing. A stock picker's market
is well suited to our opportunistic style and may be a key to performance going
forward.
We continue to build the portion of the Fund's portfolio that we manage using a
bottom-up approach, choosing one stock at a time. We seek to identify catalysts
that may help a company effectively realize the full market value of its stock.
Despite recent market gains, we continue to find stocks that meet our stringent
risk/reward criteria. We have redeployed the proceeds from the sale of our
successes into investment opportunities that we believe are attractive,
including health care service companies and positions in the media industry. In
our view, many of these stocks are driven by company-specific catalysts and have
been generally overlooked in the recent market rally. Regardless of what the
markets or the economy may bring, we will continue to seek long-term
appreciation of capital.
Mark G. DeFranco
Brian M. Gillott
Portfolio Managers
Jennison Associates LLC
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
13
MainStay MAP Fund
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (88.5%)+
AEROSPACE & DEFENSE (5.1%)
Availl, Inc. (a)............... 6,550 $ 99,887
Boeing Co. (The)............... 54,000 2,078,460
Goodrich Corp. ................ 79,000 2,181,980
Honeywell International,
Inc. ......................... 86,000 2,632,460
Innovative Solutions & Support,
Inc. (a)...................... 8,800 93,280
Lockheed Martin Corp. ......... 95,595 4,431,784
Northrop Grumman Corp. ........ 171,239 15,308,767
Orbital Sciences Corp. (a)..... 113,400 1,042,146
Raytheon Co. .................. 173,600 4,596,928
Teledyne Technologies, Inc.
(a)........................... 108,550 1,789,990
United Industrial Corp. ....... 3,950 67,545
------------
34,323,227
------------
AIR FREIGHT & LOGISTICS (0.0%) (b)
Danielson Holding Corp. (a).... 79,890 111,047
------------
AIRLINES (0.5%)
AMR Corp. (a).................. 245,100 3,254,928
------------
AUTO COMPONENTS (0.1%)
Goodyear Tire & Rubber Co.
(The) (a)..................... 95,650 656,159
------------
BEVERAGES (0.2%)
PepsiCo, Inc. ................. 25,041 1,197,461
------------
BIOTECHNOLOGY (5.0%)
Amylin Pharmaceuticals, Inc.
(a)........................... 82,687 2,259,836
Cell Therapeutics, Inc. (a).... 16,100 167,440
Chiron Corp. (a)............... 64,200 3,507,246
Enzon Pharmaceuticals, Inc.
(a)........................... 50,925 568,323
Gen-Probe, Inc. (a)............ 28,968 775,473
Genentech, Inc. (a)............ 168,350 13,799,650
Genta, Inc. (a)................ 177,117 1,895,152
MedImmune, Inc. (a)............ 367,924 9,808,854
Regeneration Technologies, Inc.
(a)........................... 19,700 236,400
XOMA Ltd. (a).................. 76,425 572,423
------------
33,590,797
------------
CAPITAL MARKETS (4.9%)
Ameritrade Holding Corp. (a)... 16,800 229,152
Bank of New York Co., Inc.
(The)......................... 185,900 5,798,221
A.G. Edwards, Inc. ............ 107,273 4,344,557
Janus Capital Group, Inc. ..... 213,800 3,023,132
Mellon Financial Corp. ........ 104,000 3,106,480
Merrill Lynch & Co., Inc. ..... 90,870 5,379,504
National Financial Partners
Corp. (a)..................... 77,600 2,102,960
Neuberger Berman, Inc. ........ 14,950 648,082
Northern Trust Corp. .......... 29,955 1,391,410
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------------
CAPITAL MARKETS (CONTINUED)
State Street Corp. ............ 92,800 $ 4,859,008
Waddell & Reed Financial, Inc.
Class A....................... 90,300 2,002,854
------------
32,885,360
------------
CHEMICALS (3.4%)
Cambrex Corp. ................. 104,156 2,462,248
Eastman Chemical Co. .......... 13,250 430,095
Great Lakes Chemical Corp. .... 212,803 4,575,265
IMC Global, Inc. .............. 258,500 1,806,915
Monsanto Co. .................. 393,207 9,849,835
Olin Corp. .................... 239,700 4,173,177
------------
23,297,535
------------
COMMERCIAL BANKS (2.9%)
Bank One Corp. ................ 126,800 5,382,660
Popular, Inc. ................. 193,370 8,701,650
Southwest Bancorp. of Texas,
Inc. ......................... 74,600 2,678,886
Wachovia Corp. ................ 65,000 2,981,550
------------
19,744,746
------------
COMMERCIAL SERVICES & SUPPLIES (1.5%)
Brink's Co. (The).............. 17,100 342,855
Cendant Corp. (a).............. 74,000 1,511,820
Coinstar, Inc. (a)............. 24,070 352,626
DiamondCluster International,
Inc. (a)...................... 9,800 87,220
Hewitt Associates, Inc. Class A
(a)........................... 105,000 2,698,500
Korn/Ferry International (a)... 24,600 215,004
Manpower, Inc. ................ 97,200 4,510,080
MemberWorks, Inc. (a).......... 5,800 167,504
------------
9,885,609
------------
COMMUNICATIONS EQUIPMENT (2.4%)
3Com Corp. (a)................. 28,700 206,640
ADC Telecommunications, Inc.
(a)........................... 240,900 614,295
Adaptec, Inc. (a).............. 8,250 70,207
Avici Systems, Inc. (a)........ 13,463 83,861
Brocade Communications Systems,
Inc. (a)...................... 193,961 1,270,445
CommScope, Inc. (a)............ 41,059 636,004
Endwave Corp. (a).............. 32,288 256,367
Enterasys Networks, Inc. (a)... 24,950 97,305
Finisar Corp. (a).............. 435,389 1,349,706
Harris Corp. (a)............... 241,750 8,997,935
Nortel Networks Corp. (a)...... 5,472 24,350
REMEC, Inc. (a)................ 6,550 72,247
Riverstone Networks, Inc.
(a)........................... 12,802 15,746
Stratex Networks, Inc. (a)..... 32,096 102,707
Tellabs, Inc. (a).............. 296,100 2,229,633
------------
16,027,448
------------
COMPUTERS & PERIPHERALS (0.8%)
ActivCard Corp. (a)............ 52,567 444,191
Advanced Digital Information
Corp. (a)..................... 156,600 2,544,750
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
Portfolio of Investments October 31, 2003
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (CONTINUED)
COMPUTERS & PERIPHERALS (CONTINUED)
Sigma Designs, Inc. (a)........ 53,368 $ 455,763
Sun Microsystems, Inc. (a)..... 561,797 2,224,716
------------
5,669,420
------------
CONSTRUCTION & ENGINEERING (0.0%) (b)
McDermott International,
Inc. ......................... 26,600 196,840
------------
CONSTRUCTION MATERIALS (0.4%)
Martin Marietta Materials,
Inc. ......................... 950 38,921
Vulcan Materials Co. .......... 53,389 2,365,667
------------
2,404,588
------------
CONSUMER FINANCE (0.1%)
iDine Rewards Network, Inc.
(a)........................... 7,900 86,268
Providian Financial Corp.
(a)........................... 82,000 911,020
------------
997,288
------------
CONTAINERS & PACKAGING (1.0%)
Smurfit-Stone Container Corp.
(a)........................... 16,050 248,775
Temple-Inland, Inc. ........... 120,950 6,534,929
------------
6,783,704
------------
DIVERSIFIED FINANCIALS SERVICES (0.6%)
CIT Group, Inc. ............... 38,000 1,277,560
Instinet Group, Inc. (a)....... 134,746 832,730
Principal Financial Group, Inc.
(The)......................... 58,400 1,830,840
------------
3,941,130
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (1.2%)
CenturyTel, Inc. .............. 44,700 1,598,025
Cincinnati Bell, Inc. (a)...... 232,950 1,190,375
SBC Communications, Inc. ...... 192,700 4,620,946
Sprint Corp. (FON Group)....... 28,467 455,472
------------
7,864,818
------------
ELECTRIC UTILITIES (0.3%)
American Electric Power Co.,
Inc. ......................... 60,000 1,691,400
Black Hills Corp. ............. 14,050 451,988
DTE Energy Co. ................ 2,000 73,760
------------
2,217,148
------------
ELECTRICAL EQUIPMENT (0.0%) (b)
Acuity Brands, Inc. ........... 1,000 21,500
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (3.6%)
Agilent Technologies, Inc.
(a)........................... 334,500 8,335,740
Giga-tronics, Inc. (a)......... 32,459 61,023
Sanmina-SCI Corp. (a).......... 321,400 3,390,770
Solectron Corp. (a)............ 548,118 3,036,574
Symbol Technologies, Inc. ..... 589,100 7,357,859
Vishay Intertechnology, Inc.
(a)........................... 122,800 2,302,500
------------
24,484,466
------------
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------------
ENERGY EQUIPMENT & SERVICES (4.5%)
FMC Technologies, Inc. (a)..... 109,487 $ 2,198,499
Halliburton Co. ............... 258,200 6,165,816
Nabors Industries Ltd. (a)..... 34,500 1,304,100
Newpark Resources, Inc. (a).... 109,750 441,195
Rowan Cos., Inc. (a)........... 226,500 5,424,675
Schlumberger Ltd. ............. 123,425 5,797,272
Transocean, Inc. (a)........... 214,100 4,108,579
Weatherford International Ltd.
(a)........................... 153,849 5,346,253
------------
30,786,389
------------
FOOD & STAPLES RETAILING (1.9%)
CVS Corp. ..................... 74,438 2,618,729
Costco Wholesale Corp. (a)..... 130,350 4,610,480
Kroger Co. (The) (a)........... 195,564 3,420,414
Longs Drug Stores Corp. ....... 19,000 425,600
Pathmark Stores, Inc. (a)...... 76,050 520,942
Rite Aid Corp. (a)............. 200,850 1,150,871
------------
12,747,036
------------
FOOD PRODUCTS (0.7%)
Archer-Daniels-Midland Co. .... 236,340 3,391,479
Bunge Ltd. .................... 26,000 704,600
Corn Products International,
Inc. ......................... 13,350 452,432
Sylvan, Inc. (a)............... 5,850 58,909
------------
4,607,420
------------
GAS UTILITIES (0.9%)
Kinder Morgan, Inc. ........... 59,150 3,167,482
Peoples Energy Corp. .......... 37,000 1,496,650
Sempra Energy.................. 60,050 1,669,390
------------
6,333,522
------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.2%)
Apogent Technologies, Inc.
(a)........................... 151,165 3,318,072
ArthroCare Corp. (a)........... 22,810 509,803
Fisher Scientific
International, Inc. (a)....... 108,829 4,380,367
------------
8,208,242
------------
HEALTH CARE PROVIDERS & SERVICES (4.6%)
Aetna, Inc. ................... 141,300 8,112,033
AmerisourceBergen Corp. ....... 59,500 3,377,815
Andrx Group (a)................ 34,700 690,530
Cerner Corp. (a)............... 173,820 7,364,753
Humana, Inc. (a)............... 36,600 742,614
IMS Health, Inc. (a)........... 11,215 263,889
Medco Health Solutions, Inc.
(a)........................... 144,700 4,804,040
Per-Se Technologies, Inc.
(a)........................... 40,800 554,880
Quest Diagnostics, Inc. ....... 30,800 2,083,620
Tenet Healthcare Corp. (a)..... 39,000 538,200
WebMD Corp. (a)................ 339,054 2,641,231
------------
31,173,605
------------
HOTELS, RESTAURANTS & LEISURE (1.2%)
Hilton Hotels Corp. ........... 97,000 1,536,480
Wendy's International, Inc. ... 186,600 6,913,530
------------
8,450,010
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
MainStay MAP Fund
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (CONTINUED)
HOUSEHOLD DURABLES (0.4%)
Maytag Corp. .................. 82,400 $ 2,092,960
Newell Rubbermaid, Inc. ....... 9,500 216,600
SunLink Health Systems, Inc.
(a)........................... 33,700 92,338
------------
2,401,898
------------
HOUSEHOLD PRODUCTS (0.9%)
Energizer Holdings, Inc. (a)... 27,490 1,011,632
Kimberly-Clark Corp. .......... 99,200 5,238,752
------------
6,250,384
------------
INDUSTRIAL CONGLOMERATES (2.7%)
3M Co. ........................ 16,390 1,292,679
Tyco International Ltd. ....... 794,058 16,579,931
Walter Industries, Inc. ....... 53,150 631,422
------------
18,504,032
------------
INSURANCE (3.6%)
ACE, Ltd. ..................... 139,600 5,025,600
CNA Financial Corp. (a)........ 24,000 517,920
Hartford Financial Services
Group, Inc. (The)............. 106,455 5,844,380
MetLife, Inc. ................. 228,850 7,185,890
Ohio Casualty Corp. (a)........ 13,100 200,430
XL Capital Ltd. Class A........ 81,142 5,639,369
------------
24,413,589
------------
INTERNET & CATALOG RETAIL (0.1%)
Stamps.com, Inc. (a)........... 97,048 578,406
------------
INTERNET SOFTWARE & SERVICES (3.3%)
Blue Coat Systems, Inc. (a).... 1,440 24,206
DoubleClick, Inc. (a).......... 134,800 1,122,884
Marimba, Inc. (a).............. 6,500 31,258
S1 Corp. (a)................... 290,800 2,349,664
ValueClick, Inc. (a)........... 49,077 395,561
Vignette Corp. (a)............. 242,100 607,671
Yahoo!, Inc. (a)............... 407,877 17,824,225
------------
22,355,469
------------
IT SERVICES (1.8%)
BearingPoint, Inc. (a)......... 186,195 1,750,233
Ceridian Corp. (a)............. 279,457 5,868,597
CheckFree Corp. (a)............ 9,300 256,029
Computer Sciences Corp. (a).... 7,100 281,302
Concord EFS, Inc. (a).......... 6,100 65,209
eFunds Corp. (a)............... 135,744 2,173,262
Electronic Data Systems
Corp. ........................ 38,000 815,100
Gartner Group, Inc. Class B
(a)........................... 2,939 35,826
Liberate Technologies, Inc.
(a)........................... 112,900 384,989
Titan Corp. (The) (a).......... 21,200 447,744
------------
12,078,291
------------
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------------
LEISURE EQUIPMENT & PRODUCTS (0.3%)
Hasbro, Inc. .................. 6,200 $ 135,160
Mattel, Inc. .................. 110,200 2,133,472
------------
2,268,632
------------
MACHINERY (0.2%)
Navistar International Corp.
(a)........................... 39,700 1,605,071
------------
MEDIA (3.8%)
Cablevision Systems New York
Group Class A (a)............. 103,700 2,094,740
General Motors Corp. Class H
(a)........................... 558,700 9,179,441
Interpublic Group of Cos., Inc.
(The) (a)..................... 106,200 1,580,256
Meredith Corp. ................ 2,300 111,596
New York Times Co. Class A
(The)......................... 59,110 2,809,498
Pearson PLC ADR (c)............ 148,032 1,554,336
PRIMEDIA, Inc. (a)............. 53,678 144,394
Radio One, Inc. Class D (a).... 253,600 4,032,240
Viacom, Inc. Class B........... 97,100 3,871,377
------------
25,377,878
------------
METALS & MINING (1.8%)
Arch Coal, Inc. ............... 224,821 5,508,115
CONSOL Energy, Inc. ........... 120,700 2,619,190
Massey Energy Co. ............. 20,450 284,255
Harmony Gold Mining Co., Ltd.
ADR (c)....................... 239,400 3,619,728
------------
12,031,288
------------
MULTILINE RETAIL (1.3%)
Big Lots, Inc. (a)............. 216,300 3,246,663
May Department Stores Co.
(The)......................... 39,650 1,108,614
Nordstrom, Inc. ............... 136,800 4,171,032
------------
8,526,309
------------
MULTI-UTILITIES & UNREGULATED POWER (0.3%)
AES Corp. (The) (a)............ 55,500 485,625
El Paso Corp. ................. 21,650 158,911
Westar Energy, Inc. ........... 79,500 1,588,410
------------
2,232,946
------------
OIL & GAS (3.8%)
Amerada Hess Corp. ............ 21,500 1,109,830
Anadarko Petroleum Corp. ...... 110,000 4,798,200
Chesapeake Energy Corp. ....... 31,300 373,409
ConocoPhillips................. 27,539 1,573,854
Devon Energy Corp. ............ 60,871 2,952,243
Kerr-McGee Corp. .............. 21,200 879,800
Marathon Oil Corp. ............ 42,000 1,241,940
Murphy Oil Corp. .............. 9,200 542,616
Noble Energy, Inc. ............ 41,400 1,644,408
Spinnaker Exploration Co.
(a)........................... 170,400 4,360,536
Unocal Corp. .................. 75,000 2,376,000
Total S.A. ADR (c)............. 51,200 3,997,184
------------
25,850,020
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (CONTINUED)
PAPER & FOREST PRODUCTS (2.4%)
Boise Cascade Corp. ........... 261,504 $ 7,335,187
Louisiana-Pacific Corp. (a).... 80,400 1,529,208
MeadWestvaco Corp. ............ 190,549 4,939,030
Weyerhaeuser Co. .............. 38,600 2,324,878
------------
16,128,303
------------
PHARMACEUTICALS (4.6%)
Abbott Laboratories............ 95,700 4,078,734
Alpharma, Inc. Class A......... 152,200 2,770,040
American Pharmaceutical
Partners, Inc. (a)............ 8,275 201,496
Bristol-Myers Squibb Co. ...... 112,400 2,851,588
IVAX Corp. (a)................. 416,100 8,014,086
King Pharmaceuticals, Inc.
(a)........................... 3,000 40,200
Mylan Laboratories, Inc. ...... 105,000 2,535,750
Pfizer, Inc. .................. 231,178 7,305,225
Wyeth.......................... 70,100 3,094,214
------------
30,891,333
------------
REAL ESTATE (0.8%)
Boykin Lodging Co. ............ 66,900 553,932
Crescent Real Estate Equity
Co. .......................... 4,200 64,470
Health Care Property Investors,
Inc. ......................... 21,073 982,634
St. Joe Co. (The).............. 59,000 1,949,360
United Dominion Realty Trust,
Inc. ......................... 92,570 1,615,346
------------
5,165,742
------------
ROAD & RAIL (1.1%)
Celadon Group, Inc. (a)........ 75,426 912,655
CSX Corp. ..................... 142,500 4,534,350
Norfolk Southern Corp. ........ 42,950 865,442
Overnite Corp. (a)............. 36,600 811,056
------------
7,123,503
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (1.4%)
Applied Micro Circuits Corp.
(a)........................... 317,050 1,845,231
ASML Holding N.V. ADR (a)(c)... 107,200 1,881,360
Cypress Semiconductor Corp.
(a)........................... 57,400 1,231,804
LSI Logic Corp. (a)............ 90,200 833,448
Three-Five Systems, Inc. (a)... 60,400 280,256
TriQuint Semiconductor, Inc.
(a)........................... 103,790 744,174
Vitesse Semiconductor Corp.
(a)........................... 370,406 2,607,658
------------
9,423,931
------------
SOFTWARE (2.3%)
Ascential Software Corp. (a)... 35,033 777,382
BARRA, Inc. (a)................ 4,500 171,000
Compuware Corp. (a)............ 234,450 1,317,609
Intervoice, Inc. (a)........... 50,600 526,746
Mentor Graphics Corp. (a)...... 166,900 2,795,575
Microsoft Corp. ............... 181,900 4,756,685
MSC.Software Corp. (a)......... 62,300 641,690
Network Associates, Inc. (a)... 77,550 1,080,272
NetIQ Corp. (a)................ 78,640 954,690
Novell, Inc. (a)............... 181,757 1,066,914
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------------
SOFTWARE (CONTINUED)
Sybase, Inc. (a)............... 87,649 $ 1,568,917
WatchGuard Technologies, Inc.
(a)........................... 3,250 18,687
------------
15,676,167
------------
SPECIALTY RETAIL (1.6%)
Burlington Coat Factory
Warehouse Corp. .............. 15,674 336,207
Charming Shoppes, Inc. (a)..... 13,750 90,062
Limited Brands................. 124,600 2,192,960
Linens 'n Things, Inc. (a)..... 61,000 1,800,720
RadioShack Corp. .............. 139,750 4,191,103
Toys "R" Us, Inc. (a).......... 167,585 2,178,605
------------
10,789,657
------------
TEXTILES, APPAREL & LUXURY GOODS (0.9%)
Polo Ralph Lauren Corp. ....... 195,610 5,946,544
------------
WIRELESS TELECOMMUNICATION SERVICES (0.1%)
AT&T Wireless Services, Inc.
(a)........................... 36,854 267,192
Sprint Corp. (PCS Group) (a)... 128,083 557,161
------------
824,353
------------
Total Common Stocks
(Cost $503,829,234)........... 598,305,189
------------
PREFERRED STOCK (0.6%)
MEDIA (0.6%)
News Corp. Ltd. (The) ADR
(c)........................... 137,252 4,048,934
------------
Total Preferred Stock
(Cost $3,483,938)............. 4,048,934
------------
<Caption>
PRINCIPAL
AMOUNT
-----------
LONG-TERM BONDS (1.2%)
CONVERTIBLE BONDS (0.7%)
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.1%)
Solectron Corp.
(zero coupon), due 11/20/20... $ 625,000 359,375
------------
INDUSTRIAL CONGLOMERATES (0.0%) (b)
Tyco International Ltd.
(zero coupon), due 11/17/20... 125,000 96,406
------------
INTERNET SOFTWARE & SERVICES (0.6%)
Akamai Technologies, Inc.
5.50%, due 7/1/07............. 4,650,000 4,301,250
------------
Total Convertible Bonds
(Cost $2,938,632)............. 4,757,031
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
MainStay MAP Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
CORPORATE BONDS (0.5%)
FOOD & STAPLES RETAILING (0.4%)
Rite Aid Corp.
7.625%, due 4/15/05........... $3,000,000 $ 3,037,500
------------
MARINE (0.1%)
American Commercial Lines LLC
11.25%, due 1/1/08 (d)(e)..... 5,511,870 716,543
------------
Total Corporate Bonds
(Cost $5,530,365)............. 3,754,043
------------
Total Long-Term Bonds
(Cost $8,468,997)............. 8,511,074
------------
SHORT-TERM INVESTMENTS (9.9%)
COMMERCIAL PAPER (4.2%)
American Express Credit Corp.
0.90%, due 11/3/03............ 14,352,000 14,352,000
General Electric Capital Corp.
0.90%, due 11/3/03............ 14,000,000 14,000,000
------------
Total Commercial Paper
(Cost $28,352,000)............ 28,352,000
------------
</Table>
<Table>
<Caption>
VALUE
AMOUNT VALUE
-----------------------------
TIME DEPOSIT (5.7%)
Bank of New York Cayman
0.5625%, due 11/3/03.......... $38,337,000 $ 38,337,000
------------
Total Time Deposit
(Cost $38,337,000)............ 38,337,000
------------
Total Short-Term Investments
(Cost $66,689,000)............ 66,689,000
------------
Total Investments
(Cost $582,471,169) (f)....... 100.2% 677,554,197(g)
Liabilities in Excess of
Cash and Other Assets......... (0.2) (1,402,872)
----------- ------------
Net Assets..................... 100.0% $676,151,325
=========== ============
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) ADR--American Depositary Receipt.
(d) Issuer in bankruptcy.
(e) Issue in default.
(f) The cost for federal income tax purposes is $585,510,507.
(g) At October 31, 2003, net unrealized appreciation was
$92,043,690, 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 $115,331,331 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $23,287,641.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$582,471,169)............................................. $677,554,197
Cash........................................................ 11,182
Receivables:
Investment securities sold................................ 3,132,753
Fund shares sold.......................................... 2,490,063
Dividends and interest.................................... 457,681
Other assets................................................ 20,812
------------
Total assets........................................ 683,666,688
------------
LIABILITIES:
Payables:
Investment securities purchased........................... 5,550,454
Fund shares redeemed...................................... 772,884
Transfer agent............................................ 363,805
Manager................................................... 354,176
NYLIFE Distributors....................................... 297,519
Custodian................................................. 9,878
Trustees.................................................. 7,408
Accrued expenses............................................ 159,239
------------
Total liabilities................................... 7,515,363
------------
Net assets.................................................. $676,151,325
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 63,106
Class B................................................... 81,058
Class C................................................... 34,856
Class I................................................... 65,009
Additional paid-in capital.................................. 626,193,437
Undistributed net investment income......................... 12,233
Accumulated net realized loss on investments................ (45,381,402)
Net unrealized appreciation on investments.................. 95,083,028
------------
Net assets.................................................. $676,151,325
============
CLASS A
Net assets applicable to outstanding shares................. $176,932,484
============
Shares of beneficial interest outstanding................... 6,310,610
============
Net asset value per share outstanding....................... $ 28.04
Maximum sales charge (5.50% of offering price).............. 1.63
------------
Maximum offering price per share outstanding................ $ 29.67
============
CLASS B
Net assets applicable to outstanding shares................. $220,932,152
============
Shares of beneficial interest outstanding................... 8,105,756
============
Net asset value and offering price per share outstanding.... $ 27.26
============
CLASS C
Net assets applicable to outstanding shares................. $ 95,004,196
============
Shares of beneficial interest outstanding................... 3,485,644
============
Net asset value and offering price per share outstanding.... $ 27.26
============
CLASS I
Net assets applicable to outstanding shares................. $183,282,493
============
Shares of beneficial interest outstanding................... 6,500,939
============
Net asset value and offering price per share outstanding.... $ 28.19
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
------------- -------------
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 4,239,812 $ 4,595,705
Interest.................................................. 1,081,961 4,551,346
------------ -------------
Total income............................................ 5,321,773 9,147,051
------------ -------------
Expenses:
Manager................................................... 3,376,275 3,499,789
Transfer agent............................................ 1,571,546 1,532,568
Distribution--Class B..................................... 1,104,871 1,181,623
Distribution--Class C..................................... 477,779 531,999
Service--Class A.......................................... 294,196 325,589
Service--Class B.......................................... 368,290 393,874
Service--Class C.......................................... 159,260 177,333
Shareholder communication................................. 142,008 196,807
Professional.............................................. 84,775 82,781
Recordkeeping............................................. 67,228 73,332
Registration.............................................. 60,130 60,191
Custodian................................................. 45,556 50,684
Trustees.................................................. 24,184 25,584
Miscellaneous............................................. 30,777 38,942
------------ -------------
Total expenses before reimbursement..................... 7,806,875 8,171,096
Expense reimbursement by Manager............................ (450,609) (507,575)
------------ -------------
Net expenses............................................ 7,356,266 7,663,521
------------ -------------
Net investment income (loss)................................ (2,034,493) 1,483,530
------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments..................... 9,601,817 (55,362,524)
Net change in unrealized appreciation (depreciation) on
investments............................................... 124,644,560 (58,286,807)
------------ -------------
Net realized and unrealized gain (loss) on investments...... 134,246,377 (113,649,331)
------------ -------------
Net increase (decrease) in net assets resulting from
operations................................................ $132,211,884 $(112,165,801)
============ =============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
(a) Dividends recorded net of foreign withholding taxes of
$42,446 and $12,776 for 2003 and 2002, respectively.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and
December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ------------- ------------
INCREASE IN NET ASSETS:
Operations:
Net investment income (loss).............................. $ (2,034,493) $ 1,483,530 $ 304,773
Net realized gain (loss) on investments................... 9,601,817 (55,362,524) 1,454,876
Net change in unrealized appreciation (depreciation) on
investments............................................. 124,644,560 (58,286,807) 4,221,642
------------ ------------- ------------
Net increase (decrease) in net assets resulting from
operations.............................................. 132,211,884 (112,165,801) 5,981,291
------------ ------------- ------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. -- (591,975) (91,819)
Class B................................................. -- -- --
Class C................................................. -- -- --
Class I................................................. -- (815,618) (230,011)
From net realized gain on investments:
Class A................................................. -- (358,110) (484,596)
Class B................................................. -- (455,285) (655,854)
Class C................................................. -- (207,585) (245,181)
Class I................................................. -- (330,392) (475,539)
------------ ------------- ------------
Total dividends and distributions to shareholders..... -- (2,758,965) (2,183,000)
------------ ------------- ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 61,829,430 100,821,231 93,868,013
Class B................................................. 46,690,947 90,029,523 105,112,834
Class C................................................. 19,304,395 53,506,262 46,417,919
Class I................................................. 61,267,902 58,574,236 33,792,356
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. -- 801,111 471,489
Class B................................................. -- 403,046 589,482
Class C................................................. -- 154,233 196,234
Class I................................................. -- 1,102,772 659,849
------------ ------------- ------------
189,092,674 305,392,414 281,108,176
Cost of shares redeemed:
Class A................................................. (43,414,587) (49,191,426) (14,065,090)
Class B................................................. (21,993,148) (32,596,210) (11,697,847)
Class C................................................. (11,575,079) (17,554,911) (2,584,972)
Class I................................................. (29,475,751) (16,064,833) (8,419,104)
------------ ------------- ------------
Increase in net assets derived from capital share
transactions........................................ 82,634,109 189,985,034 244,341,163
------------ ------------- ------------
Net increase in net assets............................ 214,845,993 75,060,268 248,139,454
NET ASSETS:
Beginning of period......................................... 461,305,332 386,245,064 138,105,610
------------ ------------- ------------
End of period............................................... $676,151,325 $ 461,305,332 $386,245,064
============ ============= ============
Undistributed (distribution in excess of) net investment
income at end of period................................... $ 12,233 $ (189,998) $ --
============ ============= ============
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A Class B
---------------------------------------------------------- -----------
January 31, January 31,
2003 Year ended June 9** 2003
through December 31, through through
October 31, ----------------------------- December 31, October 31,
2003* 2002 2001 2000 1999 2003*
----------- -------- -------- ------- ------------ -----------
Net asset value at beginning
of period.................... $ 21.95 $ 27.66 $ 27.25 $ 26.22 $25.38 $ 21.47
-------- -------- -------- ------- ------ --------
Net investment income
(loss)....................... (0.04) 0.15 0.03 0.02 0.05 (0.16)
Net realized and unrealized
gain (loss) on investments... 6.13 (5.69) 0.55 4.17 1.81 5.95
-------- -------- -------- ------- ------ --------
Total from investment
operations................... 6.09 (5.54) 0.58 4.19 1.86 5.79
-------- -------- -------- ------- ------ --------
Less dividends and
distributions:
From net investment income... -- (0.11) (0.03) -- (0.08) --
From net realized gain on
investments................ -- (0.06) (0.14) (3.16) (0.94) --
-------- -------- -------- ------- ------ --------
Total dividends and
distributions................ -- (0.17) (0.17) (3.16) (1.02) --
-------- -------- -------- ------- ------ --------
Net asset value at end of
period....................... $ 28.04 $ 21.95 $ 27.66 $ 27.25 $26.22 $ 27.26
======== ======== ======== ======= ====== ========
Total investment return (b)... 27.74% (20.04%) 2.11% 16.67% 7.53% 26.97%
Ratios (to average net
assets)/
Supplemental Data:
Net investment income
(loss).................... (0.17%)+ 0.63% 0.37% 0.12% 0.46%+ (0.92%)+
Net expenses............... 1.35%+ 1.33% 1.25% 1.25% 1.25%+ 2.10%+
Expenses (before
reimbursement)............ 1.45%+ 1.44% 1.43% 1.44% 1.41%+ 2.20%+
Portfolio turnover rate....... 61% 77% 19% 40% 32% 61%
Net assets at end of period
(in 000's)................... $176,932 $123,461 $103,402 $$22,048 $8,651 $220,932
<Caption>
Class B
--------------------------------------------
Year ended June 9**
December 31, through
----------------------------- December 31,
2002 2001 2000 1999
-------- -------- ------- ------------
Net asset value at beginning
of period.................... $ 27.13 $ 26.92 $ 26.15 $ 25.38
-------- -------- ------- -------
Net investment income
(loss)....................... (0.03) (0.06) (0.11) 0.02
Net realized and unrealized
gain (loss) on investments... (5.57) 0.41 4.04 1.76
-------- -------- ------- -------
Total from investment
operations................... (5.60) 0.35 3.93 1.78
-------- -------- ------- -------
Less dividends and
distributions:
From net investment income... -- -- -- (0.07)
From net realized gain on
investments................ (0.06) (0.14) (3.16) (0.94)
-------- -------- ------- -------
Total dividends and
distributions................ (0.06) (0.14) (3.16) (1.01)
-------- -------- ------- -------
Net asset value at end of
period....................... $ 21.47 $ 27.13 $ 26.92 $ 26.15
======== ======== ======= =======
Total investment return (b)... (20.63%) 1.29% 15.72% 7.23%
Ratios (to average net
assets)/
Supplemental Data:
Net investment income
(loss).................... (0.12%) (0.38%) (0.63%) (0.29%)+
Net expenses............... 2.08% 2.00% 2.00% 2.00%+
Expenses (before
reimbursement)............ 2.19% 2.18% 2.19% 2.16%+
Portfolio turnover rate....... 77% 19% 40% 32%
Net assets at end of period
(in 000's)................... $153,581 $134,883 $40,078 $11,511
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class A, B and C shares first offered on June 9, 1999.
*** The financial information for the year ended December 31,
1998 and prior relates to the MAP-Equity Fund shares, which
were reorganized into Class I shares as of the close of
business on June 8, 1999. Financial information for the year
ended December 31, 1999 represents the combined results of
operations of the MAP-Equity Fund and MainStay MAP Fund
(formerly MainStay MAP Equity Fund).
+ Annualized.
(a) Less than one cent per share.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<Table>
<Caption>
Class C Class I***
-------------------------------------------------------- --------------------------------------------------------------
January 31, January 31,
2003 Year ended June 9** 2003 Year ended
through December 31, through through December 31,
October 31, --------------------------- December 31, October 31, ------------------------------------------------
2003* 2002 2001 2000 1999 2003* 2002 2001 2000 1999 1998
----------- ------- ------- ------- ------------ ----------- -------- ------- ------- ------- -------
$ 21.47 $ 27.13 $ 26.92 $ 26.15 $ 25.38 $ 22.03 $ 27.75 $ 27.31 $ 26.25 $ 24.58 $ 22.73
------- ------- ------- ------- ------- -------- -------- ------- ------- ------- -------
(0.16) (0.03) (0.06) (0.11) 0.02 0.00(a) 0.19 0.07 0.12 0.11 0.33
5.95 (5.57) 0.41 4.04 1.76 6.16 (5.69) 0.58 4.13 2.81 4.81
------- ------- ------- ------- ------- -------- -------- ------- ------- ------- -------
5.79 (5.60) 0.35 3.93 1.78 6.16 (5.50) 0.65 4.25 2.92 5.14
------- ------- ------- ------- ------- -------- -------- ------- ------- ------- -------
-- -- -- -- (0.07) -- (0.16) (0.07) (0.03) (0.11) (0.33)
-- (0.06) (0.14) (3.16) (0.94) -- (0.06) (0.14) (3.16) (1.14) (2.96)
------- ------- ------- ------- ------- -------- -------- ------- ------- ------- -------
-- (0.06) (0.14) (3.16) (1.01) -- (0.22) (0.21) (3.19) (1.25) (3.29)
------- ------- ------- ------- ------- -------- -------- ------- ------- ------- -------
$ 27.26 $ 21.47 $ 27.13 $ 26.92 $ 26.15 $ 28.19 $ 22.03 $ 27.75 $ 27.31 $ 26.25 $ 24.58
======= ======= ======= ======= ======= ======== ======== ======= ======= ======= =======
26.97% (20.63%) 1.29% 15.72% 7.23% 27.96% (19.81%) 2.36% 16.88% 12.18% 24.23%
(0.92%)+ (0.12%) (0.38%) (0.63%) (0.29%)+ 0.08%+ 0.88% 0.62% 0.37% 0.39% 1.10%
2.10%+ 2.08% 2.00% 2.00% 2.00%+ 1.10%+ 1.08% 1.00% 1.00% 0.88% 0.70%
2.20%+ 2.19% 2.18% 2.19% 2.16%+ 1.20%+ 1.19% 1.18% 1.19% 0.96% 0.77%
61% 77% 19% 40% 32% 61% 77% 19% 40% 32% 41%
$95,004 $69,077 $51,234 $ 6,546 $ 2,478 $183,283 $115,186 $96,726 $69,434 $63,460 $60,414
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
MainStay MAP Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay MAP
Fund (formerly MainStay MAP Equity Fund, the "Fund"), a diversified fund.
MainStay MAP Fund commenced operations in 1971 as the Mutual Benefit Fund. It
was renamed MAP-Equity Fund on May 1, 1995. Pursuant to an Agreement and Plan of
Reorganization approved by MAP-Equity shareholders on June 3, 1999, the
MAP-Equity Fund was reorganized as the MainStay MAP Equity Fund. As of June 10,
2002 the MainStay MAP Equity Fund was renamed the MainStay MAP Fund. The
financial statements of the MainStay MAP Fund reflect the historical financial
results of the MAP-Equity Fund prior to the reorganization.
The Fund currently offers four classes of shares, Class A shares, Class B
shares, Class C shares and Class I shares. Distribution of Class A shares, Class
B shares, and Class C shares commenced on June 9, 1999. Class A shares are
offered at net asset value per share plus an initial sales charge. No sales
charge applies on investments of $1 million or more (and certain other qualified
purchases) in Class A shares, but a contingent deferred sales charge is imposed
on certain redemptions of such shares within one year of the date of purchase.
Class B shares and Class C shares are offered without an initial sales charge,
although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase of Class B shares and within one
year of purchase of Class C shares. Class I shares are not subject to sales
charge. The four classes of shares bear the same voting (except for issues that
relate solely to one class), dividend, liquidation and other rights and
conditions except that Class B shares and Class C shares are subject to higher
distribution fee rates than Class A shares under a distribution plan pursuant to
Rule 12b-1 under the 1940 Act. Class I shares are not subject to a distribution
or service fee and may be sold to institutional investors and other individuals,
as detailed in the prospectus.
The Fund's investment objective is to seek long-term appreciation of capital.
The Fund also seeks to earn income, but this is a secondary objective.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
24
Notes to Financial Statements
asked prices. Prices are taken from the primary market in which each security
trades. Debt securities are valued at prices supplied by a pricing agent
selected by the Fund's Manager, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques, if those prices are deemed
by the Fund's Manager to be representative of market values at the regular close
of business of the Exchange. Temporary cash investments acquired over 60 days to
maturity are valued using the latest bid prices or using valuations based on a
matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value.
(B) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay any
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current period reclassification between
accumulated net investment loss and additional paid-in capital on investments
arising from permanent differences; net assets at October 31, 2003, are not
affected.
<Table>
<Caption>
ACCUMULATED
NET INVESTMENT ADDITIONAL
LOSS PAID-IN CAPITAL
- -------------- ---------------
$2,236,724 $(2,236,724)
</Table>
The reclassification for the Fund is primarily due to net operating losses.
25
MainStay MAP Fund
(D) 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 as earned.
Discounts and premiums on securities, other than short-term securities,
purchased for the Fund are accreted and amortized, respectively, on the constant
yield method over the life of the respective securities or, in the case of a
callable security, over the period to the first call date. Discounts and
premiums on short-term securities are accreted and amortized, respectively, on
the straight line method. Income from payment-in-kind securities is recorded
daily based on the effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(F) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. Markston
International LLC and Jennison Associates LLC (the "Subadvisors") will manage
its allocated portion of the Fund's assets subject to the oversight of NYLIM.
Each Subadvisor is responsible for the day-to-day portfolio management of the
Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.75% of the average
daily net assets of the Fund. The Manager
26
- -
Notes to Financial Statements (continued)
had contractually agreed to limit total annual fund operating expenses to 1.00%,
1.25%, 2.00% and 2.00% for Class I, Class A, Class B and Class C shares,
respectively, through May 30, 2001, after which time the Manager voluntarily
agreed to continue the limitation through March 11, 2002. Effective March 12,
2002, the Manager voluntarily agreed to reimburse the expenses of the Fund to
the extent that operating expenses would exceed on an annualized basis 1.10%,
1.35%, 2.10% and 2.10% of the average daily net assets of the Class I, Class A,
Class B and Class C shares, respectively. For the ten months ended October 31,
2003, the Manager earned from the Fund $3,376,275 and reimbursed the Fund
$450,609. For the year ended December 31, 2002, the Manager earned from the Fund
$3,499,789 and reimbursed the Fund $507,575.
Pursuant to the terms of Sub-Advisory Agreements between the Manager and the
Subadvisors, the Manager pays the Subadvisors a monthly fee at an annual rate of
the Fund's average daily net assets of 0.45% on assets up to $250 million, 0.40%
on assets from $250 million to $500 million and 0.35% on assets in excess of
$500 million.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC ("the Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
Class A, Class B and Class C shares, has adopted distribution plans (the
"Plans") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives a monthly fee from the
Fund at an annual rate of 0.25% of the average daily net assets of the Fund's
Class A shares, which is an expense of the Class A shares of the Fund for
distribution or service activities as designated by the Distributor. Pursuant to
the Class B and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plans provide that the Class B and Class C shares of
the Fund also incur a service fee at the annual rate of 0.25% of the average
daily net asset value of the Class B or Class C shares of the Fund. Class I
shares are not subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A Fund shares was $39,780 for the ten
months ended October 31, 2003. The Fund was also advised that the Distributor
retained contingent deferred sales charges on redemption of Class A, Class B and
Class C shares of $220, $299,227 and $12,037, respectively, for the ten months
ended October 31, 2003.
27
MainStay MAP Fund
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and year ended December 31, 2002 amounted to $1,571,546
and $1,532,568, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the MAP Fund only
pays a portion of the fees identified above.
(F) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $11,900 for the ten months ended
October 31, 2003 and $9,635 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $67,228 for the ten months ended October
31, 2003 and $73,332 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
UNDISTRIBUTED NET ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
INVESTMENT INCOME AND OTHER LOSSES APPRECIATION GAIN
- ------------------ ------------------- ------------ -----------------
$12,233 $(42,342,064) $92,043,690 $49,713,859
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals and real estate investment trust
distributions.
28
Notes to Financial Statements (continued)
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $42,342,064 were available, as shown in the table below, to the extent
provided by regulations to offset future realized gains through the years
indicated. 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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
----------------- --------
2010................................................... $ 7,302
2011................................................... 35,040
-------
$42,342
=======
</Table>
The tax character of distributions paid during the years December 31, 2002 and
December 31, 2001, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2002 2001
----------- -----------
Distributions paid from:
Ordinary income $2,233,683 $ 340,737
Long-term capital gains 525,282 1,842,263
---------- ----------
$2,758,965 $2,183,000
========== ==========
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $346,030 and $295,940, respectively.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
29
MainStay MAP Fund
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
JANUARY 1 THROUGH ---------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
------------------------------------- ------------------------------------- -----------------
CLASS A CLASS B CLASS C CLASS I CLASS A CLASS B CLASS C CLASS I CLASS A CLASS B
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold.................. 2,489 1,920 778 2,448 3,907 3,567 2,098 2,358 3,438 3,917
Shares issued in reinvestment
of dividends and
distributions.............. -- -- -- -- 36 19 7 49 17 22
------ ----- ---- ------ ------ ------ ----- ----- ----- -----
2,489 1,920 778 2,448 3,943 3,586 2,105 2,407 3,455 3,939
Shares redeemed.............. (1,802) (966) (509) (1,176) (2,058) (1,405) (776) (664) (525) (456)
------ ----- ---- ------ ------ ------ ----- ----- ----- -----
Net increase................. 687 954 269 1,272 1,885 2,181 1,329 1,743 2,930 3,483
====== ===== ==== ====== ====== ====== ===== ===== ===== =====
<Caption>
YEAR ENDED
DECEMBER 31,
-----------------
2001
-----------------
CLASS C CLASS I
------- -------
Shares sold.................. 1,738 1,233
Shares issued in reinvestment
of dividends and
distributions.............. 7 24
----- -----
1,745 1,257
Shares redeemed.............. (100) (313)
----- -----
Net increase................. 1,645 944
===== =====
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
30
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay MAP Fund
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 MAP Fund (one of the funds
constituting The MainStay Funds, hereafter referred to as the "Fund") at October
31, 2003, the results of its operations for the ten months ended October 31,
2003 and the year ended December 31, 2002, the changes in its net assets for the
ten months ended October 31, 2003 and each of the two years in the period ended
December 31, 2002 and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. 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 auditing standards generally accepted in
the United States of America, 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 October 31, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
31
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
32
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
33
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
34
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
35
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY FUNDS LOGO]
MainStay is a division of New York Life Investment
Management LLC, the investment advisor to The MainStay Funds.
- ------------------------------------------------------
Y Not FDIC insured. Y No bank guarantee. Y May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSMP11- 12/03
NYLIM-A04375 30
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R) MAP Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY FUNDS LOGO]
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay Strategic Value
Fund versus S&P 500(R) Index, a Strategic
Value Composite Index, and Inflation--Class
A, Class B, and Class C Shares 4
Portfolio Management Discussion and Analysis 6
Year-by-Year and 10-Month Performance 7
Portfolio of Investments 12
Financial Statements 23
Notes to Financial Statements 28
Report of Independent Auditors 38
Trustees and Officers 39
The MainStay(R) Funds 42
</Table>
- -
This page intentionally left blank
-
3
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
- -
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
$10,000 Invested in MainStay Strategic Value
Fund versus S&P 500(R) Index, a Strategic
Value Composite Index, and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 20.28%, 5 Years 3.73%, Since Inception
(10/22/97) 3.65%
<Table>
<Caption>
MAINSTAY STRATEGIC STRATEGIC VALUE
Period-end VALUE FUND S&P 500 INDEX(1) COMPOSITE INDEX(2) INFLATION (CPI)(3)
- ---------- ------------------ ---------------- ------------------ ------------------
10/22/97 $ 9,450 $ 10,000 $ 10,000 $ 10,000
10/31/97 9,374 9,412 10,000 10,000
10/31/98 9,767 11,482 9,223 10,149
10/31/99 10,781 14,429 9,748 10,409
10/31/00 11,983 15,308 10,903 10,768
10/31/01 11,167 11,495 10,753 10,997
10/31/02 9,750 9,759 10,434 11,226
10/31/03 12,410 11,789 13,638 11,455
</Table>
CLASS B AND CLASS C SHARES
Class B Total Returns with Sales Charges: 1 Year 21.38%, 5 Years 3.79%, Since
Inception (10/22/97) 3.85%
Class C Total Returns with Sales Charges: 1 Year 25.22%, 5 Years 4.13%, Since
Inception (10/22/97) 3.85%
<Table>
<Caption>
MAINSTAY STRATEGIC STRATEGIC VALUE
Period-end VALUE FUND S&P 500 INDEX(1) COMPOSITE INDEX(2) INFLATION (CPI)(3)
- ---------- ------------------ ---------------- ------------------ ------------------
10/22/97 $ 10,000 $ 10,000 $ 10,000 $ 10,000
10/31/97 9,920 9,412 10,000 10,000
10/31/98 10,256 11,482 9,223 10,149
10/31/99 11,237 14,429 9,748 10,409
10/31/00 12,396 15,308 10,903 10,768
10/31/01 11,460 11,495 10,753 10,997
10/31/02 9,935 9,759 10,434 11,226
10/31/03 12,556 11,789 13,638 11,455
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION PLEASE VISIT WWW.MAINSTAYFUNDS.COM.
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect change in share price, reinvestment of dividend and capital
gain distributions, and maximum applicable sales charges explained in this
paragraph. The graphs assume an initial investment of $10,000 and reflect
deduction of all sales charges that would have applied for the period of
investment. Class A share performance reflects the effect of the maximum 5.5%
initial sales charge. Class B shares are subject to a contingent deferred
sales charge (CDSC) of up to 5% if shares are redeemed within the first six
years of purchase. Class C share performance includes the historical
performance of the Class B shares for periods from 10/22/97 through 8/31/98.
Class C shares would be subject to a CDSC of 1% if redeemed within one year
of purchase.
- ----------
1. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume reinvestment of
all income and capital gains. An investment cannot be made directly into
an index.
2. The Fund compares itself to a Strategic Value Composite Index that is
comprised of the Russell 1000(R) Value Index, the Credit Suisse First
Boston(TM) Convertible Securities Index, and the Credit Suisse First
Boston(TM) High Yield Index weighted 60%/20%/20%, respectively. The
Russell 1000 Value Index is an unmanaged index that measures the
performance of those Russell 1000(R) companies with lower price-to-book
ratios and lower forecasted growth values. The Russell 1000(R) Index is an
unmanaged index that measures the performance of the 1,000 largest U.S.
companies based on total market capitalization. The Credit Suisse First
Boston Convertible Securities Index is an unmanaged index that generally
includes 250 to 300 issues. Convertibles must have a minimum issue size of
$50 million; bonds and preferreds must be rated B- or better by S&P; and
preferreds must have a minimum of 500,000 shares outstanding. The Credit
Suisse First Boston High Yield Index is an unmanaged market-weighted index
that includes publicly traded bonds rated below BBB by S&P and Baa by
Moody's. Results assume that all income and capital gains are reinvested
in the index or indices that produce them. An investment cannot be made
directly into an index or this composite.
3. Inflation is measured 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. The rate of inflation does not represent an
investment return.
5
Portfolio Management Discussion and Analysis
The equity markets enjoyed strong performance in the first 10 months of 2003,
and the Fund participated fully in the market's advance. Stocks rallied early in
the year, but plummeted from mid-January through early March as the possibility
of a war in Iraq, general geopolitical uncertainty, weak employment, and
declining consumer confidence influenced the market.
From mid-March through the end of October 2003, a series of encouraging
developments helped stocks post strong gains. Investors reacted positively to
progress in the war in Iraq, interest-rate policy remained accommodative, a tax
cut provided fiscal stimulus, most equity valuations were reasonable, and a
weakening U.S. dollar provided potential benefits for U.S. exporters and
companies traditionally subject to import competition.
The equity rally appeared justified by a solid recovery in the economy and in
corporate earnings. Real gross domestic product rose 1.4% in the first quarter
of 2003, 3.3% in the second quarter, and according to preliminary estimates from
the Bureau of Economic Analysis, at a seasonally adjusted rate of 8.2% in the
third quarter. Operating earnings for companies in the S&P 500 Index(1) grew 6%
in the second quarter of 2003 and an estimated 11% in the third quarter. Recent
evidence suggests that labor markets are improving, but the geopolitical
landscape remains relatively uncertain.
Whatever is good for stocks tends to be good for convertible securities, and the
convertible-bond market provided strong returns for first 10 months of 2003.
Evidence of economic improvement apparently increased investors' appetite for
risk, which also helped performance in the high-yield bond market over the same
period.
Low interest rates, declining default rates, and strong demand propelled high-
yield bond prices higher, with the high-yield market showing strong technicals
throughout most of the 10-month period. In the beginning of August, we saw some
technical selling pressure that resulted from rising interest rates, retail
money flows out of high-yield bonds, and a flood of new issuance. Even so, some
$23 billion flowed into the high-yield market from January through October of
2003.
PERFORMANCE REVIEW
For the 10-month period ended October 31, 2003, MainStay Strategic Value Fund
returned 21.85% for Class A shares, 21.20% for Class B shares, and 21.19% for
Class C shares, excluding all sales charges. All share classes outperformed the
15.80% return of the average Lipper(2) flexible portfolio fund over the same
- -------
1. See footnote on page 5 for more information about the S&P 500(R) Index.
2. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
6
- -------
3. See footnote on page 5 for more information about the Fund's Strategic Value
Composite Index.
4. Performance percentages reflect the price performance of the securities
mentioned for the 10 months ended October 31, 2003, or for the portion of the
reporting period the securities were held in the Fund, if shorter.
Performance percentages do not reflect the impact of dividends received, if
any. Due to purchases and sales, the performance of Fund holdings may differ
from that of the securities themselves.
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[BAR GRAPH]
<Table>
<Caption>
Period-end Total Return%
- ---------- -------------
12/97 4.11
12/98 0.52
12/99 13.59
12/00 5.78
12/01 0.81
12/02 -14.98
10/03 21.85
</Table>
See footnotes on pages 4 and 5 for more information on performance.
CLASS B SHARES
[BAR GRAPH]
<Table>
<Caption>
Period-end Total Return%
- ---------- -------------
12/97 4.04
12/98 -0.27
12/99 12.64
12/00 5.07
12/01 -0.07
12/02 -15.58
10/03 21.20
</Table>
See footnotes on pages 4 and 5 for more information on performance.
period. Class A shares outperformed and Class B and Class C shares under-
performed the 21.21% return of the S&P 500(R) Index and the 21.66% return of the
Fund's Strategic Value Composite Index(3) over the 10-month period ended October
31, 2003.
EQUITIES
In the equity portion of the Fund's portfolio, stock selection in the
industrials sector was a major positive contributor to performance. Shares of
truck manufacturer Navistar International advanced 66.31%(4) as signs pointed to
a recovery in the heavy-duty truck market. Electrical-components maker Cooper
7
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES), CONTINUED
CLASS C SHARES
[BAR GRAPH]
<Table>
<Caption>
CLASS C SHARES
--------------
12/97 4.04
12/98 -0.27
12/99 12.64
12/00 5.07
12/01 -0.07
12/02 -15.58
10/03 21.19
</Table>
See footnotes on pages 4 and 5 for more information on performance. Class C
share returns reflect the historical performance of Class B shares through
8/31/98.
Industries rose 48.78%, helped by strong free cash flow and a cyclical recovery
in the company's end-markets.
The Fund's equity holdings in the semiconductors & semiconductor equipment
industry performed well as demand for microprocessors rebounded while pricing
held firm. We took advantage of low valuations in Intel (+112.29%), and the
stock rose with the improving semiconductor cycle. We sold the Intel position
when it reached our price target.
In the information technology sector, attractively valued equities with
fundamental business improvements were difficult to find. Shares of Apple
Computer detracted from the Fund's equity performance, and we sold the Fund's
shares in the company in mid-April on concerns about published reports that
Apple was interested in buying a large music company--reports that the company
would not refute. Our concern was that a large acquisition outside the company's
area of core competence would present considerable downside risk. No deal has
yet been announced, and Apple Computer shares have risen since the Fund sold its
equity position.
In the financials sector, FleetBoston Financial (+72.60%) was helped by an
acquisition bid from Bank of America late in the reporting period. The Fund's
capital-markets sensitive holdings rebounded, with Merrill Lynch (+57.80%),
Goldman Sachs (+39.14%), and Citigroup (+38.25%) leading the way. Mortgage
lender Washington Mutual (+31.23%) benefited from a strong housing market.
McDonald's suffered from a series of earnings-shortfall announcements and store
closings. In February, after determining that the company's fundamentals had
deteriorated, we sold the Fund's entire position in the stock. McDonald's
8
shares were down from the beginning of the reporting period through the time of
the Fund's last sale.
A shifting competitive landscape continues to impact the Fund's
telecommunication services sector holdings. Local telecommunications providers
BellSouth (+5.21%), SBC Communications (-6.42%), and Verizon (-9.58%) had
disappointing results. We have underweighted the equity portion of the Fund in
telecommunication services, since we anticipate a new wave of competitive
pressure.
HIGH-YIELD BONDS
The high-yield portion of the Fund's portfolio benefited from telecommunications
holdings Nextel International, Qwest, Call Net Enterprises, and Colt Telecom. In
the wireless area, Sprint PCS generated strong results for the portion of the
reporting period the securities were held in the Fund. The Fund was also
rewarded for holding Alamosa and U.S. Unwired.
An overweighted position in the utilities sector throughout the reporting period
contributed positively to high-yield bond results, as the industry was among the
top performers year-to-date. Within the utilities industry group, the Fund
emphasized gas-pipeline companies such as El Paso, Tennessee Gas Pipeline, and
PG&E.
High-yield information technology bonds outperformed the Credit Suisse First
Boston High Yield Index during the reporting period, as many companies benefited
from cost cutting and balance-sheet improvements. Avaya, Juniper Networks,
Lucent Technologies, and Nortel Networks were all strong performers in the
high-yield portion of the Fund's portfolio. We sold the Fund's position in
Juniper Networks in August 2003. While revenues for telecom equipment makers are
not growing, the market reacted positively to balance-sheet repair and cash-flow
restructurings, which bolstered the returns of these bonds. Xerox performed well
as the firm showed revenue gains as well as an increase in its margins. Other
high-yield technology holdings that helped results were Advanced Micro Devices,
Ciena, and LSI Logic. We sold the Fund's position in Advanced Micro Devices in
October 2003.
After setbacks in 2002, the cable industry saw improvements in free cash flow
and credit quality in 2003 that resulted in strong performance. High-yield
holdings in FrontierVision, Comcast, and Quebecor Media all enhanced results. We
have recently lowered the Fund's exposure to this industry by taking profits in
issues that were purchased at a discount and that reached what we believed to be
their full potential.
Airline-industry bonds were extremely volatile during the 10-month reporting
period, suffering from financial, war-related, and union difficulties in the
first
9
quarter of 2003 but bouncing back strongly as the year progressed. The Fund's
high-yield holdings in Delta Airlines and Northwest Airlines were both strong
performers.
High-yield health care bonds have been lackluster year-to-date, and the high-
yield portion of the Fund's portfolio benefited from an underweighted position
in the sector. Health care holdings included Caremark, dj Orthopedics, and
Vertex Pharmaceuticals. HealthSouth was particularly disappointing. An SEC
investigation hurt HealthSouth's performance, and we decided to sell the Fund's
position in the company.
CONVERTIBLE SECURITIES
The convertible portion of the Fund's portfolio had an eclectic group of strong-
performing securities during the reporting period. Navistar International and
Caterpillar benefited directly from the recovering economy, and we sold the
Fund's position in Caterpillar in October. We also saw strong performance in the
information technology sector, particularly among companies in the
semiconductors & semiconductor equipment industry. Fairchild Semiconductor stock
benefited the Fund during the reporting period.
Generic drug maker Teva Pharmaceuticals was another positive contributor,
benefiting from a strong market position, solid earnings, and a rising stock
price. Cendant, which has exposure to the travel industry through interests in
travel agencies, hotels, and rental-car businesses, provided positive results.
Gap Stores also performed well when a "back-to-basics" strategy and increased
cash on the company's balance sheet helped the stock appreciate.
In selecting convertible securities for the Fund's portfolio, we consider upside
potential as well as downside risk. Ideally, we seek securities that can
participate strongly in a company's upside potential and offer a measure of risk
manage ment in difficult times. Although the best-performing convertibles during
the 10-month period were highly speculative, we sought higher-quality
convertibles that we felt might have less downside risk. Even so, we did see
weakness among some of the Fund's convertible holdings.
At the end of October 2003, the Fund held 57.21% of its assets in equities,
20.87% in high-yield securities, and 10.75% in convertible securities. The
remainder was invested primarily in cash and cash equivalents.
LOOKING AHEAD
Although recent gross domestic product figures have been highly encouraging, it
remains to be seen whether such a high level of growth can be sustained. We
believe that a stronger economy may benefit value equities, high-yield
securities, and the prospects for convertible securities.
10
Whatever the economy or the markets may bring, the Fund will continue to seek
maximum long-term total return from a combination of common stocks and
high-yield and convertible securities.
Donald E. Morgan
Mark T. Spellman
Thomas Wynn
Portfolio Managers
MacKay Shields LLC
Foreign securities may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information, and changes in tax or currency laws or monetary policy. These risks
are likely to be greater in emerging markets than in developed markets.
High-yield securities ("junk bonds") are generally considered speculative
because they present a greater risk of loss than higher-quality debt securities
and may be subject to greater price volatility.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
11
MainStay Strategic Value Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
ASSET-BACKED SECURITIES (0.6%)+
AIRLINES (0.1%)
Northwest Airlines, Inc.
Pass-Through Certificates
Series 1996-1
8.97%, due 1/2/15.............. $ 34,786 $ 22,668
-----------
MEDIA (0.0%) (b)
United Artists Theatres Circuit,
Inc.
Pass-Through Certificates
Series 1995-A
9.30%, due 7/1/15 (d).......... 14,104 13,752
-----------
MULTILINE RETAIL (0.0%) (b)
Kmart Corp.
Pass-Through Certificates
Series 1995-K3
8.54%, due 1/2/15 (e)(f)....... 33,703 13,481
-----------
MULTI-UTILITIES & UNREGULATED POWER (0.5%)
AES Eastern Energy L.P.
Pass-Through Certificates
Series 1999-A
9.00%, due 1/2/17.............. 127,307 138,128
Tiverton/Rumford Power
Associates Ltd., L.P.
Pass-Through Certificates
9.00%, due 7/15/18 (c)......... 63,000 51,660
-----------
189,788
-----------
Total Asset-Backed Securities
(Cost $242,232)................ 239,689
-----------
CONVERTIBLE SECURITIES (10.7%)
CONVERTIBLE BONDS (7.3%)
AIRLINES (0.0%) (b)
Delta Air Lines, Inc.
8.00%, due 6/3/23 (c).......... 20,000 19,250
-----------
BIOTECHNOLOGY (0.1%)
Vertex Pharmaceuticals, Inc.
5.00%, due 9/19/07............. 45,000 40,050
-----------
COMMERCIAL SERVICES & SUPPLIES (0.2%)
Cendant Corp.
(zero coupon), due 2/13/21..... 67,000 47,403
World Color Press, Inc.
6.00%, due 10/1/07............. 56,000 57,120
-----------
104,523
-----------
COMMUNICATIONS EQUIPMENT (0.4%)
CIENA Corp.
3.75%, due 2/1/08.............. 42,000 36,855
Nortel Networks Corp.
4.25%, due 9/1/08.............. 100,000 94,750
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
COMMUNICATIONS EQUIPMENT (CONTINUED)
Riverstone Networks, Inc.
3.75%, due 12/1/06 (c)......... $ 40,000 $ 39,000
-----------
170,605
-----------
CONSUMER FINANCE (0.1%)
Providian Financial Corp.
3.25%, due 8/15/05............. 45,000 43,425
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.4%)
At Home Corp.
4.75%, due 12/15/06 (e)(f)..... 177,810 24,893
COLT Telecom Group PLC
2.00%, due 12/16/06 (c)........ E 40,000 47,430
2.00%, due 4/3/07 (c).......... 68,000 80,631
KPNQwest N.V.
10.00%, due 3/15/12 (e)(g)..... 8,000 24
Premiere Technologies, Inc.
5.75%, due 7/1/04.............. $ 19,000 19,142
-----------
172,120
-----------
ENERGY EQUIPMENT & SERVICES (0.8%)
BJ Services Co.
0.3954%, due 4/24/22........... 315,000 256,331
Pride International, Inc.
2.50%, due 3/1/07.............. 75,000 87,469
-----------
343,800
-----------
HEALTH CARE EQUIPMENT & SUPPLIES (0.2%)
ALZA Corp.
(zero coupon), due 7/28/20..... 30,000 21,338
Wilson Greatbatch Technologies,
Inc.
2.25%, due 6/15/13 (c)......... 45,000 51,019
-----------
72,357
-----------
HEALTH CARE PROVIDERS & SERVICES (0.3%)
Province Healthcare Co.
4.25%, due 10/10/08............ 35,000 32,944
Quest Diagnostics, Inc.
1.75%, due 11/30/21............ 75,000 76,875
-----------
109,819
-----------
INDUSTRIAL CONGLOMERATES (0.4%)
Tyco International Group S.A.
Series A
2.75%, due 1/15/18............. 135,000 149,681
-----------
INSURANCE (1.3%)
American International Group,
Inc.
0.50%, due 5/15/07............. 250,000 236,250
XL Capital Ltd.
(zero coupon), due 5/23/21..... 450,000 288,000
-----------
524,250
-----------
</Table>
<Table>
- -------
+ Percentage indicated are based on Portfolio net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
Portfolio of Investments October 31, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
CONVERTIBLE SECURITIES (CONTINUED)
CONVERTIBLE BONDS (CONTINUED)
INTERNET SOFTWARE & SERVICES (0.2%)
CNET Networks, Inc.
5.00%, due 3/1/06.............. $ 70,000 $ 67,550
-----------
MEDIA (0.8%)
Adelphia Communications Corp.
3.25%, due 5/1/21 (e).......... 160,000 69,600
6.00%, due 2/15/06 (e)......... 70,000 30,450
News America, Inc.
(zero coupon), due 2/28/21
(h)............................ 373,000 210,745
Regal Entertainment Group
3.75%, due 5/15/08 (c)......... 45,000 50,512
-----------
361,307
-----------
PAPER & FOREST PRODUCTS (0.6%)
International Paper Co.
(zero coupon), due 6/20/21..... 500,000 270,000
-----------
PHARMACEUTICALS (0.4%)
ICN Pharmaceuticals, Inc.
6.50%, due 7/15/08............. 45,000 45,281
Teva Pharmaceutical Finance N.V.
0.75%, due 8/15/21............. 105,000 143,850
-----------
189,131
-----------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.8%)
Atmel Corp.
(zero coupon), due 5/23/21..... 90,000 37,575
Fairchild Semiconductor
International, Inc.
5.00%, due 11/1/08............. 90,000 94,612
Kulicke & Soffa Industries, Inc.
4.75%, due 12/15/06............ 35,000 33,863
LSI Logic Corp.
4.00%, due 11/1/06............. 130,000 126,425
Vitesse Semiconductor Corp.
4.00%, due 3/15/05............. 25,000 24,406
-----------
316,881
-----------
SPECIALTY RETAIL (0.1%)
Gap, Inc. (The)
5.75%, due 3/15/09............. 25,000 33,344
-----------
WIRELESS TELECOMMUNICATION SERVICES (0.2%)
Millicom International Cellular
S.A.
2.00%, due 6/1/06 (d)(g)(i).... 11,000 63,167
-----------
Total Convertible Bonds
(Cost $2,990,268).............. 3,051,260
-----------
<Caption>
SHARES VALUE
---------------------------
CONVERTIBLE PREFERRED STOCKS (3.4%)
AEROSPACE & DEFENSE (0.4%)
Northrop Grumman Corp.
7.25% (j)...................... 1,600 $ 161,440
-----------
CAPITAL MARKETS (0.3%)
State Street Corp.
6.75%.......................... 500 124,360
-----------
COMMERCIAL SERVICES & SUPPLIES (0.3%)
Cendant Corp.
7.75%.......................... 2,200 106,480
-----------
DIVERSIFIED FINANCIAL SERVICES (0.0%) (B)
Pacific & Atlantic (Holdings),
Inc.
7.50% Class A (d)(g)(i)(k)..... 207 2
-----------
ELECTRIC UTILITIES (0.2%)
PPL Capital Funding Trust I
7.75% (l)...................... 4,500 94,050
-----------
HEALTH CARE PROVIDERS & SERVICES (0.2%)
Anthem, Inc.
6.00%.......................... 1,000 81,520
-----------
INSURANCE (0.9%)
Hartford Financial Services
Group, Inc. (The)
7.00%.......................... 3,100 175,553
Prudential Financial, Inc.
6.75%.......................... 3,400 209,678
-----------
385,231
-----------
MACHINERY (0.3%)
Cummins Capital Trust I
7.00%.......................... 1,900 116,850
-----------
MEDIA (0.4%)
Comcast Corp.
2.00% (m)...................... 2,700 101,925
Tribune Co.
2.00% (n)...................... 1,100 88,275
-----------
190,200
-----------
PAPER & FOREST PRODUCTS (0.4%)
International Paper Capital
Trust
5.25%.......................... 3,800 188,100
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
MainStay Strategic Value Fund
<Table>
<Caption>
SHARES VALUE
---------------------------
CONVERTIBLE SECURITIES (CONTINUED)
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
WIRELESS TELECOMMUNICATION SERVICES (0.0%) (b)
NEON Communications, Inc.
12.00% (d)(g)(i)(k)............ 438 $ 4,928
-----------
Total Convertible Preferred
Stocks
(Cost $1,359,079).............. 1,453,161
-----------
Total Convertible Securities
(Cost $4,349,347).............. 4,504,421
-----------
<Caption>
PRINCIPAL
AMOUNT
----------
CORPORATE BONDS (16.6%)
AEROSPACE & DEFENSE (0.2%)
BE Aerospace, Inc.
Series B
8.875%, due 5/1/11............. $ 50,000 45,000
Sequa Corp.
Series B
8.875%, due 4/1/08............. 50,000 54,562
-----------
99,562
-----------
AIRLINES (0.6%)
American Airlines, Inc.
Series 2001-2 Class B
8.608%, due 4/1/11............. 45,000 39,401
Delta Air Lines, Inc.
Series C
6.65%, due 3/15/04............. 25,000 24,938
8.30%, due 12/15/29............ 134,000 88,775
10.375%, due 12/15/22.......... 20,000 13,850
Northwest Airlines, Inc.
8.375%, due 3/15/04............ 5,000 5,000
8.52%, due 4/7/04.............. 35,000 34,912
8.875%, due 6/1/06............. 10,000 8,875
9.875%, due 3/15/07............ 40,000 35,700
-----------
251,451
-----------
AUTO COMPONENTS (0.2%)
Dana Corp.
7.00%, due 3/1/29.............. 25,000 22,188
Goodyear Tire & Rubber Co. (The)
6.625%, due 12/1/06............ 25,000 24,000
8.50%, due 3/15/07............. 30,000 28,800
Tenneco Automotive, Inc.
Series B
10.25%, due 7/15/13............ 20,000 22,100
-----------
97,088
-----------
AUTO LEASES (0.1%)
Williams Scotsman, Inc.
10.00%, due 8/15/08 (c)........ 40,000 44,000
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
AUTOMOBILES (0.1%)
General Motors Corp.
8.375%, due 7/15/33............ $ 50,000 $ 52,753
-----------
BUILDING PRODUCTS (0.2%)
Dayton Superior Corp.
10.75%, due 9/15/08 (c)........ 35,000 36,488
Interline Brands, Inc.
11.50%, due 5/15/11 (c)........ 40,000 43,200
-----------
79,688
-----------
CHEMICALS (0.8%)
Equistar Chemicals L.P.
10.625%, due 5/1/11 (c)........ 40,000 41,800
FMC Corp.
10.25%, due 11/1/09............ 45,000 52,650
General Chemical Industrial
Products, Inc.
10.625%, due 5/1/09 (e)........ 26,000 7,800
Lyondell Chemical Co.
Series A
9.625%, due 5/1/07............. 5,000 5,075
10.50%, due 6/1/13............. 55,000 56,650
Millennium America, Inc.
7.625%, due 11/15/26........... 34,000 29,070
Sovereign Specialty Chemicals,
Inc.
11.875%, due 3/15/10........... 47,000 46,765
Terra Capital, Inc.
12.875%, due 10/15/08.......... 73,000 84,680
-----------
324,490
-----------
COMMERCIAL SERVICES & SUPPLIES (0.3%)
American Color Graphics, Inc.
10.00%, due 6/15/10 (c)........ 35,000 37,538
Phoenix Color Corp.
10.375%, due 2/1/09............ 65,000 59,150
Protection One Alarm Monitoring,
Inc.
7.375%, due 8/15/05............ 50,000 41,250
-----------
137,938
-----------
COMMUNICATIONS EQUIPMENT (0.5%)
Avaya, Inc.
11.125%, due 4/1/09............ 75,000 88,500
Lucent Technologies, Inc.
6.45%, due 3/15/29............. 119,000 91,927
7.25%, due 7/15/06............. 29,000 29,580
-----------
210,007
-----------
CONSTRUCTION & ENGINEERING (0.4%)
AMSTED Industries, Inc.
10.25%, due 10/15/11 (c)....... 50,000 55,125
Shaw Group, Inc. (The)
10.75%, due 3/15/10 (c)........ 45,000 47,475
URS Corp.
11.50%, due 9/15/09............ 60,000 68,100
-----------
170,700
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
CORPORATE BONDS (CONTINUED)
CONTAINERS & PACKAGING (0.2%)
Applied Extrusion Technologies,
Inc.
Series B
10.75%, due 7/1/11............. $ 30,000 $ 23,100
Owens-Brockway Glass Container,
Inc.
8.25%, due 5/15/13............. 15,000 15,825
Owens-Illinois, Inc.
7.15%, due 5/15/05............. 1,000 1,025
7.80%, due 5/15/18............. 63,000 60,480
-----------
100,430
-----------
DIVERSIFIED FINANCIAL SERVICES (0.7%)
Caithness Coso Funding Corp.
Series B
9.05%, due 12/15/09............ 49,929 53,424
Calpine Construction Finance
Corp.
9.75%, due 8/26/11 (c)......... 35,000 34,738
FINOVA Group, Inc. (The)
7.50%, due 11/15/09............ 83,000 41,500
IPC Acquisition Corp.
11.50%, due 12/15/09........... 60,000 62,775
National Beef Pack/NB Finance
10.50%, due 8/1/11 (c)......... 40,000 44,000
UCAR Finance, Inc.
10.25%, due 2/15/12............ 55,000 60,912
-----------
297,349
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES (1.1%)
COLO.COM
13.875%, due 3/15/10
(c)(d)(e)(k)(o1)............... 82 820
Mountain States Telephone &
Telegraph Co.
7.375%, due 5/1/30............. 25,000 24,000
Qwest Communications
International, Inc.
Series B
7.50%, due 11/1/08............. 50,000 48,500
Qwest Corp.
7.25%, due 9/15/25............. 15,000 14,100
7.50%, due 6/15/23............. 55,000 52,800
8.875%, due 3/15/12 (c)........ 50,000 56,500
8.875%, due 6/1/31............. 30,000 31,500
Qwest Services Corp.
13.00%, due 12/15/07 (c)....... 30,000 34,050
13.50%, due 12/15/10 (c)....... 83,000 96,902
14.00%, due 12/15/14 (c)....... 20,000 24,400
TSI Telecommunication Services,
Inc.
Series B
12.75%, due 2/1/09............. 70,000 72,100
-----------
455,672
-----------
ELECTRIC UTILITIES (0.6%)
Cedar Brakes II LLC
9.875%, due 9/1/13............. 121,537 122,752
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
ELECTRIC UTILITIES (CONTINUED)
Mirant Americas Generation LLC
8.50%, due 10/1/21 (e)......... $ 40,000 $ 33,100
9.125%, due 5/1/31 (e)......... 65,000 53,788
Southern California Edison Co.
8.00%, due 2/15/07............. 45,000 50,512
-----------
260,152
-----------
ELECTRICAL EQUIPMENT (0.1%)
Knowles Electronics Holdings,
Inc.
13.125%, due 10/15/09.......... 55,000 54,450
-----------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.1%)
ON Semiconductor Corp.
12.00%, due 5/15/08............ 20,000 23,200
-----------
ENERGY EQUIPMENT & SERVICES (0.3%)
El Paso Natural Gas Co.
7.625%, due 8/1/10............. 40,000 39,600
Halliburton Co.
8.75%, due 2/15/21............. 10,000 11,855
Parker Drilling Co.
Series B
10.125%, due 11/15/09.......... 50,000 52,250
-----------
103,705
-----------
FOOD PRODUCTS (0.4%)
Chiquita Brands International,
Inc.
10.56%, due 3/15/09............ 35,000 38,238
Dole Food Co., Inc.
8.75%, due 7/15/13............. 5,000 5,463
Seminis, Inc.
10.25%, due 10/1/13 (c)........ 20,000 21,400
Swift & Co.
10.125%, due 10/1/09........... 40,000 45,000
12.50%, due 1/1/10 (c)......... 45,000 51,075
-----------
161,176
-----------
GAS UTILITIES (0.5%)
ANR Pipeline, Inc.
9.625%, due 11/1/21............ 70,000 79,100
Southern Natural Gas Co.
7.35%, due 2/15/31............. 45,000 42,525
Transcontinental Gas Pipe Line
Corp.
Series B
7.00%, due 8/15/11............. 30,000 32,025
7.25%, due 12/1/26............. 50,000 50,750
-----------
204,400
-----------
HEALTH CARE EQUIPMENT & SUPPLIES (0.3%)
dj Orthopedics LLC
12.625%, due 6/15/09........... 26,000 28,860
Fisher Scientific International,
Inc.
8.00%, due 9/1/13 (c).......... 75,000 80,625
8.125%, due 5/1/12............. 5,000 5,375
-----------
114,860
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
MainStay Strategic Value Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
CORPORATE BONDS (CONTINUED)
HEALTH CARE PROVIDERS & SERVICES (1.0%)
AmeriPath, Inc.
10.50%, due 4/1/13............. $ 40,000 $ 42,200
Ardent Health Services
10.00%, due 8/15/13 (c)........ 30,000 32,100
Caremark Rx, Inc.
7.375%, due 10/1/06............ 79,000 84,727
Harborside Healthcare Corp.
(zero coupon), due 8/1/07
12.00%, beginning 8/1/04
(d)(i)......................... 66,000 23,100
HCA, Inc.
7.50%, due 11/15/95............ 104,000 96,895
National Nephrology Associates,
Inc.
9.00%, due 11/1/11 (c)......... 15,000 15,488
QuadraMed Corp.
10.00%, due 4/1/08 (c)(p)...... 40,728 35,026
Quintiles Transnational Corp.
10.00%, due 10/1/13 (c)........ 65,000 68,575
Team Health, Inc.
Series B
12.00%, due 3/15/09............ 31,000 33,015
-----------
431,126
-----------
HOTELS, RESTAURANTS & LEISURE (0.8%)
FRI-MRD Corp.
12.00%, due 1/31/05
(d)(g)(i)(k)................... 158,305 66,488
Gaylord Entertainment Co.
8.00%, due 11/15/13 (c)........ 10,000 10,287
ITT Corp.
7.375%, due 11/15/15........... 96,000 101,760
Jacobs Entertainment, Inc.
11.875%, due 2/1/09............ 25,000 27,031
Vail Resorts, Inc.
8.75%, due 5/15/09............. 44,030 46,287
Venetian Casino Resort LLC
11.00%, due 6/15/10............ 45,000 51,919
Wheeling Island Gaming, Inc.
10.125%, due 12/15/09.......... 35,000 36,050
-----------
339,822
-----------
HOUSEHOLD DURABLES (0.1%)
Foamex L.P.
10.75%, due 4/1/09............. 45,000 39,600
-----------
INSURANCE (0.3%)
Crum & Forster
10.375%, due 6/15/13 (c)....... 50,000 53,750
Fremont General Corp.
Series B
7.875%, due 3/17/09............ 55,000 55,000
Lumbermens Mutual Casualty Co.
8.45%, due 12/1/97 (c)(e)...... 5,000 250
9.15%, due 7/1/26 (c)(e)....... 155,000 7,750
-----------
116,750
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
INTERNET SOFTWARE & SERVICES (0.1%)
Globix Corp.
11.00%, due 5/1/08 (c)(d)(g)... $ 23,621 $ 20,078
-----------
IT SERVICES (0.1%)
Unisys Corp.
6.875%, due 3/15/10............ 50,000 53,125
-----------
MACHINERY (0.2%)
Mark IV Industries, Inc.
7.50%, due 9/1/07.............. 86,000 73,100
Titan International, Inc.
8.75%, due 4/1/07.............. 35,000 20,650
-----------
93,750
-----------
MEDIA (1.5%)
Adelphia Communications Corp.
9.375%, due 11/15/09 (e)....... 20,000 16,800
10.25%, due 11/1/06 (e)........ 60,000 48,300
10.25%, due 6/15/11 (e)........ 75,000 63,000
FrontierVision Operating
Partners L.P.
11.00%, due 10/15/06 (e)....... 120,000 123,750
General Media, Inc.
15.00%, due 3/29/04
(d)(e)(o2)..................... 18 7,920
Hollinger Participation Trust
12.125%, due 11/15/10 (c)(g)... 34,983 40,580
Jones Intercable, Inc.
8.875%, due 4/1/07............. 45,000 47,420
Morris Publishing Group LLC
7.00%, due 8/1/13 (c).......... 45,000 45,900
Paxson Communications Corp.
(zero coupon), due 1/15/09
12.25%, beginning 1/15/06...... 95,000 79,800
Radio One, Inc.
Series B
8.875%, due 7/1/11............. 40,000 44,000
Radio Unica Corp.
11.75%, due 8/1/06 (e)......... 76,000 49,970
Vertis, Inc.
9.75%, due 4/1/09 (c).......... 40,000 42,500
Ziff Davis Media, Inc.
Series B
12.00%, due 8/12/09............ 38,396 34,556
-----------
644,496
-----------
METALS & MINING (0.4%)
AK Steel Corp.
7.75%, due 6/15/12............. 55,000 37,400
Allegheny Technologies, Inc.
8.375%, due 12/15/11........... 40,000 32,800
Commonwealth Industries, Inc.
10.75%, due 10/1/06............ 34,000 34,340
Ormet Corp.
11.00%, due 8/15/08 (c)(e)..... 45,000 10,350
United States Steel Corp.
9.75%, due 5/15/10............. 10,000 10,550
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
CORPORATE BONDS (CONTINUED)
METALS & MINING (CONTINUED)
United States Steel LLC
10.75%, due 8/1/08............. $ 50,000 $ 54,875
-----------
180,315
-----------
MULTI-UTILITIES & UNREGULATED POWER (0.8%)
AES Corp. (The)
9.00%, due 5/15/15 (c)......... 70,000 74,900
Calpine Corp.
7.75%, due 4/15/09............. 25,000 17,375
8.25%, due 8/15/05............. 10,000 9,000
8.50%, due 7/15/10 (c)......... 85,000 77,775
8.50%, due 2/15/11............. 15,000 10,725
8.75%, due 7/15/07............. 15,000 11,625
PG&E National Energy Group, Inc.
10.375%, due 5/16/11 (e)....... 88,000 56,320
Reliant Resources, Inc.
9.25%, due 7/15/10 (c)......... 15,000 13,425
Salton Sea Funding Corp.
Series E
8.30%, due 5/30/11............. 36,547 39,105
-----------
310,250
-----------
OFFICE ELECTRONICS (0.1%)
Xerox Corp.
9.75%, due 1/15/09............. 25,000 28,313
-----------
OIL & GAS (1.6%)
Comstock Resources, Inc.
11.25%, due 5/1/07............. 40,000 43,400
Continental Resources, Inc.
10.25%, due 8/1/08............. 65,000 63,862
Dynegy Holdings, Inc.
9.875%, due 7/15/10 (c)........ 50,000 53,750
10.125%, due 7/15/13 (c)....... 25,000 27,125
El Paso Corp.
6.95%, due 12/15/07............ 50,000 44,750
El Paso Energy Partners L.P.
Series B
8.50%, due 6/1/11.............. 25,000 27,250
El Paso Production Holding Co.
7.75%, due 6/1/13 (c).......... 80,000 76,800
Energy Corp. of America
Series A
9.50%, due 5/15/07............. 82,000 58,425
Newfield Exploration Co.
7.625%, due 3/1/11............. 5,000 5,475
8.375%, due 8/15/12............ 5,000 5,525
Northwest Pipeline Corp.
7.125%, due 12/1/25............ 55,000 55,000
Petro Stopping Centers Holdings
L.P.
Series B
(zero coupon), due 8/1/08
15.00%, beginning 8/1/04....... 21,000 14,700
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
OIL & GAS (CONTINUED)
Tennessee Gas Pipeline Co.
7.00%, due 3/15/27............. $ 40,000 $ 40,600
7.00%, due 10/15/28............ 25,000 22,313
7.625%, due 4/1/37............. 25,000 23,375
8.375%, due 6/15/32............ 10,000 10,125
Vintage Petroleum, Inc.
8.25%, due 5/1/12.............. 60,000 65,700
Westport Resources Corp.
8.25%, due 11/1/11............. 15,000 16,538
-----------
654,713
-----------
PAPER & FOREST PRODUCTS (0.6%)
Georgia-Pacific Corp.
7.75%, due 11/15/29............ 10,000 9,450
8.875%, due 2/1/10............. 40,000 45,700
8.875%, due 5/15/31............ 110,000 116,875
9.375%, due 2/1/13............. 20,000 23,000
Pope & Talbot, Inc.
8.375%, due 6/1/13............. 60,000 58,500
-----------
253,525
-----------
PERSONAL PRODUCTS (0.1%)
Herbalife International, Inc.
11.75%, due 7/15/10............ 35,000 40,250
-----------
REAL ESTATE (0.6%)
CB Richard Ellis Services, Inc.
11.25%, due 6/15/11............ 66,000 74,002
CBRE Escrow, Inc.
9.75%, due 5/15/10 (c)......... 40,000 43,200
Crescent Real Estate Equities
L.P.
7.50%, due 9/15/07............. 68,000 69,700
Omega Healthcare Investors, Inc.
6.95%, due 8/1/07.............. 55,000 53,075
-----------
239,977
-----------
SPECIALTY RETAIL (0.1%)
Rent-Way, Inc.
11.875%, due 6/15/10 (c)....... 40,000 42,850
-----------
TOBACCO (0.2%)
Commonwealth Brands, Inc.
9.75%, due 4/15/08 (c)......... 35,000 38,500
10.625%, due 9/1/08 (c)........ 35,000 38,150
-----------
76,650
-----------
WIRELESS TELECOMMUNICATION SERVICES (0.3%)
Alamosa (Delaware), Inc.
12.50%, due 2/1/11............. 31,000 29,760
Alamosa Holdings, Inc.
(zero coupon), due 2/15/10
12.875%, beginning 2/15/05..... 74,000 57,720
Loral CyberStar, Inc.
10.00%, due 7/15/06 (e)........ 53,000 40,015
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
MainStay Strategic Value Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
CORPORATE BONDS (CONTINUED)
WIRELESS TELECOMMUNICATION SERVICES (CONTINUED)
US UNWIRED, INC.
Series B
(zero coupon), due 11/1/09
13.375%, beginning 11/1/04..... $ 2,000 $ 1,300
-----------
128,795
-----------
Total Corporate Bonds
(Cost $6,647,133).............. 6,937,456
-----------
FOREIGN BONDS (2.4%)
CHEMICALS (0.1%)
Acetex Corp.
10.875%, due 8/1/09............ 55,000 61,600
-----------
COMMERCIAL SERVICES & SUPPLIES (0.3%)
Quebecor Media, Inc.
(zero coupon), due 7/15/11
13.75%, beginning 7/15/06...... 107,000 92,555
11.125%, due 7/15/11........... 19,000 21,850
-----------
114,405
-----------
COMMUNICATIONS EQUIPMENT (0.1%)
Marconi Corp. PLC
8.00%, due 4/30/08............. 25,253 24,622
10.00%, due 10/31/08........... 3,938 4,233
-----------
28,855
-----------
CONTAINERS & PACKAGING (0.3%)
Crown Euro Holdings S.A.
9.50%, due 3/1/11.............. 70,000 77,700
10.875%, due 3/1/13............ 50,000 57,000
-----------
134,700
-----------
FOOD PRODUCTS (0.2%)
Burns Philp Capital Property
Ltd.
9.50%, due 11/15/10 (c)........ 15,000 15,750
10.75%, due 2/15/11 (c)........ 60,000 63,300
-----------
79,050
-----------
MARINE (0.1%)
Navigator Gas Transport PLC
10.50%, due 6/30/07
(c)(d)(e)...................... 89,000 31,150
-----------
MEDIA (0.4%)
Hollinger, Inc.
11.875%, due 3/1/11 (c)........ 45,000 49,500
Vivendi Universal S.A.
6.25%, due 7/15/08 (c)......... 15,000 15,675
9.25%, due 4/15/10 (c)......... 80,000 93,000
-----------
158,175
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
MULTI-UTILITIES & UNREGULATED POWER (0.3%)
AES Drax Holdings Ltd.
Series B
10.41%, due 12/31/20 (e)(q).... $ 45,000 $ 35,325
Calpine Canada Energy Finance
ULC
8.50%, due 5/1/08.............. 100,000 73,500
-----------
108,825
-----------
OIL & GAS (0.1%)
Baytex Energy Ltd.
9.625%, due 7/15/10............ 30,000 31,350
-----------
PAPER & FOREST PRODUCTS (0.0%) (b)
Tembec Industries, Inc.
8.50%, due 2/1/11.............. 20,000 19,300
-----------
PERSONAL PRODUCTS (0.1%)
Jafra Cosmetics International,
Inc.
10.75%, due 5/15/11............ 40,000 44,000
-----------
ROAD & RAIL (0.1%)
Grupo Transportacion Ferroviaria
Mexicana S.A. de C.V.
12.50%, due 6/15/12............ 50,000 55,000
-----------
WIRELESS TELECOMMUNICATION SERVICES (0.3%)
Millicom International Cellular
S.A.
11.00%, due 6/1/06 (c)......... 80,000 81,800
Nextel International, Inc.
(zero coupon), due 11/1/09
(d)(r)......................... 46,290 47,679
-----------
129,479
-----------
Total Foreign Bonds
(Cost $927,173)................ 995,889
-----------
LOAN ASSIGNMENT (0.0%) (b)
DIVERSIFIED TELECOMMUNICATION SERVICES (0.0%) (b)
GT Group Telecom Services Corp.
Bank debt, Term Loan A
6.5625%, due 6/30/08
(d)(e)(i)(k)(s)................ 34,993 3
Bank debt, Term Loan B
6.625%, due 6/30/08
(d)(e)(i)(k)(s)................ 25,007 3
-----------
6
-----------
Total Loan Assignment
(Cost $23,470)................. 6
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
MORTGAGE-BACKED SECURITIES (0.1%)
COMMERCIAL MORTGAGE LOANS (COLLATERALIZED MORTGAGE
OBLIGATIONS) CONSUMER FINANCE (0.1%)
Debit Securitized Lease Trust
Series 1994-K1 Class A2
8.375%, due 8/15/15............ $ 48,455 $ 25,681
Series 1994-K1 Class A3
8.55%, due 8/15/19............. 9,625 5,101
-----------
30,782
-----------
Total Mortgage-Backed Securities
(Cost $31,940)................. 30,782
-----------
MUNICIPAL BONDS (0.1%)
IOWA (0.0%) (b)
Tobacco Settlement Financing
Corp.
5.30%, due 6/1/25.............. 5,000 3,965
5.60%, due 6/1/35.............. 10,000 7,728
-----------
11,693
-----------
NEW JERSEY (0.1%)
Tobacco Settlement Financing
Corp.
6.00%, due 6/1/37.............. 5,000 4,102
6.25%, due 6/1/43.............. 35,000 29,348
-----------
33,450
-----------
RHODE ISLAND (0.0%) (b)
Tobacco Settlement Financing
Corp.
6.25%, due 6/1/42.............. 10,000 8,392
-----------
Total Municipal Bonds
(Cost $51,553)................. 53,535
-----------
YANKEE BONDS (0.6%) (v)
DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%)
Call-Net Enterprises, Inc.
10.625%, due 12/31/08.......... 31,978 30,619
-----------
ENERGY EQUIPMENT & SERVICES (0.2%)
Petroleum Geo-Services ASA
6.25%, due 11/19/03 (e)........ 35,000 27,300
7.125%, due 3/30/28 (e)........ 60,000 46,800
7.50%, due 3/31/07 (e)......... 5,000 3,900
8.15%, due 7/15/29 (e)......... 5,000 3,900
-----------
81,900
-----------
MARINE (0.1%)
Sea Containers Ltd.
Series B
7.875%, due 2/15/08............ 38,000 34,960
-----------
METALS & MINING (0.1%)
Algoma Steel, Inc.
11.00%, due 12/31/09 (d)(e).... 55,000 51,425
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
PAPER & FOREST PRODUCTS (0.1%)
Doman Industries Ltd.
12.00%, due 7/1/04 (e)......... $ 65,000 $ 68,250
-----------
Total Yankee Bonds
(Cost $227,311)................ 267,154
-----------
<Caption>
SHARES
----------
COMMON STOCKS (57.1%)
AEROSPACE & DEFENSE (2.6%)
Boeing Co. (The)................ 8,400 $ 323,316
Northrop Grumman Corp. ......... 5,100 455,940
Raytheon Co. ................... 12,135 321,335
-----------
1,100,591
-----------
AUTO COMPONENTS (0.9%)
Delphi Corp. ................... 43,394 386,207
-----------
BUILDING PRODUCTS (1.0%)
American Standard Cos., Inc.
(a)............................ 4,252 406,916
-----------
CAPITAL MARKETS (1.9%)
Goldman Sachs Group, Inc.
(The).......................... 4,479 420,578
Merrill Lynch & Co., Inc. ...... 6,675 395,160
-----------
815,738
-----------
CHEMICALS (0.6%)
Air Products & Chemicals,
Inc. .......................... 5,566 252,752
-----------
COMMERCIAL BANKS (3.7%)
Bank of America Corp. .......... 4,400 333,212
Bank One Corp. ................. 4,300 182,535
FleetBoston Financial Corp. .... 10,148 409,878
PNC Financial Services
Group, Inc. (The).............. 7,908 423,631
Wachovia Corp. ................. 4,500 206,415
-----------
1,555,671
-----------
COMMERCIAL SERVICES & SUPPLIES (0.7%)
Pitney Bowes, Inc. ............. 6,722 276,274
-----------
COMMUNICATIONS EQUIPMENT (0.3%)
Marconi Corp. PLC (a)........... 1,422 26,023
Tellabs, Inc. (a)............... 12,681 95,488
-----------
121,511
-----------
COMPUTERS & PERIPHERALS (1.1%)
International Business Machines
Corp. ......................... 4,919 440,152
-----------
CONTAINERS & PACKAGING (1.2%)
Smurfit-Stone Container Corp.
(a)............................ 31,800 492,900
-----------
DIVERSIFIED FINANCIAL SERVICES (1.9%)
Citigroup, Inc. ................ 16,390 776,886
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
MainStay Strategic Value Fund
<Table>
<Caption>
SHARES VALUE
---------------------------
COMMON STOCKS (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES (3.5%)
ALLTEL Corp. ................... 8,686 $ 410,587
AT&T Corp. ..................... 3,739 69,508
BellSouth Corp. ................ 9,500 249,945
Call-Net Enterprises, Inc.
Class B (a).................... 1,536 6,482
SBC Communications, Inc. ....... 11,273 270,326
UGC Europe, Inc. (a)............ 2,277 152,559
Verizon Communications, Inc. ... 9,088 305,357
-----------
1,464,764
-----------
ELECTRIC UTILITIES (2.3%)
FirstEnergy Corp. .............. 10,379 356,934
PPL Corp. ...................... 5,500 219,560
Southern Co. (The).............. 12,800 381,440
-----------
957,934
-----------
ELECTRICAL EQUIPMENT (1.2%)
Cooper Industries, Ltd.
Class A........................ 9,500 502,550
-----------
ENERGY EQUIPMENT & SERVICES (2.0%)
Rowan Cos., Inc. ............... 18,300 438,285
Transocean, Inc. ............... 19,900 381,881
-----------
820,166
-----------
FOOD & STAPLES RETAILING (2.3%)
CVS Corp. ...................... 9,700 341,246
Kroger Co. (The)................ 27,600 482,724
Safeway, Inc. (a)............... 6,600 139,260
-----------
963,230
-----------
FOOD PRODUCTS (1.1%)
Heinz (H.J.) Co. ............... 6,730 237,771
Kraft Foods, Inc.
Class A........................ 8,346 242,869
-----------
480,640
-----------
HEALTH CARE PROVIDERS & SERVICES (1.5%)
Fountain View, Inc. (d)(i)...... 27 0(u)
HCA, Inc. ...................... 6,600 252,450
Laboratory Corp. of America
Holdings (a)................... 6,600 233,970
Medco Health Solutions, Inc.
(a)............................ 4,706 156,239
-----------
642,659
-----------
HOUSEHOLD DURABLES (0.8%)
Fortune Brands, Inc. ........... 5,212 339,562
-----------
HOUSEHOLD PRODUCTS (1.1%)
Energizer Holdings, Inc. (a).... 7,104 261,427
Kimberly-Clark Corp. ........... 4,048 213,775
-----------
475,202
-----------
</Table>
<Table>
<Caption>
SHARES VALUE
---------------------------
INSURANCE (5.7%)
Allstate Corp. (The)............ 10,615 $ 419,292
Hartford Financial Services
Group, Inc. (The).............. 11,312 621,029
Prudential Financial, Inc. ..... 13,300 513,912
St. Paul Cos., Inc. (The)....... 6,900 263,097
Travelers Property Casualty
Corp. ......................... 25,968 425,096
UnumProvident Corp. ............ 8,100 132,597
-----------
2,375,023
-----------
INTERNET SOFTWARE & SERVICES (0.0%) (b)
Globix Corp. (a)(d)(i)(k)(w).... 2,477 7,617
-----------
IT SERVICES (2.3%)
Computer Sciences Corp. (a)..... 19,172 759,595
Unisys Corp. ................... 13,678 210,094
-----------
969,689
-----------
MACHINERY (2.2%)
Ingersoll-Rand Co.
Class A........................ 3,515 212,306
Morris Material Handling, Inc.
(a)(d)(i)(k)................... 261 1,383
Navistar International Corp. ... 16,900 683,267
Thermadyne Holdings Corp.
(a)(d)......................... 2,474 32,360
-----------
929,316
-----------
METALS & MINING (1.7%)
Alcoa, Inc. .................... 22,075 696,908
Algoma Steel, Inc. (a)(t)....... 4,843 13,522
Neenah Foundry Co. (a)(c)(d).... 10,779 5,389
-----------
715,819
-----------
OIL & GAS (5.1%)
ChevronTexaco Corp. ............ 4,805 357,011
ExxonMobil Corp. ............... 11,012 402,819
Kerr-McGee Corp. ............... 3,700 153,550
Premcor, Inc. (a)............... 11,900 280,840
Sunoco, Inc. ................... 4,700 205,672
Unocal Corp. ................... 7,350 232,848
Valero Energy Corp. ............ 12,000 512,400
-----------
2,145,140
-----------
PAPER & FOREST PRODUCTS (2.7%)
Bowater, Inc. .................. 8,500 347,055
International Paper Co. ........ 11,608 456,775
MeadWestvaco Corp. ............. 11,880 307,929
-----------
1,111,759
-----------
PHARMACEUTICALS (1.9%)
Bristol-Myers Squibb Co. (a).... 8,800 223,256
Merck & Co., Inc. .............. 12,700 561,975
-----------
785,231
-----------
ROAD & RAIL (0.8%)
Burlington Northern Santa Fe
Corp. ......................... 11,173 323,347
-----------
SOFTWARE (0.3%)
BMC Software, Inc. ............. 8,200 142,516
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
SHARES VALUE
---------------------------
COMMON STOCKS (CONTINUED)
SPECIALTY RETAIL (0.8%)
Gap, Inc. (The)................. 17,200 $ 328,176
-----------
THRIFTS & MORTGAGE FINANCE (1.9%)
PMI Group, Inc. (The)........... 5,300 202,619
Radian Group, Inc. ............. 4,100 216,890
Washington Mutual, Inc. ........ 9,066 396,638
-----------
816,147
-----------
WIRELESS TELECOMMUNICATION SERVICES (0.0%) (b)
Minorplanet Systems USA, Inc.
(a)............................ 23,846 12,639
NEON Communications, Inc.
(d)(i)......................... 4,021 5,026
-----------
17,665
-----------
Total Common Stocks
(Cost $23,069,314)............. 23,939,750
-----------
PREFERRED STOCKS (0.4%)
MEDIA (0.0%) (b)
Ziff Davis Media, Inc.
10.00%, Series E-1 (a)(d)...... 10 85
-----------
REAL ESTATE (0.3%)
Sovereign Real Estate Investment
Corp.
12.00%, Series A (c)........... 97 144,530
-----------
WIRELESS TELECOMMUNICATION SERVICES (0.1%)
Rural Cellular Corp.
11.375%, Series B (g).......... 36 29,117
-----------
Total Preferred Stocks
(Cost $110,838)................ 173,732
-----------
WARRANTS (0.1%) (b)
DIVERSIFIED TELECOMMUNICATION SERVICES (0.0%) (b)
ICO Global Communications
Holdings Ltd.
Strike Price $60.00
Expire 5/16/06 (a)(d).......... 1,812 18
-----------
HEALTH CARE PROVIDERS & SERVICES (0.1%)
Harborside Healthcare Corp.
Class A
Strike Price $0.01
Expire 8/1/09 (a)(d)(i)........ 1,220 12
QuadraMed Corp.
Strike Price $0.01
Expire 4/1/08 (a)(c)(d)........ 6,368 15,729
-----------
15,741
-----------
MEDIA (0.0%) (b)
Ono Finance PLC
Strike Price $0.01
Expire 2/15/11 (a)(c)(d)....... 110 1
</Table>
<Table>
<Caption>
SHARES VALUE
---------------------------
MEDIA (CONTINUED)
Ziff Davis Media, Inc.
Strike Price $0.001
Expire 8/12/12 (a)(c).......... 1,958 $ 20
-----------
21
-----------
METALS & MINING (0.0%) (b)
Neenah Foundry Co.
Strike Price $0.01
Expire 10/7/13 (a)(c)(d)....... 10,519 5,154
-----------
TOBACCO (0.0%) (b)
North Atlantic Trading Co.
Strike Price $0.01
Expire 6/15/07 (a)(c)(d)(k).... 4 0(u)
-----------
WIRELESS TELECOMMUNICATION SERVICES (0.0%) (b)
NEON Communications, Inc.
Strike Price $0.01
Expire 12/2/12 (a)(d)(i)(k).... 4,021 40
Class A 12/2/12
Strike Price $0.01
Expire 12/2/12 (a)(d)(i)(k).... 2,192 2,740
Redeemable Preferred
Strike Price $0.01
Expire 12/2/12 (a)(d)(i)(k).... 2,630 26
UbiquiTel Operating Co.
Strike Price $22.74
Expire 4/15/10 (a)(c)(d)....... 65 1
-----------
2,807
-----------
Total Warrants
(Cost $23,174)................. 23,741
-----------
<Caption>
PRINCIPAL
AMOUNT
----------
SHORT-TERM INVESTMENTS (11.1%)
COMMERCIAL PAPER (6.8%)
American Express Credit Corp.
1.02%, due 11/4/03............. $ 105,000 104,991
Federal National Mortgage
Association
0.95%, due 11/3/03............. 320,000 319,983
1.00%, due 11/5/03............. 225,000 224,975
Freddie Mac Discount Note
1.01%, due 11/6/03............. 215,000 214,970
General Electric Capital Corp.
1.00%, due 11/5/03............. 170,000 169,981
1.00%, due 12/2/03............. 100,000 99,914
1.03%, due 11/19/03............ 100,000 99,948
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
MainStay Strategic Value Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
---------------------------
SHORT-TERM INVESTMENTS (CONTINUED)
COMMERCIAL PAPER (CONTINUED)
UBS Finance Delaware LLC
1.03%, due 11/3/03............. $1,595,000 $ 1,594,909
-----------
2,829,671
-----------
Total Commercial Paper
(Cost $2,829,671).............. 2,829,671
-----------
SHARES
----------
INVESTMENT COMPANY (4.2%)
Merrill Lynch Premier
Institutional Fund............. 1,780,374 1,780,374
-----------
Total Investment Company
(Cost $1,780,374).............. 1,780,374
-----------
PRINCIPAL
AMOUNT
----------
SHORT-TERM LOAN PARTICIPATION (0.1%)
BUILDING PRODUCTS (0.1%)
Owens Corning, Inc.
Bank Debt Revolver
3.62%, due 1/1/04
(d)(e)(i)(s)................... $ 70,666 46,404
-----------
Total Short-Term Loan
Participations
(Cost $47,912)................. 46,404
-----------
Total Short-Term Investments
(Cost $4,657,957).............. 4,656,449
-----------
Total Investments
(Cost $40,361,442) (x)......... 99.8% 41,822,604(y)
-----------
Cash and Other Assets,
Less Liabilities............... 0.2 73,253
---------- -----------
Net Assets...................... 100.0% $41,895,857
========== ===========
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Illiquid security.
(e) Issue in default.
(f) Issuer in bankruptcy.
(g) PIK ("Payment in Kind")--Interest or dividend payment is
made with additional securities.
(h) LYON--Liquid Yield Option Note: callable, zero coupon
securities priced at a deep discount from par. They
include a "put" feature that enables holders to redeem
them at a specific date, at a specific price. Put prices
reflect fixed interest rates, and therefore increase
over time.
(i) Restricted security.
(j) Equity Units--Each unit reflects 1 Senior Note plus 1
purchase contract to acquire shares of common stock at
$100.00 by November 16, 2004.
(k) Fair valued security.
(l) PEPS Units (Premium Equity Participating Security
Units)--Each unit reflects a Trust Preferred Security
plus 1 purchase contract to acquire shares of common
stock at $25.00 by May 18, 2004.
(m) ZONES--Zero-premium Option Note Exchangeable Security.
(n) PHONES--Participation Hybrid Option Note Exchangeable
Security.
(o1) 82 Units--Each unit reflects $1,000 principal amount of
13.875% Senior Notes plus 1 warrant to acquire 19.9718
shares of common stock at $0.01 per share by March 15,
2010.
(o2) 18 Units--Each unit reflects $1,000 principal amount of
15.00% Senior Secured Notes plus 0.1923 shares of Series
A preferred stock.
(p) CIK ("Cash in Kind")--Interest payment is made with cash
or additional securities.
(q) Partially segregated for unfunded loan commitments.
(r) Eurobond--Bond denominated in U.S. Dollars or other
currencies and sold to investors outside the country
whose currency is used.
(s) Floating rate. Rate shown is the rate in effect at
October 31, 2003.
(t) Canadian Security.
(u) Less than one dollar.
(v) Yankee Bond--Dollar-denominated bond issued in the
United States by a foreign bank or corporation.
(w) An affiliate.
(x) The cost for federal income tax purposes is $40,647,153.
(y) At October 31, 2003, net unrealized appreciation was
$1,175,451, based on cost for federal income tax
purposes. This consisted of aggregate gross unrealized
appreciation for all investments on which there was an
excess of market value over cost of $3,254,723 and
aggregate gross unrealized depreciation for all
investments on which there was an excess cost over
market value of $2,079,272.
The following abbreviations are used in the above portfolio:
E--Euro
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$40,361,442).............................................. $41,822,604
Cash denominated in foreign currencies (identified cost
$12,116).................................................. 12,049
Cash........................................................ 5,184
Receivables:
Dividends and interest.................................... 261,000
Fund shares sold.......................................... 74,464
Investment securities sold................................ 7,724
Manager................................................... 5,768
Other assets................................................ 16,037
-----------
Total assets........................................ 42,204,830
-----------
LIABILITIES:
Payables:
Investment securities purchased........................... 144,517
Transfer agent............................................ 37,420
NYLIFE Distributors....................................... 28,024
Fund shares redeemed...................................... 9,697
Custodian................................................. 4,072
Accrued expenses............................................ 85,243
-----------
Total liabilities................................... 308,973
-----------
Net assets.................................................. $41,895,857
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... 10,631
Class B................................................... 30,652
Class C................................................... 774
Additional paid-in capital.................................. 43,970,735
Accumulated undistributed net investment income............. 35,047
Accumulated net realized loss on investments and written
option transactions....................................... (3,613,274)
Net unrealized appreciation on investments.................. 1,461,162
Net unrealized appreciation on translation of other assets
and liabilities in foreign currencies..................... 130
-----------
Net assets.................................................. $41,895,857
===========
CLASS A
Net assets applicable to outstanding shares................. $10,604,027
===========
Shares of beneficial interest outstanding................... 1,063,108
===========
Net asset value per share outstanding....................... $ 9.97
Maximum sales charge (5.50% of offering price).............. 0.58
-----------
Maximum offering price per share outstanding................ $ 10.55
===========
CLASS B
Net assets applicable to outstanding shares................. $30,521,441
===========
Shares of beneficial interest outstanding................... 3,065,249
===========
Net asset value and offering price per share outstanding.... $ 9.96
===========
CLASS C
Net assets applicable to outstanding shares................. $ 770,389
===========
Shares of beneficial interest outstanding................... 77,356
===========
Net asset value and offering price per share outstanding.... $ 9.96
===========
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
----------- -----------
INVESTMENT INCOME:
Income:
Dividends(a).............................................. $ 432,293 $ 486,586
Interest.................................................. 928,454 1,067,232
----------- -----------
Total income............................................ 1,360,747 1,535,818
----------- -----------
Expenses:
Manager................................................... 223,494 254,463
Transfer agent............................................ 185,583 201,215
Distribution--Class B..................................... 164,704 195,410
Distribution--Class C..................................... 3,451 3,578
Service--Class A.......................................... 18,447 18,492
Service--Class B.......................................... 54,901 65,137
Service--Class C.......................................... 1,150 1,192
Professional.............................................. 43,547 39,132
Shareholder communication................................. 36,554 36,451
Registration.............................................. 28,469 23,667
Custodian................................................. 22,544 19,834
Recordkeeping............................................. 12,708 14,642
Trustees.................................................. 5,283 5,270
Miscellaneous............................................. 38,699 45,889
----------- -----------
Total expenses before reimbursement..................... 839,534 924,372
Expense reimbursement by Manager and Subadvisor............. (164,793) (134,377)
----------- -----------
Net expenses............................................ 674,741 789,995
----------- -----------
Net investment income....................................... 686,006 745,823
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN
OPTION AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions..................................... (988,739) (1,992,004)
Written option transactions............................... 1,920 16,766
Foreign currency transactions............................. 7,696 (12,457)
----------- -----------
Net realized loss on investments, written option and foreign
currency transactions..................................... (979,123) (1,987,695)
----------- -----------
Net change in unrealized appreciation (depreciation) on:
Security transactions..................................... 7,359,141 (4,594,678)
Translation of other assets and liabilities in foreign
currencies and foreign currency forward transactions.... (68) (1,945)
----------- -----------
Net unrealized gain (loss) on investments and foreign
currency transactions..................................... 7,359,073 (4,596,623)
----------- -----------
Net realized and unrealized gain (loss) on investments,
written option and foreign currency transactions.......... 6,379,950 (6,584,318)
----------- -----------
Net increase (decrease) in net assets resulting from
operations................................................ $ 7,065,956 $(5,838,495)
=========== ===========
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
(a) Dividends recorded net of withholding taxes of $0 and $120
for 2003 and 2002, respectively.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 686,006 $ 745,823 $ 1,016,178
Net realized gain (loss) on investments, written option
and foreign currency transactions....................... (979,123) (1,987,695) 412,057
Net change in unrealized appreciation (depreciation) on
investments and foreign currency transactions........... 7,359,073 (4,596,623) (2,124,831)
------------ ------------ ------------
Net increase (decrease) in net assets resulting from
operations.............................................. 7,065,956 (5,838,495) (696,596)
------------ ------------ ------------
Dividends to shareholders:
From net investment income:
Class A................................................. (194,845) (207,179) (451,432)
Class B................................................. (418,040) (519,324) (615,884)
Class C................................................. (8,943) (10,070) (6,302)
From net realized gain on investment:
Class A................................................. -- -- (153,000)
Class B................................................. -- -- (580,387)
Class C................................................. -- -- (5,490)
------------ ------------ ------------
Total dividends to shareholders....................... (621,828) (736,573) (1,812,495)
------------ ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 3,808,940 2,772,185 2,740,332
Class B................................................. 5,036,688 4,566,761 4,253,502
Class C................................................. 371,225 613,586 245,115
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 186,193 198,269 583,413
Class B................................................. 401,912 500,414 1,156,258
Class C................................................. 6,547 6,900 8,085
------------ ------------ ------------
9,811,505 8,658,115 8,986,705
Cost of shares redeemed:
Class A................................................. (2,165,249) (1,991,966) (13,783,197)
Class B................................................. (3,700,342) (4,692,754) (5,552,069)
Class C................................................. (223,176) (347,675) (136,602)
------------ ------------ ------------
Increase (decrease) in net assets derived from capital
share transactions.................................. 3,722,738 1,625,720 (10,485,163)
------------ ------------ ------------
Net increase (decrease) in net assets................. 10,166,866 (4,949,348) (12,994,254)
NET ASSETS:
Beginning of period......................................... $ 31,728,991 36,678,339 49,672,593
------------ ------------ ------------
End of period............................................... 41,895,857 $ 31,728,991 $ 36,678,339
============ ============ ============
Accumulated undistributed (distributions in excess of) net
investment income at end of period........................ $ 35,047 $ (37,568) $ (97,048)
============ ============ ============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
---------------------------------------------------------------------------------
January 31, 2003
through Year ended December 31,
October 31, -----------------------------------------------------------
2003* 2002 2001 2000 1999 1998
---------------- ------- ------- ------- ------- -------
Net asset value at beginning of period........ $ 8.36 $ 10.12 $ 10.55 $ 11.15 $ 10.18 $ 10.29
---------- ------- ------- ------- ------- -------
Net investment income......................... 0.22(a) 0.26 0.28(a)(d) 0.31 0.22 0.15
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions................................. 1.58 (1.77) (0.20)(d) 0.29 1.15 (0.10)
---------- ------- ------- ------- ------- -------
Total from investment operations.............. 1.80 (1.51) 0.08 0.60 1.37 0.05
---------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income................... (0.19) (0.25) (0.30) (0.33) (0.23) (0.15)
From net realized gain on investments........ -- -- (0.21) (0.87) (0.17) (0.01)
---------- ------- ------- ------- ------- -------
Total dividends and distributions............. (0.19) (0.25) (0.51) (1.20) (0.40) (0.16)
---------- ------- ------- ------- ------- -------
Net asset value at end of period.............. $ 9.97 $ 8.36 $ 10.12 $ 10.55 $ 11.15 $ 10.18
========== ======= ======= ======= ======= =======
Total investment return (b)................... 21.85% (14.98%) 0.81% 5.78% 13.59% 0.52%
Ratios (to average net assets)/
Supplemental Data:
Net investment income...................... 2.87%+ 2.78% 2.62%(d) 2.76% 1.97% 1.49%
Net expenses............................... 1.70%+ 1.74% 1.83% 1.82% 1.69% 1.79%
Expenses (before reimbursement)............ 2.25%+ 2.14% 1.83% 1.82% 1.69% 1.79%
Portfolio turnover rate....................... 39% 53% 82% 113% 122% 203%
Net assets at end of period (in 000's)........ $ 10,604 $ 7,174 $ 7,636 $19,278 $18,899 $17,946
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
(c) Less than one cent per share.
(d) As required, effective January 1, 2001 the Fund has adopted
the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt
securities. The effect of this change for the year ended
December 31, 2001 is shown below. Per share ratios and
supplemental data for periods prior to January 1, 2001 have
not been restated to reflect this change in presentation.
</Table>
<Table>
<Caption>
Class A Class B Class C
--------------- --------------- ---------------
Decrease net investment income.............................. ($0.00)(c) ($0.00)(c) ($0.00)(c)
Increase net realized and unrealized gains and losses....... 0.00(c) 0.00)(c) 0.00(c)
Decrease ratio of net investment income..................... (0.03%) (0.03%) (0.03%)
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
26
<Table>
<Caption>
Class B Class C
----------------------------------------------------------------- -------------------------------------------------------
January 1, 2003 January 1, 2003
through Year ended December 31, through Year ended December 31,
October 31 ----------------------------------------------- October 31 -------------------------------------
2003* 2002 2001 2000 1999 1998 2003* 2002 2001 2000 1999
--------------- ------- ------- ------- ------- ------- --------------- ------- ------- ------- -------
$ 8.35 $ 10.10 $ 10.54 $ 11.13 $ 10.17 $ 10.29 $ 8.35 $ 10.10 $ 10.54 $ 11.13 $ 10.17
---------- ------- ------- ------- ------- ------- ---------- ------- ------- ------- -------
0.16(a) 0.19 0.20(a)(d)0.23 0.14 0.08 0.16(a) 0.19 0.20(a)(d 0.23 0.14
1.59 (1.76) (0.21)(d) 0.30 1.14 (0.11) 1.59 (1.76) (0.21)(d) 0.30 1.14
---------- ------- ------- ------- ------- ------- ---------- ------- ------- ------- -------
1.75 (1.57) (0.01) 0.53 1.28 (0.03) 1.75 (1.57) (0.01) 0.53 1.28
---------- ------- ------- ------- ------- ------- ---------- ------- ------- ------- -------
(0.14) (0.18) (0.22) (0.25) (0.15) (0.08) (0.14) (0.18) (0.22) (0.25) (0.15)
-- -- (0.21) (0.87) (0.17) (0.01) -- -- (0.21) (0.87) (0.17)
---------- ------- ------- ------- ------- ------- ---------- ------- ------- ------- -------
(0.14) (0.18) (0.43) (1.12) (0.32) (0.09) (0.14) (0.18) (0.43) (1.12) (0.32)
---------- ------- ------- ------- ------- ------- ---------- ------- ------- ------- -------
$ 9.96 $ 8.35 $ 10.10 $ 10.54 $ 11.13 $ 10.17 $ 9.96 $ 8.35 $ 10.10 $ 10.54 $ 11.13
========== ======= ======= ======= ======= ======= ========== ======= ======= ======= =======
21.20% (15.58%) (0.07%) 5.07% 12.64% (0.27%) 21.19% (15.58%) (0.07%) 5.07% 12.64%
2.12%+ 2.03% 1.87%(d) 2.01% 1.22% 0.74% 2.12%+ 2.03% 1.87%(d) 2.01% 1.22%
2.45%+ 2.49% 2.58% 2.57% 2.44% 2.54% 2.45%+ 2.49% 2.58% 2.57% 2.44%
3.00%+ 2.89% 2.58% 2.57% 2.44% 2.54% 3.00%+ 2.89% 2.58% 2.57% 2.44%
39% 53% 82% 113% 122% 203% 39% 53% 82% 113% 122%
$ 30,521 $24,038 $28,684 $30,134 $35,702 $38,528 $ 770 $ 517 $ 358 $ 260 $ 154
<Caption>
Class C
-------------
September 1**
through
December 31,
1998
-------------
$ 9.15
-------
0.05
1.03
-------
1.08
-------
(0.05)
(0.01)
-------
(0.06)
-------
$ 10.17
=======
11.77%
0.74%+
2.54%+
2.54%
203%
$ 84
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
27
MainStay Strategic Value Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
Strategic Value Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on October 22, 1997. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and within one year of purchase
of Class C shares. Class A shares, Class B shares and Class C shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions except that the Class B shares and
Class C shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek maximum long-term total return from a
combination of common stocks, convertible securities and high yield securities.
The Fund invests in high yield securities (sometimes called "junk bonds"), which
are generally considered speculative because they present a greater risk of
loss, including default, than higher quality debt securities. These securities
pay a premium -- a high interest rate or yield -- because of the increased risk
of loss. These securities can also be subject to greater price volatility.
The Fund also invests in foreign securities which carry certain risks in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
28
Notes to Financial Statements
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Debt securities are valued at prices supplied by a pricing agent or
brokers selected by the Fund's Manager, whose prices reflect broker/dealer
supplied valuations and electronic data processing techniques if those prices
are deemed by the Fund's Manager to be representative of market values at the
regular close of business of the Exchange. Temporary cash investments acquired
over 60 days to maturity are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and ratings), both as furnished by independent
pricing services. Other temporary cash investments are valued at amortized cost,
which approximates market value. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value. Options contracts are valued at the last posted settlement
price on the market where any such options or futures are principally traded.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. Should the Manager or Subadvisor conclude that such events
may have effected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund, adjust the value of the local price to reflect the impact on the price of
such securities as a result of such events.
(B) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward 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 foreign currency forward
contracts primarily to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates or to try to enhance the Fund's returns.
The use of foreign currency 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
29
MainStay Strategic Value Fund
appreciation on forward contracts reflects the Fund's exposure at period end to
credit loss in the event of a counterparty's failure to perform its obligations.
(C) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund does not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt sale
at an acceptable price may be difficult.
Restricted securities held at October 31, 2003:
<Table>
<Caption>
PRINCIPAL PERCENT
DATE(S) OF AMOUNT/ 10/31/03 OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
- -------- ---------------- --------- -------- -------- ----------
Fountain View, Inc.
Common Stock......................... 2/23/03 27 $ 0(b) $ 0(b) 0.0%(a)
FRI-MRD Corp.
12.00%, due 1/31/05.................. 8/12/97-4/3/98 $158,305 159,031 66,488 0.2
Globix Corp.
Common Stock......................... 6/21/01-3/13/02 2,477 651 7,617 0.0(a)
GT Group Telecom Services Corp.
Term Loan A
6.5625%, due 6/30/08................. 1/30/01 34,993 13,648 3 0.0(a)
Term Loan B
6.625%, due 6/30/08.................. 1/30/01 25,007 9,822 3 0.0(a)
Harborside Healthcare Corp.
(zero coupon), due 8/1/07
12.00%, beginning 8/1/04............. 5/12/01 66,000 47,474 23,100 0.1
Class A, Warrants.................... 5/12/01 1,220 1,854 12 0.0(a)
Millicom International Cellular S.A.
2.00%, due 6/1/06.................... 5/13/03 11,000 10,074 63,167 0.1
Morris Material Handling, Inc.
Common Stock......................... 3/5/99-10/22/01 261 102 1,383 0.0(a)
NEON Communications, Inc.
Common Stock......................... 9/11/03 4,021 3,563 5,026 0.0(a)
Preferred Stock
12.00%............................... 12/3/02 438 4,882 4,928 0.0(a)
Warrants............................. 9/11/03 4,021 3,563 40 0.0(a)
Warrants, Class A.................... 12/3/02 2,192 22 2,740 0.0(a)
Warrants, Redeemable Preferred....... 12/3/02 2,630 26 26 0.0(a)
Owens Corning, Inc.
Bank debt, Revolver
(zero coupon), due 1/1/04............ 1/10/02-6/6/02 70,666 47,912 46,404 0.1
Pacific & Atlantic (Holdings) Inc.
Convertible Preferred Stock
7.50%, Class A....................... 2/4/00-6/28/02 207 2 2 0.0(a)
-------- -------- ---
$302,626 $220,939 0.5%
======== ======== ===
</Table>
- -------
<Table>
(a) Less than one tenth of a percent.
(b) Less than one dollar.
</Table>
30
Notes to Financial Statements (continued)
(D) LOAN PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan commitments
and loan participations. Loan commitments and loan participations are agreements
to make money available to a borrower in a specified amount, at a specified rate
and within a specified time. The Fund records an investment when the borrower
withdraws money and records interest as earned. The unfunded amounts are
recorded in memorandum accounts. 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"). As of October 31, 2003,
the Fund had an unfunded loan commitment pursuant to the following loan
agreement:
<Table>
<Caption>
UNFUNDED
BORROWER COMMITMENT
- -------- ----------
Owens Corning, Inc. ........................................ $4,651
======
</Table>
This commitment is available until maturity date of the respective security.
(E) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted to
reflect the current value of the options written. Premiums received from writing
options which expire are treated as realized gains. Premiums received from
writing options which are exercised or are cancelled in closing purchase
transactions are added to the proceeds or netted against the amount paid on the
transaction to determine the realized gain or loss. By writing a covered call
option, the Fund foregoes in exchange for the premium the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security or foreign currency increase. By writing a covered put
option, the Fund, in exchange for the premium, accepts the risk of a decline in
the market value of the underlying security or foreign currency below the
exercise price. A call option may be covered by the call writer's owning the
underlying security throughout the option period. A call option may also be
covered by the call writer's maintaining liquid assets valued at greater than
the exercise price of the call written, in a segregated account with its
custodian.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security it anticipates purchasing or to seek to enhance returns. The Fund may
purchase put options on its securities to protect against a decline in the value
of the security or to close out covered written put positions. Risks may arise
from an imperfect correlation between the change in market value of the
securities held by the Fund and the prices of options relating to the securities
purchased or sold by the Fund and from the possible lack of a liquid secondary
market for an option. The maximum exposure to loss for any purchased option is
limited to the premium initially paid for the option.
31
MainStay Strategic Value Fund
Written option activity for the period ended October 31, 2003 was as follows:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
--------- -------
Options outstanding at December 31, 2002.................... -- $ --
Options -- written.......................................... (31) (3,807)
Options -- buybacks......................................... 16 2,352
Options -- exercised........................................ 15 1,455
--- -------
Options outstanding at October 31, 2003..................... -- $ --
=== =======
</Table>
(F) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(G) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized loss
on investments, and accumulated net realized gain on foreign currency
transactions arising from permanent differences; net assets at October 31, 2003,
are not effected.
<Table>
<Caption>
ACCUMULATED
NET REALIZED
ACCUMULATED ACCUMULATED GAIN
UNDISTRIBUTED NET REALIZED ON FOREIGN
NET INVESTMENT LOSS ON CURRENCY
INCOME INVESTMENTS TRANSACTIONS
- -------------- ------------ ------------
$8,437 $(741) $(7,696)
</Table>
The reclassifications for the Fund are primarily due to premium amortization
adjustments and foreign currency gain (loss).
(H) 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 as earned.
Discounts and premiums on securities, other than short-term securities purchased
for the Fund
32
Notes to Financial Statements (continued)
are accreted and amoritized, respectively, on the constant yield method over the
life of the respective securities or, in the case of a callable security, over
the period to the first date of call. Discounts and premiums on short-term
securities are accreted and amoritized, respectively, on the straight line
method. Income from payment-in-kind securities is recorded daily based on the
effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(I) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(J) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at
the mean between the buying and selling rates last quoted by any major U.S. bank
at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities of the Fund are presented at the exchange rates and
market values at the close of the period. The realized and unrealized changes in
net assets arising from fluctuations in exchange rates and market prices of
securities are not separately presented. Accordingly, gains and losses from
foreign currency transactions are included in the reported net realized gains
(losses) on investment transactions.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward 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 foreign currency denominated
assets and liabilities, other than investments, at period end exchange rates are
reflected in unrealized foreign exchange gains or losses.
33
MainStay Strategic Value Fund
Foreign currency held at October 31, 2003:
<Table>
<Caption>
CURRENCY COST VALUE
- ----------------------- ------- -------
Euro E 10,365 $12,116 $12,049
======= =======
</Table>
(K) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's Manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.75% of the Fund's
average daily net assets. Effective March 12, 2002, the Manager has voluntarily
agreed to reimburse the expenses of the Fund to the extent that operating
expenses would exceed on an annualized basis 1.70%, 2.45% and 2.45% of the
average daily net assets of the Class A, Class B and Class C shares,
respectively. For the ten months ended October 31, 2003 and year ended December
31, 2002, the Manager earned from the Fund $223,494 and $254,463, respectively.
For the ten months ending October 31, 2003 and year ended December 31, 2002, the
Manager reimbursed the Fund $164,793 and $134,377, respectively.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor a monthly fee at an annual rate of
0.375% of the average daily net assets of the Fund. To the extent the Manager
has agreed to reimburse expenses of the Fund, the Subadvisor has voluntarily
agreed to do so proportionately.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service
34
Notes to Financial Statements (continued)
activities as designated by the Distributor. Pursuant to the Class B and Class C
Plans, the Fund pays the Distributor a monthly fee, which is an expense of the
Class B and Class C shares of the Fund, at the annual rate of 0.75% of the
average daily net assets of the Fund's Class B and Class C shares. The
distribution plans provide that the Class B and Class C shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B or Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $2,333 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemption of Class A, Class B and Class C
shares of $27, $27,551 and $257, respectively, for the ten months ended October
31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") by which
BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses for the ten months ended October 31, 2003
and year ended December 31, 2002, amounted to $185,583 and $201,215,
respectively.
(E) TRUSTEES' FEES. Trustees, other than those currently affiliated with NYLIM
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the Strategic
Value Fund only pays a portion of the fees identified above.
(F) OTHER. Fees for the cost of legal services, included in Professional fees
as shown in the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $768 for the ten months ended October
31, 2003 and $666 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of
35
MainStay Strategic Value Fund
$100 million of average monthly net assets. Fees for recordkeeping services
provided to the Fund by the Manager amounted to $12,708 for the ten months ended
October 31, 2003 and $14,642 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
UNDISTRIBUTED NET ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
INVESTMENT INCOME AND OTHER LOSSES APPRECIATION LOSS
- ----------------- ------------------- ------------ -----------------
$100,116 $(3,328,109) $1,111,058 $(2,116,935)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals, premium amortization adjustments and bond
reorganizations.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $3,328,109 were available as shown in the table below, to the extent provided
by the regulations to offset future realized gains of the Fund through the years
indicated. 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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
- ----------------- -------
2010................................................... $1,669
2011................................................... 1,659
------
$3,328
======
</Table>
The tax character of distributions paid during the ten months ended October 31,
2003 and years ended December 31, 2002 and 2001, shown in the Statement of
Changes in Net Assets, was as follows:
<Table>
<Caption>
2003 2002 2001
-------- -------- ----------
Distributions paid from:
Ordinary Income $621,828 $736,573 $1,076,467
Long Term Capital Gains -- -- 736,028
-------- -------- ----------
$621,828 $736,573 $1,812,495
==========
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $14,073 and $12,872, respectively.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the
36
Notes to Financial Statements (continued)
average commitment amount, regardless of usage, to The Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings on the line of credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
JANUARY 1, THROUGH ---------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold................ 425 553 39 302 496 65 261 406 23
Shares issued in
reinvestment of dividends
and distributions........ 21 45 1 23 57 1 58 115 1
---- ---- --- ---- ---- --- ------ ---- ---
446 598 40 325 553 66 319 521 24
Shares redeemed............ (241) (412) (25) (222) (513) (39) (1,391) (540) (14)
---- ---- --- ---- ---- --- ------ ---- ---
Net increase (decrease).... 205 186 15 103 40 27 (1,072) (19) 10
==== ==== === ==== ==== === ====== ==== ===
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
37
Report of Independent Auditors
To the Trustees of the MainStay Funds and Shareholders of
MainStay Strategic Value Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Strategic Value Fund (one
of the funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 22, 2003
TAX INFORMATION (UNAUDITED)
The Fund intends to designate the maximum amount of dividends, qualified for the
reduced tax rate under the Jobs and Growth Tax Relief Reconciliation Act of
2003, allowable.
In addition, 56.0% of the ordinary income dividends paid during the ten months
ended October 31, 2003 qualify for the corporate dividends received deduction
under section 243 of the Internal Revenue Code.
38
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
39
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
40
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
41
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MacKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
New York, New York
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
McMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
42
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY LOGO]
MainStay is a division of New York Life Investment
Management LLC, the investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSST11- 12/03
NYLIM-A04372 17
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
Strategic Value Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY LOGO]
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay Tax Free Bond
Fund versus Lehman Brothers(R) Municipal Bond
Index, a Tax Free Bond Composite Index, and
Inflation--Class A, Class B, and Class C
Shares 4
Portfolio Management Discussion and Analysis 6
Year-by-Year and 10-Month Performance 7
Portfolio of Investments 10
Financial Statements 15
Notes to Financial Statements 20
Report of Independent Auditors 26
Trustees and Officers 27
The MainStay(R) Funds 30
</Table>
This page intentionally left blank
2
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
3
$10,000 Invested in MainStay Tax Free
Bond Fund versus Lehman Brothers(R)
Municipal Bond Index, a Tax Free Bond
Composite Index, and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year -1.99%, 5 Years 2.64%, 10 Years 3.95%
<Table>
<Caption>
LEHMAN BROTHERS
MAINSTAY TAX FREE MUNICIPAL BOND TAX FREE BOND
Period-end BOND FUND INDEX(1) COMPOSITE INDEX(2) INFLATION (CPI)(3)
- ---------- ----------------- --------------- ------------------ ------------------
10/31/93 $ 9,550.00 $10,000.00 $10,000.00 $10,000.00
10/31/94 $ 9,104.00 $ 9,564.00 $ 9,515.00 $10,261.00
10/31/95 $10,163.00 $10,983.00 $10,980.00 $10,543.00
10/31/96 $10,675.00 $11,610.00 $11,606.00 $10,865.00
10/31/97 $11,565.00 $12,596.00 $12,601.00 $11,092.00
10/31/98 $12,348.00 $13,605.00 $13,642.00 $11,257.00
10/31/99 $11,549.00 $13,364.00 $13,315.00 $11,545.00
10/31/00 $12,498.00 $14,502.00 $14,517.00 $11,944.00
10/31/01 $13,785.00 $16,025.00 $16,088.00 $12,198.00
10/31/02 $14,352.00 $16,966.00 $17,056.00 $12,452.00
10/31/03 $14,729.00 $17,833.00 $17,962.00 $12,706.00
</Table>
CLASS B AND CLASS C SHARES
Class B Total Returns with Sales Charges: 1 Year -2.56%, 5 Years 2.97%, 10 Years
4.21%
Class C Total Returns with Sales Charges: 1 Year 1.39%, 5 Years 3.31%, 10 Years
4.21%
<Table>
<Caption>
LEHMAN BROTHERS
MAINSTAY TAX FREE MUNICIPAL BOND TAX FREE BOND
Period-end BOND FUND INDEX(1) COMPOSITE INDEX(2) INFLATION (CPI)(3)
- ---------- ----------------- --------------- ------------------ ------------------
10/31/93 $10,000.00 $10,000.00 $10,000.00 $10,000.00
10/31/94 $ 9,533.00 $ 9,564.00 $ 9,515.00 $10,261.00
10/31/95 $10,630.00 $10,983.00 $10,980.00 $10,543.00
10/31/96 $11,141.00 $11,610.00 $11,606.00 $10,865.00
10/31/97 $12,048.00 $12,596.00 $12,601.00 $11,092.00
10/31/98 $12,837.00 $13,605.00 $13,642.00 $11,257.00
10/31/99 $11,977.00 $13,364.00 $13,315.00 $11,545.00
10/31/00 $12,916.00 $14,502.00 $14,517.00 $11,944.00
10/31/01 $14,212.00 $16,025.00 $16,088.00 $12,198.00
10/31/02 $14,757.00 $16,966.00 $17,056.00 $12,452.00
10/31/03 $15,108.00 $17,833.00 $17,962.00 $12,706.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION, PLEASE VISIT WWW.MAINSTAYFUNDS.COM. Performance tables and
graphs do not reflect the deduction of taxes that a shareholder would pay on
distributions or Fund-share redemptions. Total returns reflect change in
share price, reinvestment of dividend and capital gain distributions, and
maximum applicable sales charges explained in this paragraph. The graphs
assume an initial investment of $10,000 and reflect deduction of all sales
charges that would have applied for the period of investment. Class A share
performance reflects the effect of the maximum 4.5% initial sales charge and
includes the historical performance of the Class B shares for periods from
the Fund's inception on 5/1/86 through 12/31/94. Performance figures for the
two classes vary after 12/31/94, based on differences in their sales charges
and expense structures. Class C share performance includes the historical
performance of the Class B shares for periods from the Fund's inception on
5/1/86 through 8/31/98. Class B shares would be subject to a contingent
deferred sales charge (CDSC) of up to 5% if redeemed within the first six
years of purchase, and Class C shares would be subject to a CDSC of 1% if
redeemed within one year of purchase.
1. The Lehman Brothers(R) Municipal Bond Index is an unmanaged index that
includes approximately 15,000 municipal bonds that are rated Baa or better
by Moody's and have a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded.
Results assume reinvestment of all income and capital gains. An investment
cannot be made directly into an index.
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
4
- ----------
2. The Tax Free Bond Composite Index is an unmanaged index that is comprised
of the Lehman Brothers(R) Municipal Bond Index and the Lehman Brothers(R)
Municipal Insured Index weighted 50%/50%. The Lehman Brothers(R) Municipal
Insured Index includes all the insured bonds in the Lehman Brothers(R)
Municipal Bond Index with a maturity of at least one year and a rating of
Baa or better by Moody's. Results assume that all income and capital gains
are reinvested in the index or indices that produce them. An investment
cannot be made directly into an index or a composite.
3. Inflation is measured 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. The rate of inflation does not represent an
investment return.
5
Portfolio Management Discussion and Analysis
Economic growth was lackluster early in 2003, with real gross domestic product
advancing at an annual rate of 1.4% during the first quarter of the year. Three
important economic drivers--business confidence, capital spending, and hiring--
were all weak. That left the job of supporting the economy to the consumer and
the robust housing market. GDP grew at a 3.3% annualized rate in the second
quarter of 2003, aided by an accommodative monetary policy, a stimulative fiscal
policy, and a lower U.S. dollar. In June, the Federal Reserve tried to bolster
economic growth by lowering the targeted federal funds rate to a 1.0%--a
four-decade low.
During the first four months of 2003, turbulence in the municipal bond market
echoed conflicting viewpoints regarding the economy. In early May, the Federal
Reserve ignited a sharp rally in the market when it cited the possibility of "an
unwelcome substantial fall in inflation." By mid-June of 2003, 10-year
municipals touched an exceedingly low yield of 2.85%. Shortly thereafter, the
bond market reversed course amid investor disappointment over the size of the
Fed's June easing move in the face of perceived deflationary risk. Ten-year
municipal yields rose to 4.07% by mid-August, before falling slightly when mixed
economic news left the outlook uncertain. Ten-year municipal yields fell to 3.5%
at the end of September but rose again to 3.7% at the end of October when
economic data was more upbeat.
Faced with growing budget deficits and historically low interest rates,
municipalities continued their torrid issuance pace during the first 10 months
of 2003. While issuance did taper off in October because of rising interest
rates, calendar-year 2003 issuance is estimated to be between $360 and $380
billion--surpassing the previous record of $357 billion in 2002. Demand has been
sufficient to absorb this heavy supply, as investors continued to find value in
municipals versus taxable fixed-income securities. As of October 31, 2003, the
30-year municipal bond yield was 94% of the yield on long-term Treasury bonds.
Although municipals outperformed Treasuries during the reporting period, we
believe that municipal valuations are still attractive from a longer-term
perspective.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Tax Free Bond Fund returned
0.54% for Class A shares and 0.32% for Class B and Class C shares, excluding all
sales charges. All share classes underperformed the 2.80% return of the average
Lipper(1) general municipal debt fund for the same period. All share classes
also underperformed the 3.37% return of the Lehman Brothers(R) Municipal Bond
Index(2) and the 3.49% return of the Fund's Tax Free Composite Index(3) for the
10 months ended October 31, 2003.
- -------
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 4 for more information about Lehman Brothers(R)
Municipal Bond Index.
3. See footnote on page 5 for more information about the Fund's Tax Free Bond
Composite Index.
6
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
<Table>
<Caption>
Period-end Total Return %
- ---------- --------------
12/94 -6.02
12/95 15.00
12/96 3.63
12/97 9.02
12/98 4.98
12/99 -6.75
12/00 12.15
12/01 4.04
12/02 8.61
10/03 0.54
</Table>
CLASS B AND CLASS C SHARES
<Table>
<Caption>
Period-end Total Return %
- ---------- --------------
12/94 -6.02
12/95 14.86
12/96 3.33
12/97 8.80
12/98 4.83
12/99 -6.96
12/00 11.75
12/01 3.79
12/02 8.34
10/03 0.32
</Table>
STRATEGIC DURATION POSITIONING
Our duration positioning significantly detracted from performance during the
reporting period. The Fund's duration was shorter than the Lehman Brothers
Municipal Bond Index at the end of February 2003, as concerns over geopolitical
risks intensified and we felt that yields had little room to decline further.
Although this strategy enhanced performance in March and April when yields rose
modestly, it hampered overall performance when yields fell to multidecade lows
in May. Our thesis for maintaining a short duration included a pending
7
record auction of Treasury securities to finance the growing budget deficit, a
sustained rally in equities, and narrower corporate-bond spreads. Historically,
these trends have caused interest rates to move higher.
A confluence of events, however, drove interest rates down even further. At its
May 2003 meeting, the Federal Reserve highlighted the risks of deflation.
Meanwhile, Asian central banks were aggressively purchasing Treasuries to keep
their currencies from rising against the dollar. As rates moved moderately
higher toward the end of the second quarter of 2003, we used the opportunity to
return to a neutral duration posture.
In early July, bond yields continued to rise. We began extending the Fund's
duration prior to Federal Reserve Chairman Alan Greenspan's semiannual testimony
before Congress. We expected that he would focus his remarks on concerns that a
rapid rise in rates would stop the mortgage-refinancing boom and temper consumer
spending. Instead, Greenspan offered an upbeat prediction on expected economic
growth and classified deflationary risks as "remote." In response, the bond
market's sell-off intensified, causing our duration extension to further detract
from performance. We maintained the Fund's long duration position throughout
much of July and August. As interest rates fell in September, however, we
reduced the Fund to a more-neutral position on concerns that the rapid and
severe decline in the U.S. dollar could send yields higher if foreign investors
curtailed their purchases of U.S. assets.
KEY SECTOR IMPACT
The Fund's overweighted position in tobacco settlement asset-backed securities
detracted from performance during the reporting period as yield spreads widened
in response to a $10 billion decision entered against Philip Morris by an
Illinois court. The decision also mandated that a bond be set aside for the full
amount of the verdict, plus interest, should Philip Morris wish to appeal the
court's ruling. In April 2003, Philip Morris reached an agreement with the court
that lowered the bonding requirement to a manageable level and allowed the
company to make on-time payments to states participating in the Master
Settlement Agreement (MSA). In September, the Illinois Supreme Court agreed to
hear the appeal of its earlier decision. Although following the MSA payment,
yield spreads retraced some of their widening, spreads have widened
significantly over the past twelve months on concerns about additional legal
claims and a threat by Philip Morris to declare bankruptcy if the bonding
requirement were not reduced.
It is our opinion that the market has overreacted to the industry's litigation
risks, as state and federal courts have rejected numerous class actions. In May
2003, Florida's Third District Court of Appeals decertified a class-action suit
whereby punitive damages of $145 billion were awarded. A recent U.S. Supreme
Court ruling stated that there must be a relation between compensatory and
punitive damages. With tobacco bonds now trading at significantly higher yields
8
than year-end 2002 levels, we continue to believe that these bonds offer
attractive yields relative to their risk. At the end of the reporting period,
the Fund had a 5.3% weighting in tobacco bonds versus a 2% weighting for similar
bonds in the Lehman Brothers Municipal Bond Index.
LOOKING AHEAD
Municipalities have been forced to cut spending, raise taxes and fees, and tap
"rainy day" and tobacco settlement funds to help close the gaps in their fiscal
years ended June 2003. The National Conference of State Legislators estimates
that states have reduced their cumulative budget gaps by more than $200 billion
since budget difficulties first emerged three years ago. Unfortunately, budget
woes will continue into fiscal year 2004, as states face a projected deficit of
$78 billion.
It is widely expected that states will continue to use last year's tactics to
pare expenses and raise revenues, with a continued emphasis on fee increases,
which are more politically palatable than tax increases. One bright spot is that
a strengthening economy would bode well for fragile state budgets. Should the
economy lose momentum, however, the loss in taxes and other revenues could
further strain state budgets. Given this uncertain environment, we continue to
carefully monitor regional credit trends and underweight issuers, such as the
State of California, where imbalances are particularly large.
As of October 31, 2003, the Fund's duration was modestly shorter than the Lehman
Brothers Municipal Bond Index. Preliminary estimates from the Bureau of Economic
Analysis suggest that GDP rose at a seasonally adjusted annual rate of 8.2% in
the third quarter of 2003. With the economy finally adding new jobs in October,
we remain alert to signs that the employment situation will gain traction. This
would likely lead to higher bond yields. Even so, we believe that any increases
are likely to remain moderate as long as the Federal Reserve continues to focus
on the prospects for declining inflation and maintains its position that rates
could remain low for a considerable period.
Whatever the markets or economy may bring, the Fund will continue to seek to
provide a high level of current income free from regular federal income tax,
consistent with the preservation of capital.
John Fitzgerald
Laurie Walters
Portfolio Managers
MacKay Shields LLC
The Fund may invest in derivatives, which may increase the volatility of the
Fund's net asset value and may result in a loss to the Fund. A portion of income
may be subject to state and local taxes or the alternative minimum tax.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
9
MainStay Tax Free Bond Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
LONG-TERM MUNICIPAL BONDS (95.4%)+
ALABAMA (3.6%)
Huntsville Alabama Health Care
Authority, Series A
5.75%, due 6/1/31............. $2,500,000 $ 2,541,325
Phoenix County Alabama
Industrial
Development Board
Environmental
Improvement Revenue
6.35%, due 5/15/35 (b)........ 3,000,000 3,073,290
University of
Alabama-Birmingham
University Revenues
6.00%, due 10/1/16-10/1/17.... 5,995,000 6,924,525
------------
12,539,140
------------
ALASKA (0.8%)
Northern Tobacco Securitization
Corp.
Alaska Tobacco Settlements
Asset-Backed Bonds
6.50%, due 6/1/31............. 3,055,000 2,705,691
------------
CALIFORNIA (7.4%)
California Infrastructure &
Economic
Development
Kaiser Hospital Asset I-LLC
Series A
5.55%, due 8/1/31............. 2,000,000 2,037,660
California State
General Obligation
5.125%, due 11/1/24........... 2,000,000 1,972,180
California Statewide Community
Catholic Healthcare West
6.50%, due 7/1/20............. 2,000,000 2,156,000
Foothill-Eastern Transportation
Corridor Agency, Toll Road
Revenue, Series A
(zero coupon), due 1/1/28..... 12,000,000 3,338,280
Golden State Tobacco
Securitization Corp.
California Tobacco
Settlement Revenue
Series 2003-A-1
6.625%, due 6/1/40............ 3,750,000 3,360,863
Los Angeles California
Unified School District
Series D
5.625%, due 7/1/17............ 2,000,000 2,326,820
5.75%, due 7/1/16 (d)......... 6,000,000 6,966,960
San Francisco California City &
County Airports Commission
International Airport Revenue
Second Series, Issue 6
6.50%, due 5/1/18 (b)......... 3,240,000 3,388,068
------------
25,546,831
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
COLORADO (0.4%)
Denver Colorado Health &
Hospital
Authority, Healthcare Revenue
Series A
6.00%, due 12/1/23-12/1/31.... $1,500,000 $ 1,490,590
------------
DELAWARE (0.7%)
Delaware State Economic
Development Authority
Pollution Control
Delmarva Power
Series C
4.90%, due 5/1/26............. 2,250,000 2,449,552
------------
FLORIDA (5.1%)
Capital Trust Agency Florida
Housing Shadow Run Project
Series A
5.15%, due 11/1/30............ 2,190,000 2,322,013
Highlands County Florida
Health Facilities
Authority Revenue
Hospital Adventist Health
Systems D
5.375%, due 11/15/35.......... 4,000,000 3,978,680
Meadow Pointe III Community
Development
District Florida Capital
Improvement Revenue
Series B
5.25%, due 11/1/07............ 2,400,000 2,386,776
Meadow Pointe IV Community
Development
District Florida Capital
Improvement Revenue
Series B
5.125%, due 11/1/07........... 1,000,000 1,000,360
Oakstead Florida Community
Development District
Capital Improvement Revenue
Series B
5.90%, due 5/1/07............. 2,000,000 2,012,840
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
Portfolio of Investments October 31, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
LONG-TERM MUNICIPAL BONDS (CONTINUED)
FLORIDA (CONTINUED)
Orange County Florida
Health Facilities
Authority Revenue
Hospital Adventist Health
Systems
5.625%, due 11/15/32.......... $3,000,000 $ 3,049,260
Tampa Florida Utility Tax &
Special Revenue Refunding
6.00%, due 10/1/08............ 1,500,000 1,744,080
Waterchase Community
Development
District Florida Capital
Improvement Revenue
Series B
5.90%, due 5/1/08............. 1,030,000 1,028,599
------------
17,522,608
------------
ILLINOIS (12.0%)
Chicago Illinois Board of
Education
5.875%, due 12/1/14........... 3,130,000 3,580,032
Chicago Illinois Metropolitan
Water
Reclamation District Greater
Chicago Capital Improvement
Series C
5.375%, due 12/1/16........... 2,500,000 2,748,575
Chicago Illinois Park District
Harbor Facility Revenue
5.50%, due 1/1/09............. 2,085,000 2,371,708
Chicago Illinois Wastewater
Transmission Revenue
5.50%, due 1/1/30............. 7,000,000 7,708,610
Chicago Illinois Water Revenue
6.50%, due 11/1/15............ 3,005,000 3,668,775
Illinois Health Facilities
Authority Revenue
5.75%, due 7/1/29............. 2,000,000 2,077,920
6.25%, due 11/15/29........... 4,000,000 4,203,160
Illinois State Sales Tax
Revenue
Second Series
5.50%, due 6/15/16-6/15/17.... 6,645,000 7,457,304
Regional Transportation
Authority of Illinois
Series C
7.10%, due 6/1/25............. 1,500,000 1,582,965
State of Illinois
First Series
5.375%, due 11/1/16........... 2,000,000 2,200,640
5.75%, due 6/1/14............. 3,450,000 4,016,007
------------
41,615,696
------------
KANSAS (1.5%)
Burlington Pollution Control
Revenue
Kansas Gas & Electric Co.
Project
7.00%, due 6/1/31............. 5,000,000 5,225,750
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
LOUISIANA (1.2%)
Louisiana State Offshore
Terminal
Authority, Deepwater Port
Revenue
Series C
5.25%, due 9/1/16............. $3,970,000 $ 4,144,878
------------
MASSACHUSETTS (8.0%)
Massachusetts Bay
Transportation
Authority Assessment
Series A
5.25%, due 7/1/16............. 4,430,000 4,813,372
5.75%, due 7/1/18............. 2,500,000 2,819,075
Massachusetts State
Consolidated Loan
Series C
5.50%, due 10/1/09............ 4,000,000 4,559,280
Massachusetts State Health &
Educational Facilities
Partners Healthcare Systems
Series C
5.75%, due 7/1/32............. 5,000,000 5,209,000
Massachusetts State
General Obligation
Series D
5.50%, due 10/1/09............ 9,000,000 10,196,190
------------
27,596,917
------------
MISSISSIPPI (0.1%)
Mississippi Home Corporation
Single
Family Revenue Mortgage
Series A-2
4.70%, due 6/1/24 (b)......... 445,000 466,841
------------
NEBRASKA (0.4%)
Nebraska Investment Finance
Authority, Single Family
Housing Revenue
Series C
6.30%, due 9/1/28 (b)......... 1,465,000 1,521,739
------------
NEVADA (2.3%)
Clark County Nevada Bond Bank
5.50%, due 7/1/14............. 5,460,000 6,066,333
Clark County Nevada Pollution
Control Revenue
Nevada Power Co. Project
Series B
6.60%, due 6/1/19............. 1,925,000 1,987,755
------------
8,054,088
------------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
MainStay Tax Free Bond Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
LONG-TERM MUNICIPAL BONDS (CONTINUED)
NEW JERSEY (6.2%)
Cape May County New Jersey
Industrial Pollution Control
Finance Authority
Atlantic City Electric Co.
Project A
7.20%, due 11/1/29 (b)........ $3,000,000 $ 3,235,770
New Jersey Economic Development
Authority Revenue
Transportation Project
Series A
5.875%, due 5/1/14............ 8,000,000 9,296,800
New Jersey State Trust Fund
Transportation Authority
System
Series C
5.50%, due 12/15/17........... 3,810,000 4,326,865
Tobacco Settlement
Financing Corp.
6.125%, due 6/1/24............ 5,000,000 4,584,750
------------
21,444,185
------------
NEW YORK (16.1%)
Long Island Power Authority
New York Electric
System Revenue
Series A
5.50%, due 12/1/12............ 2,470,000 2,852,727
Metropolitan Transportation
Authority New York
Commuter Facilities Revenue
Series A
5.625%, due 7/1/27............ 9,500,000 10,928,705
5.75%, due 7/1/21............. 1,000,000 1,155,350
Metropolitan Transportation
Authority New York Revenue
Series A
5.00%, due 11/15/25........... 1,500,000 1,519,020
Nassau County New York
Interim Financial Authority
Sales Tax Secured
Series A
5.75%, due 11/15/12........... 1,000,000 1,137,280
New York City General
Obligation
Series E
5.875%, due 8/1/13............ 10,000,000 10,942,700
Series D
8.00%, due 8/1/04............. 30,000 30,472
New York State Dormitory
Authority
Lease Revenue
Court Facilities
5.75%, due 5/15/30............ 2,000,000 2,196,500
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
NEW YORK (CONTINUED)
New York State Dormitory
Authority l Revenue
State Personal Income Tax
Education, Series A
5.00%, due 3/15/32............ $2,500,000 $ 2,515,675
Series C
7.375%, due 5/15/10........... 4,720,000 5,660,035
Series B
7.50%, due 5/15/11 (d)........ 1,740,000 2,199,377
7.50%, due 5/15/11............ 2,870,000 3,503,294
New York University
Series A
6.00%, due 7/1/19............. 3,700,000 4,395,008
New York State Environmental
Facilities Corp. Pollution
Control
Revenue, State Water
Series A
7.50%, due 6/15/12............ 295,000 304,750
Series B
7.50%, due 3/15/11............ 45,000 45,223
New York State Thruway
Authority
Highway & Bridge Trust Fund
Series B-1
5.75%, due 4/1/16............. 2,500,000 2,828,375
Service Contract Revenue
Local Highway & Bridge
Series B-1
5.75%, due 4/1/16............. 100,000 111,965
Triborough Bridge & Tunnel
Authority
New York Revenues
5.00%, due 11/15/32 (d)....... 3,500,000 3,531,605
------------
55,858,061
------------
NORTH CAROLINA (4.7%)
North Carolina Eastern
Municipal
Power Agency Systems Revenue
Series A
5.50%, due 1/1/12............. 2,000,000 2,136,700
Series D
6.75%, due 1/1/26............. 2,000,000 2,148,240
North Carolina Housing Finance
Agency Home Ownership
Series 13-A
4.25%, due 1/1/28 (b)......... 4,155,000 4,345,133
North Carolina Municipal Power
Agency N1 Catawba Electric
Revenue, Series B
6.50%, due 1/1/20............. 7,000,000 7,639,310
------------
16,269,383
------------
OHIO (0.8%)
Lorain County Ohio Hospital
Revenue
Catholic Healthcare
5.375%, due 10/1/30........... 2,300,000 2,307,958
------------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
LONG-TERM MUNICIPAL BONDS (CONTINUED)
PENNSYLVANIA (3.4%)
Allegheny County Port Authority
Special Revenue Transportation
6.25%, due 3/1/16............. $3,750,000 $ 4,456,350
6.375%, due 3/1/15............ 3,120,000 3,726,965
Philadelphia Pennsylvania
School
District, Series A
5.75%, due 2/1/11............. 3,000,000 3,459,660
------------
11,642,975
------------
PUERTO RICO (1.3%)
Puerto Rico Commonwealth
Infrastructure Financial
Authority
Special, Series A
5.50%, due 10/1/17............ 1,500,000 1,675,620
Puerto Rico Electric Power
Authority Revenue
Series HH
5.25%, due 7/1/29............. 2,750,000 2,861,513
------------
4,537,133
------------
RHODE ISLAND (1.3%)
Tobacco Settlement Financing
Corp.
Asset-Backed
Series A
6.125%, due 6/1/32............ 5,400,000 4,582,980
------------
SOUTH CAROLINA (2.1%)
Charleston County South
Carolina
Public Improvement
6.125%, due 9/1/11............ 2,425,000 2,826,216
South Carolina Jobs Economic
Development Authority Revenue
Bon Secours Health Systems
5.625%, due 11/15/30.......... 4,500,000 4,544,325
------------
7,370,541
------------
TEXAS (10.0%)
Austin Texas Water & Wastewater
System Revenue
5.75%, due 5/15/15............ 2,900,000 3,256,758
Dallas Fort Worth Texas
International
Airport Facilities Improvement
Revenue, Series A
6.00%, due 11/1/28 (b)........ 4,000,000 4,366,440
El Paso Texas General
Obligation
5.875%, due 8/15/11........... 1,000,000 1,131,110
Harris County Texas Health
Facility
Development Corp.
Hospital Revenue
Memorial Hermann Healthcare
Series A
6.375%, due 6/1/29............ 1,500,000 1,605,165
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
TEXAS (CONTINUED)
Harris County Texas Health
Facility
Development Corp. (Continued)
Saint Luke's Episcopal
Hospital
Series A
5.375%, due 2/15/26........... $3,500,000 $ 3,537,415
Jefferson County Texas Health
Facility Development Corp.
Texas Baptist Hospitals
5.20%, due 8/15/21............ 1,250,000 1,292,750
San Antonio Texas Electric &
Gas
Series 2000
5.00%, due 2/1/17 (d)......... 5,000,000 5,448,700
San Antonio Texas Municipal
Drain
Utilities System Revenue
5.00%, due 2/1/22............. 600,000 613,560
Tarrant Regional Water District
Texas Water Revenue
5.25%, due 3/1/17............. 2,500,000 2,705,825
Texas State General Obligation
College Student Loan
5.50%, due 8/1/10 (b)......... 1,760,000 1,966,307
Texas State Turnpike Authority
Center System Revenue
Series A
(zero coupon), due
8/15/21-8/15/23............... 23,000,000 8,520,670
------------
34,444,700
------------
WASHINGTON (2.1%)
Seattle Washington Municipal
Light & Power Revenue
6.00%, due 10/1/15............ 6,500,000 7,192,055
------------
WEST VIRGINIA (0.4%)
Kanawha Mercer Nicholas
Counties
West Virginia Single Family
Mortgage Revenue
(zero coupon), due 2/1/15
(d)........................... 2,230,000 1,286,353
------------
WISCONSIN (3.5% )
Badger Tobacco Asset
Securitization Corp.
Asset-Backed Bonds
6.125%, due 6/1/27............ 2,800,000 2,559,424
State of Wisconsin Health &
Education Facilities Authority
Revenue Wheaton
Franciscan Services
5.75%, due 8/15/25............ 2,000,000 2,036,520
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
MainStay Tax Free Bond Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
LONG-TERM MUNICIPAL BONDS (CONTINUED)
WISCONSIN (CONTINUED)
Wisconsin State General
Obligation
Series F
5.50%, due 5/1/13............. $1,030,000 $ 1,158,410
Series C
5.75%, due 5/1/11............. 1,045,000 1,186,619
6.00%, due 5/1/12............. 4,590,000 5,285,385
------------
12,226,358
------------
Total Long-Term Municipal Bonds
(Cost $310,139,452)........... 330,043,003
------------
CUMULATIVE PREFERRED STOCK (2.9%)
Charter Mac Equity Issuer Trust
Series A-1
7.10%, due 6/30/09 (a)........ 9,000,000 9,936,810
------------
Total Cumulative Preferred
Stock
(Cost $9,022,744)............. 9,936,810
------------
SHORT-TERM INVESTMENT (1.2%)
TEXAS (1.2%)
Harris County Texas Industrial
Development Corp.
Pollution Control Revenue
1.09%, due 3/1/24 (c)......... 4,200,000 4,200,000
------------
Total Short-Term Investment
(Cost $4,200,000)............. 4,200,000
------------
Total Investments
(Cost $323,362,196) (e)....... 99.5% 344,179,813(f)
Cash and Other Assets,
Less Liabilities.............. 0.5 1,829,917
----------- ------------
Net Assets..................... 100.0% $346,009,730
=========== ============
</Table>
<Table>
- -------
(a) May be sold to Institutional Investors only.
(b) Interest on these securities is subject to alternative
minimum tax.
(c) Variable rate securities that may be tendered back to the
issuer at any time prior to maturity at par.
(d) Prerefunding Securities-issuer has or will issue new
bonds and use the proceeds to purchase Treasury
securities that mature at or near the same date as the
original issue's call date.
(e) The cost federal income tax purposes is $323,406,596.
(f) At October 31, 2003, net unrealized appreciation was
$20,773,217, 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 $22,299,646 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $1,526,429.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$323,362,196)............................................. $344,179,813
Cash........................................................ 26,205
Receivables:
Interest.................................................. 5,805,685
Fund shares sold.......................................... 36,265
Other assets................................................ 17,601
------------
Total assets........................................ 350,065,569
------------
LIABILITIES:
Payables:
Investment securities purchased........................... 1,969,316
Fund shares redeemed...................................... 1,247,550
Manager................................................... 182,869
NYLIFE Distributors....................................... 138,746
Transfer agent............................................ 55,666
Trustees.................................................. 4,251
Custodian................................................. 2,972
Accrued expenses............................................ 83,210
Dividends payable........................................... 371,259
------------
Total liabilities................................... 4,055,839
------------
Net assets.................................................. $346,009,730
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 43,813
Class B................................................... 305,118
Class C................................................... 5,989
Additional paid-in capital.................................. 365,093,979
Distributions in excess of net investment income............ (821,043)
Accumulated net realized loss on investments................ (39,435,743)
Net unrealized appreciation on investments.................. 20,817,617
------------
Net assets.................................................. $346,009,730
============
CLASS A
Net assets applicable to outstanding shares................. $ 42,712,257
============
Shares of beneficial interest outstanding................... 4,381,285
============
Net asset value per share outstanding....................... $ 9.75
Maximum sales charge (4.50% of offering price).............. 0.46
------------
Maximum offering price per share outstanding................ $ 10.21
============
CLASS B
Net assets applicable to outstanding shares................. $297,458,016
============
Shares of beneficial interest outstanding................... 30,511,748
============
Net asset value and offering price per share outstanding.... $ 9.75
============
CLASS C
Net assets applicable to outstanding shares................. $ 5,839,457
============
Shares of beneficial interest outstanding................... 598,948
============
Net asset value and offering price per share outstanding.... $ 9.75
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002.
<Table>
<Caption>
2003* 2002
------------ ------------
INVESTMENT INCOME:
Income:
Interest.................................................. $14,349,237 $19,125,408
----------- -----------
Expenses:
Manager................................................... 1,838,581 2,197,934
Distribution--Class B..................................... 652,970 796,262
Distribution--Class C..................................... 13,470 12,025
Service--Class A.......................................... 99,635 107,519
Service--Class B.......................................... 652,970 796,262
Service--Class C.......................................... 13,470 12,025
Transfer agent............................................ 281,631 330,533
Professional.............................................. 70,010 75,981
Recordkeeping............................................. 52,852 63,298
Shareholder communication................................. 48,385 57,160
Registration.............................................. 44,089 5,245
Custodian................................................. 30,616 37,100
Trustees.................................................. 17,464 20,551
Miscellaneous............................................. 37,328 88,095
----------- -----------
Total expenses.......................................... 3,853,471 4,599,990
----------- -----------
Net investment income....................................... 10,495,766 14,525,418
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions..................................... (2,118,328) 416,471
Futures transactions...................................... (6,526,927) (368,663)
----------- -----------
Net realized gain (loss) on investments..................... (8,645,255) 47,808
----------- -----------
Net change in unrealized appreciation (depreciation) on
investments:
Security transactions..................................... (500,577) 14,660,165
Futures transactions...................................... -- 200,000
----------- -----------
Net unrealized gain (loss) on investments................... (500,577) 14,860,165
----------- -----------
Net realized and unrealized gain (loss) on investments...... (9,145,832) 14,907,973
----------- -----------
Net increase in net assets resulting from operations........ $ 1,349,934 $29,433,391
=========== ===========
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 10,495,766 $ 14,525,418 $ 15,366,501
Net realized gain (loss) on investments................... (8,645,255) 47,808 1,914,631
Net change in unrealized appreciation (depreciation) on
investments............................................. (500,577) 14,860,165 (4,189,627)
------------ ------------ ------------
Net increase in net assets resulting from operations...... 1,349,934 29,433,391 13,091,505
------------ ------------ ------------
Dividends to shareholders:
From net investment income:
Class A................................................. (1,594,540) (1,815,005) (1,463,396)
Class B................................................. (9,525,277) (12,523,554) (13,854,015)
Class C................................................. (196,992) (192,828) (53,528)
------------ ------------ ------------
Total dividends to shareholders....................... (11,316,809) (14,531,387) (15,370,939)
------------ ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 54,870,922 89,117,501 53,389,585
Class B................................................. 12,874,397 23,954,794 24,464,236
Class C................................................. 2,895,325 12,490,411 1,250,466
Net asset value of shares issued to shareholders in
reinvestment of dividends:
Class A................................................. 982,515 1,202,975 1,167,245
Class B................................................. 6,221,055 8,110,690 8,874,295
Class C................................................. 147,034 142,364 35,759
------------ ------------ ------------
77,991,248 135,018,735 89,181,586
Cost of shares redeemed:
Class A................................................. (57,989,235) (85,708,671) (36,941,728)
Class B................................................. (36,460,278) (36,553,847) (37,789,297)
Class C................................................. (4,600,575) (6,835,348) (813,700)
------------ ------------ ------------
Increase (decrease) in net assets derived from capital
share transactions.................................. (21,058,840) 5,920,869 13,636,861
------------ ------------ ------------
Net increase (decrease) in net assets................. (31,025,715) 20,822,873 11,357,427
NET ASSETS:
Beginning of period......................................... 377,035,445 356,212,572 344,855,145
------------ ------------ ------------
End of period............................................... $346,009,730 $377,035,445 $356,212,572
============ ============ ============
Distributions in excess of net investment income............ $ (821,043) $ -- $ --
============ ============ ============
</Table>
- -------
<Table>
The Fund changed its fiscal year end from December 31, to
* October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
---------------------------------------------------------------------------------
January 1,
2003
through Year ended December 31,
October 31, ----------------------------------------------------------------
2003* 2002 2001 2000 1999 1998
----------- -------- -------- -------- -------- --------
Net asset value at beginning of period........ $ 10.02 $ 9.62 $ 9.68 $ 9.08 $ 10.20 $ 10.19
-------- -------- -------- -------- -------- --------
Net investment income......................... 0.30 0.41 0.45 0.47 0.45 0.47
Net realized and unrealized gain (loss) on
investments.................................. (0.25) 0.40 (0.06) 0.60 (1.12) 0.03
-------- -------- -------- -------- -------- --------
Total from investment operations.............. 0.05 0.81 0.39 1.07 (0.67) 0.50
-------- -------- -------- -------- -------- --------
Less dividends:
From net investment income................... (0.32) (0.41) (0.45) (0.47) (0.45) (0.49)
-------- -------- -------- -------- -------- --------
Net asset value at end of period.............. $ 9.75 $ 10.02 $ 9.62 $ 9.68 $ 9.08 $ 10.20
======== ======== ======== ======== ======== ========
Total investment return (a)................... 0.54% 8.61% 4.04% 12.15% (6.75%) 4.98%
Ratios (to average net assets)/
Supplemental Data:
Net investment income...................... 3.64%+ 4.19% 4.59% 5.05% 4.62% 4.61%
Expenses................................... 1.04%+ 1.03% 1.03% 1.03% 1.02% 1.02%
Portfolio turnover rate....................... 34% 39% 57% 56% 101% 116%
Net assets at end of period (in 000's)........ $ 42,712 $ 46,131 $ 39,760 $ 22,495 $ 13,676 $ 17,868
</Table>
- -------
<Table>
The Fund changed its fiscal year end from December 31, to
* October 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
Total return is calculated exclusive of sales charges and is
(a) not annualized.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<Table>
<Caption>
Class B Class C
------------------------------------------------------------------ -------------------------------------------------------
January 1, January 1,
2003 2003
through Year ended December 31, through Year ended December 31,
October 31, ---------------------------------------------------- October 31, -----------------------------------------
2003* 2002 2001 2000 1999 1998 2003* 2002 2001 2000 1999
----------- -------- -------- -------- -------- -------- ----------- -------- -------- -------- --------
$ 10.02 $ 9.62 $ 9.68 $ 9.09 $ 10.21 $ 10.19 $ 10.02 $ 9.62 $ 9.68 $ 9.09 $ 10.21
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
0.28 0.39 0.42 0.45 0.43 0.45 0.28 0.39 0.42 0.45 0.43
(0.25) 0.40 (0.06) 0.59 (1.12) 0.03 (0.25) 0.40 (0.06) 0.59 (1.12)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
0.03 0.79 0.36 1.04 (0.69) 0.48 0.03 0.79 0.36 1.04 (0.69)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(0.30) (0.39) (0.42) (0.45) (0.43) (0.46) (0.30) (0.39) (0.42) (0.45) (0.43)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
$ 9.75 $ 10.02 $ 9.62 $ 9.68 $ 9.09 $ 10.21 $ 9.75 $ 10.02 $ 9.62 $ 9.68 $ 9.09
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
0.32% 8.34% 3.79% 11.75% (6.96%) 4.83% 0.32% 8.34% 3.79% 11.75% (6.96%)
3.39%+ 3.94% 4.34% 4.80% 4.37% 4.36% 3.39%+ 3.94% 4.34% 4.80% 4.37%
1.29%+ 1.28% 1.28% 1.28% 1.27% 1.27% 1.29%+ 1.28% 1.28% 1.28% 1.27%
34% 39% 57% 56% 101% 116% 34% 39% 57% 56% 101%
$297,458 $323,349 $314,867 $321,230 $358,417 $461,420 $ 5,840 $ 7,555 $ 1,586 $ 1,130 $ 490
<Caption>
Class C
-------------
September 1**
through
December 31,
1998
-------------
$ 10.25
--------
0.15
(0.04)
--------
0.11
--------
(0.15)
--------
$ 10.21
========
1.09%
4.36%+
1.27%+
116%
$ 5
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
MainStay Tax Free Bond Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay Tax
Free Bond Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and within one year of purchase of Class C
shares. Distribution of Class B shares and Class C shares commenced on May 1,
1986 and September 1, 1998, respectively. Class A shares, Class B shares and
Class C shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares and Class C shares are subject to higher distribution fee rates.
Each class of shares bears distribution and/or service fee payments under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to provide a high level of current income
free from regular federal income tax, consistent with the preservation of
capital.
The ability of issuers of debt securities held by the Fund to meet their
obligations may be affected by economic developments in a specific industry or
region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent selected by the Fund's Manager, whose prices reflect broker/dealer
supplied valuations and electronic data processing techniques, if those prices
are deemed by the Fund's Manager to be representative of market values, at the
regular close of business of the New York Stock Exchange. Futures contracts are
valued at the last posted settlement price on the market where such futures are
principally traded. Temporary cash investments acquired over 60 days to maturity
are valued using the latest bid prices or using valuations based on a matrix
system (which considers such factors as security prices, yields, maturities, and
ratings), both as furnished by independent pricing services. Other temporary
cash investments are valued at amortized cost, which approximates market value.
Securities for which
20
Notes to Financial Statements
market quotations are not readily available are valued by methods deemed by the
Board of Trustees to represent fair value.
(B) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date and
price, or to make or receive a cash payment based on the value of a securities
index. During the period the futures contract is open, changes in the value of
the contract are recognized as unrealized gains or losses by "marking to market"
such contract on a daily basis to reflect the market value of the contract at
the end of each day's trading. The Fund agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments are known as "variation margin." When the
futures contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or cost of) the closing transaction
and the Fund's basis in the contract. The Fund may enter into contracts for the
future delivery of debt securities in order to attempt to protect against the
effects of adverse changes in interest rates, to lengthen or shorten the average
maturity or duration of the Fund's portfolio or to try to enhance the Fund's
returns.
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 open 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.
(C) 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 and nontaxable income to the shareholders of the
Fund within the allowable time limits. Therefore, no federal income or
excise-tax provision is required.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends monthly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
(E) 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 as earned. Discounts and Premiums on securities purchased by the Fund
are accreted and amortized respectively, on the constant yield method over the
life of the
21
MainStay Tax Free Bond Fund
respective securities or, in the case of a callable security, over the period to
the first date of call. Discounts and premiums on short-term securities are
accreted and amortized, respectively, on the straight line method.
The investment income and realized and unrealized gains and losses on
investments of the Fund are allocated to separate classes of shares based upon
their relative net assets on the date the income is earned or realized and
unrealized gains and losses are incurred.
(F) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(G) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company, serves as the Fund's manager. The Manager provides offices, conducts
clerical, recordkeeping and bookkeeping services, and keeps the financial and
accounting records required for the Fund. The Manager also pays the salaries and
expenses of all personnel affiliated with the Fund and all the operational
expenses that are not the responsibility of the Fund. MacKay Shields LLC (the
"Subadvisor"), a registered investment adviser and indirect wholly-owned
subsidiary of New York Life, is responsible for the day-to-day portfolio
management of the Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.60% of the Fund's
average daily net assets. For the ten months ended October 31, 2003, the Manager
earned from the Fund $1,838,581. For the year ended December 31, 2002, the
Manager earned from the Fund $2,197,934.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor a monthly fee at an annual rate of
0.30% of the average daily net assets of the Fund.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"). The
Fund, with respect to each class of shares, has
22
Notes to Financial Statements (continued)
adopted distribution plans (the "Plans") in accordance with the provisions of
Rule 12b-1 under the 1940 Act. Pursuant to the Class A Plan, the Distributor
receives a monthly fee from the Fund at an annual rate of 0.25% of the average
daily net assets of the Fund's Class A shares, which is an expense of the Class
A shares of the Fund for distribution or service activities as designated by the
Distributor. Pursuant to the Class B and Class C Plans, the Fund pays the
Distributor a monthly fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.25% of the average daily net assets of the
Fund's Class B and Class C shares. The distribution plans provide that the Class
B and Class C shares of the Fund also incur a service fee at the annual rate of
0.25% of the average daily net asset value of the Class B or Class C shares of
the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $1,708 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $103,159, $80,604 and $3,122, respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expense accrued for the ten months ended October 31,
2003, and the year ended December 31, 2002, amounted to $281,631 and $330,533,
respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
attended plus reimbursement for travel and out-of-pocket expenses. The Lead
Trustee is also paid an annual fee of $20,000. Beginning January 1, 2003, the
Audit Committee Chairman receives an additional $2,000 for each meeting of the
Audit Committee attended. Also, beginning January 1, 2003, the Chairpersons of
the Brokerage Committee and the Operations Committee each receive an additional
$1,000 for each meeting of the Brokerage Committee and Operations Committee
attended, respectively. The Trust allocates trustees fees in proportion to the
net assets of the respective Funds. Thus the Tax Free Bond Fund only pays a
portion of the fees identified above.
(F) OTHER. Fees for the cost of legal services, included in Professional Fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $7,612 for the ten months ended October
31, 2003 and $7,340 for the year ended December 31, 2002.
23
MainStay Tax Free Bond Fund
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $52,852 for the ten months ended October
31, 2003 and $63,298 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
The Fund has maintained its year end of December 31 for federal income tax
purposes.
At December 31, 2002, the components of accumulated loss on a tax basis were as
follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
- ------------------- ------------- -----------------
$(30,746,089) $21,273,795 $(9,472,294)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
At December 31, 2002, for federal income tax purposes, capital loss
carryforwards of $30,746,088 were available, as shown in the table below, to the
extent provided by the regulations, to offset future realized gains through the
years indicated. 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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
- ----------------- -------
2003................................................... $ 3,256
2007................................................... 12,037
2008................................................... 15,453
-------
$30,746
=======
</Table>
Dividends to shareholders from net investment income shown in the Statement of
Changes in Net Assets represents tax-based distributions of tax exempt income.
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $120,039 and $143,084, respectively.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive
24
Notes to Financial Statements (continued)
shareholder redemption requests. The funds pay a commitment fee, at an annual
rate of .075% of the average commitment amount, regardless of usage, to The Bank
of New York, which acts as agent to the syndicate. Such commitment fees are
allocated among the funds based upon net assets and other factors. Interest on
any revolving credit loan is charged based upon the Federal Funds Advances rate.
There were no borrowings on the line of credit during the ten months ended
October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
JANUARY 1 DECEMBER 31,
THROUGH ---------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold.......... 5,511 1,289 291 9,102 2,432 1,271 5,469 2,501 128
Shares issued in
reinvestment of
dividends.......... 99 628 15 123 826 14 120 912 3
------ ------ ---- ------ ------ ----- ------ ------ ---
5,610 1,917 306 9,225 3,258 1,285 5,589 3,413 131
Shares redeemed...... (5,834) (3,683) (461) (8,753) (3,721) (696) (3,781) (3,870) (83)
------ ------ ---- ------ ------ ----- ------ ------ ---
Net increase
(decrease)......... (224) (1,766) (155) 472 (463) 589 1,808 (457) 48
====== ====== ==== ====== ====== ===== ====== ====== ===
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
25
Report of Independent Auditors
To the Board of Trustees of The MainStay Funds and Shareholders of
MainStay Tax Free Bond Fund
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 funds constituting The MainStay Funds, hereafter referred to as the "Fund")
at October 31, 2003, the results of its operations for the ten months ended
October 31, 2003 and the year ended December 31, 2002, the changes in its net
assets for the ten months ended October 31, 2003 and the two year period ended
December 31, 2002 and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. 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 auditing standards generally accepted in
the United States of America, 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 October 31, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
TAX INFORMATION (UNAUDITED)
For federal income tax purposes, 100% of the dividends paid by the Fund is tax
exempt.
26
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
27
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
28
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
29
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
30
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY FUNDS LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MST11- 12/03
NYLIM-A04350 13
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R) Tax Free Bond Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY FUNDS LOGO]
Table of Contents
<Table>
President's Letter 2
$10,000 Invested in MainStay Total Return
Fund versus S&P 500(R) Index, a Total
Return Composite Index, and
Inflation--Class A, Class B, and Class C
Shares 3
Portfolio Management Discussion and
Analysis 5
Year-by-Year and 10-Month Performance 6
Portfolio of Investments 10
Financial Statements 19
Notes to Financial Statements 24
Report of Independent Auditors 31
Trustees and Officers 32
The MainStay(R) Funds 35
</Table>
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
2
$10,000 Invested in MainStay Total Return
Fund versus S&P 500(R) Index, a Total Return
Composite Index, and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 7.73%, 5 Years -0.21%, 10 Years 6.58%
[CLASS A LINE GRAPH]
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN
PERIOD END RETURN FUND S&P 500 INDEX(1) COMPOSITE INDEX(2) INFLATION (CPI)(3)
- ---------- -------------- ---------------- ------------------ ------------------
10/31/93 $ 9,450.00 $10,000.00 $10,000.00 $10,000.00
12/94 $ 9,404.00 $10,141.00 $ 9,934.00 $10,249.00
12/95 $11,333.00 $12,784.00 $12,228.00 $10,561.00
12/96 $13,225.00 $16,108.00 $14,462.00 $10,859.00
12/97 $15,578.00 $21,698.00 $17,625.00 $11,102.00
12/98 $19,001.00 $28,242.00 $21,669.00 $11,282.00
12/99 $22,373.00 $34,669.00 $25,550.00 $11,504.00
12/00 $25,452.00 $37,182.00 $29,954.00 $11,933.00
12/01 $21,420.00 $31,668.00 $24,244.00 $12,322.00
12/02 $18,342.00 $25,971.00 $21,002.00 $12,453.00
10/31/03 $18,909.00 $26,968.00 $22,703.00 $12,706.00
</Table>
CLASS B AND CLASS C SHARES
Class B Total Returns with Sales Charges: 1 Year 8.18%, 5 Years -0.09%, 10 Years
6.57%
Class C Total Returns with Sales Charges: 1 Year 12.18%, 5 Years 0.20%, 10 Years
6.57%
[CLASS B & C LINE GRAPH]
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN
PERIOD END RETURN FUND S&P 500 INDEX(1) COMPOSITE INDEX(2) INFLATION (CPI)(3)
- ---------- -------------- ---------------- ------------------ ------------------
10/31/93 $10,000.00 $10,000.00 $10,000.00 $10,000.00
12/94 $ 9,951.00 $10,141.00 $ 9,934.00 $10,249.00
12/95 $11,959.00 $12,784.00 $12,228.00 $10,561.00
12/96 $13,885.00 $16,108.00 $14,462.00 $10,859.00
12/97 $16,279.00 $21,698.00 $17,625.00 $11,102.00
12/98 $19,733.00 $28,242.00 $21,669.00 $11,282.00
12/99 $23,063.00 $34,669.00 $25,550.00 $11,504.00
12/00 $26,072.00 $37,182.00 $29,954.00 $11,933.00
12/01 $21,782.00 $31,668.00 $24,244.00 $12,322.00
12/02 $18,503.00 $25,971.00 $21,002.00 $12,453.00
10/31/03 $18,888.00 $26,968.00 $22,703.00 $12,706.00
</Table>
- -------
<Table>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO
MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LESS
THAN THAT SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT
PERFORMANCE INFORMATION, PLEASE VISIT WWW.MAINSTAYFUNDS.COM.
Performance tables and graphs do not reflect the deduction of
taxes that a shareholder would pay on distributions or
Fund-share redemptions. Total returns reflect change in share
price, reinvestment of dividend and capital gain distributions,
and maximum applicable sales charges explained in this
paragraph. The graphs assume an initial investment of $10,000
and reflect deduction of all sales charges that would have
applied for the period of investment. Class A share performance
reflects the effect of the maximum 5.5% initial sales charge and
includes the historical performance of the Class B shares for
periods from the Fund's inception on 12/29/87 through 12/31/94.
Performance figures for the two classes vary after 12/31/94,
based on differences in their sales charges and expense
structures. Class C share performance includes the historical
performance of the Class B shares for periods from the Fund's
inception on 12/29/87 through 8/31/98. Class B shares would be
subject to a contingent deferred sales charge (CDSC) of up to 5%
if redeemed within the first six years of purchase, and Class C
shares would be subject to a CDSC of 1% if redeemed within one
year of purchase.
1. "S&P 500(R)" is a trademark of The McGraw-Hill Companies,
Inc. The S&P 500 is an unmanaged index and is widely
regarded as the standard for measuring large-cap U.S.
stock-market performance. Results assume reinvestment of all
income and capital gains. An investment cannot be made
directly into an index.
</Table>
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
3
<Table>
- ---
2. The Fund's Total Return Composite Index is comprised of the
Russell 1000(R) Growth Index and the Lehman Brothers(R)
Aggregate Bond Index weighted 60%/40%, respectively. The
Russell 1000(R) Growth Index is an unmanaged index that
measures the performance of those Russell 1000(R) companies
with higher price-to-book ratios and higher forecasted
growth values. The Russell 1000(R) Index is an unmanaged
index that measures the performance of the 1,000 largest
U.S. companies based on total market capitalization. The
Lehman Brothers(R) Aggregate Bond Index is an unmanaged
index that includes the Government Index, the Corporate
Index, the Mortgage-Backed Securities Index, and the
Asset-Backed Securities Index. To qualify for inclusion in
the Lehman Brothers Aggregate Bond Index, securities must be
U.S. dollar denominated and investment grade and have a
fixed-rate coupon, a remaining maturity of at least one
year, and a par amount outstanding of at least $150 million.
Results assume reinvestment of all income and capital gains.
An investment cannot be made directly into an index or a
composite.
3. Inflation is measured 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. The
rate of inflation does not represent an investment return.
</Table>
4
Portfolio Management Discussion and Analysis
The first 10 months of 2003 presented a number of challenges for equity
investors. In addition to facing the volatility associated with military action
in Iraq, investors had to contend with a constant stream of mixed economic
indicators, which added to the volatility and uncertainty of the stock market.
Although initial signs of an economic recovery began to take shape toward the
end of 2002, stocks declined through much of the first quarter of 2003. After
the stock market reached its year-to-date low in mid-March, stocks rallied
sharply through the end of October.
The Federal Reserve lowered the targeted federal funds rate by 25 basis points
in June 2003, its thirteenth easing move since the beginning of 2001. The latest
move brought the targeted federal funds rate to 1.0%, a four-decade low. Real
gross domestic product grew at a modest pace in the first quarter of 2003,
somewhat faster in the second, and quite rapidly in the third. According to
preliminary estimates by the Bureau of Economic Analysis, real gross domestic
product grew at a seasonally adjusted annual rate of 8.2% in the third quarter
of 2003, its fastest pace since the first quarter of 1984.
In the first four months of 2003, turbulence in the Treasury market echoed
conflicting viewpoints regarding the economy, geopolitical tensions, falling
energy prices, a weaker dollar, and accommodative monetary and fiscal policies.
As the year progressed, the Federal Reserve's concern over the threat of
deflation triggered a dramatic Treasury rally. By mid-June, 10-year notes
touched an exceedingly low yield of 3.1%. Shortly thereafter, the bond market
reversed course amid investor disappointment over the size of the Fed's June
easing move in the face of perceived deflationary risk. Ten-year Treasury yields
rose to approximately 4.5% by early September, before falling slightly when
mixed economic news left the outlook uncertain. October's economic data was more
upbeat, and yields moved higher as the 10-month reporting period came to a
close.
Aside from Treasuries, the dominant theme in the bond market was a renewed
appetite for risk. Many investors turned risk averse in 2002 in the midst of an
uncertain stock market, a sluggish economy, and a series of corporate scandals.
In this context, gloomy assessments of the durability of revenue streams led
investors to reevaluate corporate-bond risk, and prices of corporate securities
declined accordingly. In 2003, however, the economic picture brightened and
corporate-bond prices rallied sharply, especially among lower-rated securities.
Investors were drawn to the higher yields available from corporate bonds as
government yields remained relatively low.
5
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[BAR CHART]
<Table>
<Caption>
PERIOD END TOTAL RETURN %
- ---------- --------------
12/94 -2.41
12/95 28.66
12/96 13.22
12/97 18.24
12/98 26.93
12/99 16.46
12/00 -4.48
12/01 -11.92
12/02 -17.75
10/03 15.02
</Table>
Returns reflect the historical performance of the Class B shares through
12/31/94. See footnotes 1 on pages 4 and 5 for more information on performance.
CLASS B AND CLASS C SHARES
[BAR CHART]
<Table>
<Caption>
PERIOD END TOTAL RETURN %
- ---------- --------------
12/94 -2.41
12/95 27.96
12/96 12.73
12/97 17.65
12/98 25.96
12/99 15.60
12/00 -5.10
12/01 -12.61
12/02 -18.37
10/03 14.33
</Table>
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Total Return Fund returned
15.02% for Class A shares and 14.33% for Class B and Class C shares, excluding
all sales charges. All share classes outperformed the 14.22% return of the
average Lipper(1) balanced fund for the same period. All share classes under
performed the 21.21% return of the S&P 500 Index(2) and the 15.32% return of the
Fund's Total Return Composite Index(3) for the 10 months ended October 31, 2003.
--------
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 3 for more information about the S&P 500 Index.
3. See footnote on page 4 for more information about the Fund's Total Return
Composite Index.
6
EQUITY RESULTS
In the equity portion of the Fund's portfolio, information technology holdings
posted the strongest return for the reporting period, rising 50.64%(4) through
the end of October, versus a 42.79% gain for the information technology stocks
in the Russell 1000 Growth Index. VERITAS Software (+130.99%) and Intel
(+112.29%) stood out as the Fund's top performers in the sector. VERITAS
Software is a leading provider of enterprise storage products and services, a
business that has proven to be one of the most successful subsectors in the
technology market during the reporting period. Other top performing information
technology stocks in the portfolio included Texas Instruments (+93.50%), Analog
Devices (+85.71%), and Electronic Arts (+98.79%).
The Fund's equity holdings in the industrials sector gained 21.46%, slightly
underperforming related stocks in the Russell 1000 Growth Index for the 10-
month period. Cendant (+94.94%), the Fund's top-performing industrial stock,
rose on strong sales trends in its real estate business. Fed Ex, Danaher and
United Technologies were also up considerably for the period, fueled by the
strengthening economy. Two industrial stocks in the portfolio that detracted
from results were General Dynamics and Lockheed Martin. We sold General Dynamics
and recently reduced the Fund's position in Lockheed Martin.
The Fund's equity holdings in the financial sector rose 17.86% during the 10-
month period versus an 18.24% increase for this sector of the Index. American
Express, Citigroup, and Morgan Stanley were the top-three financial performers
in the equity portion of the Fund's portfolio during the reporting period, each
rising roughly 30% or more. Among the Fund's financial stocks, BB&T was the
biggest detractor from performance and we eliminated the entire position. The
company was hurt by net interest margin compression and soft loan growth.
For the period, the Fund's health care stocks rose 7.97%, lagging the 11.00%
gain for related stocks in the Index. Baxter International and Tenet Healthcare
were the two biggest laggards during the period. Among the Fund's winners were
Amgen (+27.76%) and Genentech (+147.20%). Genentech, in particular, had a
stunning rise in May 2003, after it released positive data from a first-line
colorectal-cancer trial for its new drug, Avastin.
The Fund's consumer discretionary stocks rose 15.19% compared to a 35.33% rise
for related stocks in the Russell 1000 Growth Index. In the consumer staples
sector, the Fund's holdings rose 10.44% compared to 12.86% for related stocks in
the Index. Consumer discretionary holdings Harley-Davidson, Kohl's, and Viacom
turned in disappointing results. Harley-Davidson took the greatest toll on
performance, as its stock dropped on concerns about the company's lower-
than-expected production goals for 2004. Despite these concerns, we continue to
view Harley-Davidson, Kohl's, and Viacom as solid long-term holdings. Our
top-performing consumer discretionary stocks included Lowe's (+57.50%), Target
- -------
4. Performance percentages reflect the total return performance of the indicated
securities or sector holdings for the 10 months ended October 31, 2003, or
for the portion of the reporting period such securities or sector holdings
were held in the Fund, if shorter. Due to security selection, purchases, and
sales, the performance of Fund holdings may differ from the performance of
the securities or sectors themselves.
7
(+33.22%), and Bed Bath & Beyond (+22.27%). Among the Fund's consumer staples
positions, Kraft Foods proved to be a dramatic underperformer, which prompted us
to sell the stock. The biggest gainer was Wal-Mart Stores (+17.28%). The company
continued to see strength in its retail sales as the economy rebounded.
BOND RESULTS
As of October 31, 2003, the bond portion of the Fund's portfolio was
overweighted in asset-backed securities and high-yield corporate bonds. At the
same time, it was underweighted in Treasuries, agencies, and commercial
mortgage-backed securities compared to its benchmark, the Lehman Brothers
Aggregate Bond Index.(5)
We continue to like asset-backed securities for their high credit quality and
incremental yield relative to Treasuries. At the beginning of the year, the bond
portion of the Fund's portfolio was overweighted in high-yield corporate bonds,
since we expected them to outperform Treasuries. Our strategy was based on
renewed corporate emphasis on fiscal discipline and balance-sheet strength,
reduced new corporate issuance as hiring stalled, and increased use of corporate
bonds as substitutes for stocks while the amount of investable cash was rising.
Corporate bonds, particularly infrastructure issues and lower- and moderate-
quality credits, generally outperformed during the reporting period. The bond
portion of the Fund's portfolio also benefited from exposure to dollar de-
nominated emerging-market credits, including sovereign credits of Mexico and
Russia as well as industrial issues such as Ambev, a leading Brazilian beverage
concern.
During the reporting period, we pared the Fund's exposure to longer-term
Treasuries, since we believed there were better opportunities elsewhere. Our
decision to underweight agencies and commercial mortgage-backed securities was
based on our perception of their relative value. As we entered 2003, we believed
that agencies had approached fair value. We were also concerned that the sector
could weaken as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank came
under pressure from Congress seeking to curb the risks of the agencies'
investment portfolios and from questions about Freddie Mac's earnings quality.
In the commercial mortgage-backed securities market, we believed investors were
not being properly compensated to bear the risk of a potential downturn in
commercial real estate, and we underweighted these securities in the bond
portion of the Fund's portfolio.
The Fund's duration was typically set to match the duration of its benchmark. On
several occasions, however, we tactically repositioned the Fund's duration to
take advantage of interest-rate trends. These tilts normally shortened or
lengthened the Fund's duration within a range of 5% short or long of the
benchmark.
- -------
5. See footnote 2 on page 4 for more information about the Lehman Brothers
Aggregate Bond Index.
8
LOOKING AHEAD
We expect the stock market to maintain its upward bias as the economy continues
to recover. If the latest gross domestic product figures are any indication, we
believe that more good economic news may lie ahead. As always, we will continue
to focus on high-quality growth companies with strong growth prospects.
The bond portion of the Fund's portfolio is positioned for rising Treasury
yields, lower volatility, contained inflation, and a narrowing of the yield
spread between government-related sectors--such as agency debentures, mortgage-
backed bonds, and commercial mortgage-backed securities--and Treasuries. One
emerging catalyst for tighter spreads is active participation from foreign
investors looking to diversify their portfolios away from domestic assets. These
investors are drawn to U.S. dollar denominated assets with stable and secure
cash flows, and this buying interest could reinforce existing demand for U.S.-
government-related products.
Our modestly overweighted position in mortgage-backed securities reflects the
sector's attractive incremental yield. As mortgage refinancings slow, limited
new supply of mortgage debt should be met by good investor demand. With supply
and demand in balance, we think that the sector's healthy yield advantage versus
Treasuries will provide a cushion if interest rates rise.
The flexibility to invest part of the bond portion of the Fund's portfolio in
non-government-related securities, such as asset-backed securities and corporate
bonds, enhanced results during the reporting period. We believe that these
sectors should continue to offer favorable total-return opportunities.
Whatever the markets or the economy may bring, the Fund will continue to seek to
realize current income consistent with reasonable opportunity for future growth
of capital and income.
Rudolph C. Carryl
Gary Goodenough
Christopher Harms
Edmund C. Spelman
Portfolio Managers
MacKay Shields LLC
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
9
MainStay Total Return Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
LONG-TERM BONDS (32.3%)+
ASSET-BACKED SECURITIES (2.0%)
AIRLINES (0.1%)
Continental Airlines, Inc.
Pass-Through Certificates
Series 971B
7.461%, due 10/1/14......... $ 444,302 $ 378,453
Northwest Airlines, Inc.
Pass-Through Certificates
Series 2001-1 Class C
7.626%, due 10/1/11......... 509,256 420,856
--------------
799,309
--------------
CONSUMER FINANCE (0.8%)
BMW Vehicle Owner Trust
Class 2003-A Series A3
1.94%, due 2/25/07.......... 1,645,000 1,647,247
Consumers Funding LLC
Series 2001-1 Class A6
5.76%, due 10/20/16......... 3,420,000 3,579,088
Volkswagen Auto Loan Enhanced
Trust
Series 2003-2 Class A3
2.27%, due 10/22/07......... 2,415,000 2,416,063
--------------
7,642,398
--------------
CONSUMER LOANS (0.2%)
Atlantic City Electric
Transition Funding LLC
Series 2002-1 Class A4
5.55%, due 10/20/23......... 1,600,000 1,605,286
--------------
DIVERSIFIED FINANCIAL SERVICES (0.5%)
Capital One Master Trust
Series 2001-5 Class A
5.30%, due 6/15/09.......... 910,000 968,934
DaimlerChrysler Auto Trust
Series 2001-D Class A3
3.15%, due 11/6/05.......... 4,297,476 4,327,227
--------------
5,296,161
--------------
MULTI-UTILITIES & UNREGULATED POWER (0.3%)
AES Eastern Energy L.P.
Pass-Through Certificates
Series 1999-A
9.00%, due 1/2/17........... 392,862 426,255
Public Service of New
Hampshire Funding LLC
Pass-Through Certificates
Series 2002-1 Class A
4.58%, due 2/1/10........... 1,654,994 1,734,450
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
MULTI-UTILITIES & UNREGULATED POWER (CONTINUED)
Tiverton/Rumford Power
Associates Ltd., L.P.
Pass-Through Certificates
9.00%, due 7/15/18 (c)...... $ 680,000 $ 557,600
--------------
2,718,305
--------------
THRIFTS & MORTGAGE FINANCE (0.1%)
Vanderbilt Mortgage Finance
Series 1999-B Class 1A4
6.545%, due 4/7/18.......... 900,000 936,791
--------------
Total Asset-Backed Securities
(Cost $18,711,799).......... 18,998,250
--------------
CORPORATE BONDS (10.3%)
AEROSPACE & DEFENSE (0.2%)
General Dynamics Corp.
4.50%, due 8/15/10.......... 1,030,000 1,044,161
Sequa Corp.
Series B
8.875%, due 4/1/08.......... 635,000 692,944
--------------
1,737,105
--------------
AIRLINES (0.1%)
Delta Air Lines, Inc.
Series C
6.65%, due 3/15/04.......... 40,000 39,900
8.30%, due 12/15/29......... 660,000 437,250
9.75%, due 5/15/21.......... 125,000 85,313
--------------
562,463
--------------
AUTO COMPONENTS (0.1%)
ArvinMeritor, Inc.
6.625%, due 6/15/07......... 195,000 191,100
Dana Corp.
9.00%, due 8/15/11.......... 210,000 234,675
Lear Corp.
Series B
8.11%, due 5/15/09.......... 185,000 213,213
--------------
638,988
--------------
AUTOMOBILES (0.3%)
DaimlerChrysler North America
Holdings, Inc.
6.50%, due 11/15/13......... 1,360,000 1,372,906
General Motors Corp.
8.375%, due 7/15/33......... 1,221,000 1,288,228
--------------
2,661,134
--------------
BEVERAGES (0.1%)
Anheuser-Busch Cos., Inc.
4.95%, due 1/15/14.......... 520,000 522,068
--------------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
Portfolio of Investments October 31, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CORPORATE BONDS (CONTINUED)
CAPITAL MARKETS (1.1%)
Bear Stearns Cos., Inc. (The)
4.00%, due 1/31/08.......... $1,080,000 $ 1,097,282
Goldman Sachs Group, Inc.
(The)
4.75%, due 7/15/13.......... 875,000 844,947
5.25%, due 10/15/13 (g)..... 4,860,000 4,869,185
Morgan Stanley
3.625%, due 4/1/08.......... 4,010,000 3,996,795
--------------
10,808,209
--------------
CHEMICALS (0.3%)
Equistar Chemicals L.P.
7.55%, due 2/15/26.......... 365,000 288,350
10.125%, due 9/1/08......... 270,000 283,500
10.625%, due 5/1/11 (c)..... 60,000 62,700
FMC Corp.
10.25%, due 11/1/09......... 380,000 444,600
Lyondell Chemical Co.
9.50%, due 12/15/08......... 425,000 425,000
Millennium America, Inc.
7.625%, due 11/15/26........ 1,065,000 910,575
PolyOne Corp.
10.625%, due 5/15/10........ 205,000 186,550
Terra Capital, Inc.
12.875%, due 10/15/08....... 390,000 452,400
--------------
3,053,675
--------------
COMMERCIAL BANKS (0.5%)
BankBoston North America
7.00%, due 9/15/07.......... 1,140,000 1,285,758
FleetBoston Financial Corp.
3.85%, due 2/15/08.......... 920,000 931,242
PNC Funding Corp.
5.25%, due 11/15/15......... 1,525,000 1,515,234
7.50%, due 11/1/09.......... 1,127,000 1,321,397
--------------
5,053,631
--------------
COMMERCIAL SERVICES & SUPPLIES (0.0%)(b)
Moore North America Finance,
Inc.
7.875%, due 1/15/11 (c)..... 285,000 307,800
--------------
COMMUNICATIONS EQUIPMENT (0.0%)(b)
Motorola, Inc.
6.75%, due 2/1/06........... 195,000 210,013
--------------
CONSUMER FINANCE (0.6%)
Capital One Bank
4.875%, due 5/15/08......... 335,000 343,525
Ford Motor Credit Co.
7.00%, due 10/1/13 (g)...... 1,990,000 1,956,256
General Motors Acceptance
Corp.
6.875%, due 8/28/12......... 875,000 896,937
Household Finance Corp.
6.75%, due 5/15/11.......... 730,000 816,933
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CONSUMER FINANCE (CONTINUED)
John Deere Capital Corp.
3.90%, due 1/15/08.......... $ 785,000 $ 794,776
MBNA Corp.
6.25%, due 1/17/07.......... 555,000 601,492
--------------
5,409,919
--------------
CONTAINERS & PACKAGING (0.2%)
Owens-Brockway Glass
Container, Inc.
7.75%, due 5/15/11.......... 430,000 453,650
8.875%, due 2/15/09......... 340,000 368,900
Rock-Tenn Co.
8.20%, due 8/15/11.......... 1,059,000 1,244,708
--------------
2,067,258
--------------
DIVERSIFIED FINANCIAL SERVICES (0.1%)
Citigroup, Inc.
4.875%, due 5/7/15.......... 585,000 566,869
J Paul Getty Trust
5.875%, due 10/1/33......... 755,000 741,594
--------------
1,308,463
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (1.5%)
Citizens Communications Co.
9.00%, due 8/15/31.......... 2,365,000 3,059,033
Intermedia Communications,
Inc. Series B
8.875%, due 11/1/07 (d)..... 1,485,000 1,377,338
11.25%, due 7/15/07 (d)..... 1,930,000 1,761,125
Qwest Capital Funding, Inc.
5.875%, due 8/3/04.......... 4,460,000 4,443,275
Qwest Corp.
5.625%, due 11/15/08........ 20,000 19,600
7.125%, due 11/15/43........ 100,000 88,750
7.20%, due 11/1/04.......... 320,000 328,000
7.25%, due 9/15/25.......... 190,000 178,600
8.875%, due 3/15/12 (c)..... 250,000 282,500
WorldCom, Inc.-WorldCom Group
8.25%, due 5/15/31 (d)...... 8,270,000 3,039,225
--------------
14,577,446
--------------
ELECTRIC UTILITIES (0.5%)
Cedar Brakes II LLC
9.875%, due 9/1/13.......... 504,846 509,894
CenterPoint Energy, Inc.
5.875%, due 6/1/08 (c)...... 540,000 555,743
MSW Energy Holdings, LLC
8.50%, due 9/1/10 (c)....... 400,000 428,000
Public Service Electric & Gas
Co.
Series C
5.375%, due 9/1/13.......... 2,610,000 2,675,889
Southern California Edison
Co.
8.00%, due 1/15/07.......... 390,000 437,775
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
MainStay Total Return Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CORPORATE BONDS (CONTINUED)
ELECTRIC UTILITIES (CONTINUED)
TECO Energy, Inc.
7.00%, due 5/1/12........... $ 235,000 $ 232,063
7.50%, due 6/15/10.......... 170,000 174,675
--------------
5,014,039
--------------
ELECTRICAL EQUIPMENT (0.2%)
Emerson Electric Co.
6.00%, due 8/15/32.......... 970,000 979,215
Thomas & Betts Corp.
6.625%, due 5/7/08.......... 10,000 10,125
7.25%, due 6/1/13........... 330,000 336,600
8.25%, due 1/15/04.......... 495,000 497,475
--------------
1,823,415
--------------
ENERGY EQUIPMENT & SERVICES (0.2%)
Entergy-Koch, L.P.
3.65%, due 8/20/06 (c)...... 2,125,000 2,139,401
Halliburton Co.
8.75%, due 2/15/21.......... 55,000 65,200
--------------
2,204,601
--------------
FOOD & STAPLES RETAILING (0.3%)
Wal-Mart Stores, Inc.
4.55%, due 5/1/13........... 2,475,000 2,431,034
--------------
FOOD PRODUCTS (0.0%)(b)
Dole Food Co., Inc.
8.75%, due 7/15/13.......... 110,000 120,175
Smithfield Foods, Inc.
7.625%, due 2/15/08 (g)..... 305,000 320,250
--------------
440,425
--------------
GAS UTILITIES (0.1%)
AmeriGas Partners
L.P./AmeriGas Eagle Finance
Corp.
Series B
8.875%, due 5/20/11......... 540,000 585,900
--------------
HEALTH CARE EQUIPMENT & SUPPLIES (0.0%)(b)
Apogent Technologies, Inc.
6.50%, due 5/15/13 (c)...... 355,000 366,538
--------------
HEALTH CARE PROVIDERS & SERVICES (0.4%)
Caremark Rx, Inc.
7.375%, due 10/1/06......... 550,000 589,875
HCA, Inc.
7.50%, due 11/15/95......... 330,000 307,456
8.36%, due 4/15/24.......... 210,000 224,949
8.75%, due 9/1/10........... 335,000 385,590
Manor Care, Inc.
6.25%, due 5/1/13........... 420,000 431,025
8.00%, due 3/1/08........... 535,000 597,863
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
HEALTH CARE PROVIDERS & SERVICES (CONTINUED)
McKesson Corp.
7.65%, due 3/1/27........... $ 345,000 $ 401,013
Medco Health Solutions, Inc.
7.25%, due 8/15/13.......... 565,000 601,114
Service Corp. International
6.50%, due 3/15/08.......... 70,000 70,175
7.20%, due 6/1/06........... 220,000 223,850
Tenet Healthcare Corp.
6.50%, due 6/1/12........... 190,000 176,225
6.875%, due 11/15/31........ 285,000 250,800
--------------
4,259,935
--------------
HOTELS, RESTAURANTS & LEISURE (0.2%)
Chumash Casino & Resort
Enterprise
9.00%, due 7/15/10 (c)...... 215,000 235,425
Harrah's Operating Co., Inc.
8.00%, due 2/1/11........... 370,000 430,629
ITT Corp.
7.375%, due 11/15/15........ 460,000 487,600
Mandalay Resort Group
7.00%, due 11/15/36......... 200,000 208,750
Park Place Entertainment
Corp.
8.125%, due 5/15/11......... 210,000 229,425
Station Casinos, Inc.
8.375%, due 2/15/08......... 285,000 309,938
--------------
1,901,767
--------------
HOUSEHOLD PRODUCTS (0.0%)(b)
Fort James Corp.
6.625%, due 9/15/04......... 145,000 149,350
--------------
INSURANCE (0.0%)(b)
Crum & Forster Holdings Corp.
10.375%, due 6/15/13 (c).... 210,000 225,750
--------------
IT SERVICES (0.0%)(b)
Unisys Corp.
6.875%, due 3/15/10......... 210,000 223,125
--------------
LEISURE EQUIPMENT & PRODUCTS (0.1%)
Hasbro, Inc.
5.60%, due 11/1/05.......... 160,000 167,600
8.50%, due 3/15/06.......... 405,000 447,525
--------------
615,125
--------------
MACHINERY (0.4%)
Cummins, Inc.
6.45%, due 3/1/05........... 205,000 212,431
Deere & Co.
7.85%, due 5/15/10.......... 2,398,000 2,887,815
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
Portfolio of Investments October 31, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CORPORATE BONDS (CONTINUED)
MACHINERY (CONTINUED)
Navistar International Corp.
Series B
9.375%, due 6/1/06.......... $ 415,000 $ 454,425
--------------
3,554,671
--------------
MEDIA (0.7%)
CSC Holdings, Inc.
Series B
7.625%, due 4/1/11.......... 290,000 295,800
Continental Cablevision, Inc.
8.875%, due 9/15/05......... 215,000 238,812
9.50%, due 8/1/13........... 300,000 344,671
Cox Communications, Inc.
7.125%, due 10/1/12......... 405,000 459,675
7.75%, due 11/1/10.......... 195,000 229,295
Houghton Mifflin Co.
7.20%, due 3/15/11.......... 210,000 221,550
Jones Intercable, Inc.
8.875%, due 4/1/07.......... 215,000 226,560
Liberty Media Corp.
8.50%, due 7/15/29.......... 350,000 406,766
News America, Inc.
7.25%, due 5/18/18.......... 775,000 871,439
Tele-Communications, Inc.
10.125%, due 4/15/22........ 375,000 522,378
Time Warner Cos., Inc.
8.05%, due 1/15/16.......... 400,000 468,589
Time Warner Entertainment Co.
L.P.
10.15%, due 5/1/12.......... 1,730,000 2,291,892
--------------
6,577,427
--------------
METALS & MINING (0.2%)
Allegheny Ludlum Corp.
6.95%, due 12/15/25......... 550,000 440,000
Peabody Energy Corp.
Series B
6.875%, due 3/15/13......... 390,000 410,475
United States Steel LLC
10.75%, due 8/1/08.......... 535,000 587,163
--------------
1,437,638
--------------
MULTILINE RETAIL (0.4%)
Target Corp.
6.35%, due 11/1/32.......... 2,475,000 2,593,332
8.60%, due 1/15/12.......... 675,000 840,999
--------------
3,434,331
--------------
MULTI-UTILITIES & UNREGULATED POWER (0.3%)
Consumers Energy Co.
6.25%, due 9/15/06.......... 460,000 500,842
PSE&G Power LLC
6.875%, due 4/15/06......... 1,180,000 1,291,999
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
MULTI-UTILITIES & UNREGULATED POWER (CONTINUED)
Westar Energy, Inc.
6.875%, due 8/1/04.......... $ 255,000 $ 263,606
7.125%, due 8/1/09.......... 425,000 440,406
7.875%, due 5/1/07.......... 430,000 484,288
--------------
2,981,141
--------------
OIL & GAS (0.6%)
Chesapeake Energy Corp.
7.50%, due 9/15/13 (c)...... 210,000 225,750
El Paso Corp.
7.80%, due 8/1/31........... 100,000 75,750
Forest Oil Corp.
8.00%, due 12/15/11......... 455,000 489,125
Gulfterra Energy Partners,
L.P.
10.625%, due 12/1/12........ 560,000 659,400
Tesoro Petroleum Corp.
8.00%, due 4/15/08.......... 430,000 455,800
Tosco Corp.
8.125%, due 2/15/30......... 2,827,000 3,549,615
Vintage Petroleum, Inc.
8.25%, due 5/1/12........... 425,000 465,375
--------------
5,920,815
--------------
PAPER & FOREST PRODUCTS (0.2%)
Georgia-Pacific Corp.
7.25%, due 6/1/28........... 270,000 245,700
8.875%, due
2/1/10-5/15/31.............. 435,000 476,988
9.375%, due 2/1/13.......... 95,000 109,250
Louisiana-Pacific Corp.
10.875%, due 11/15/08....... 190,000 223,250
Pope & Talbot, Inc.
8.375%, due 6/1/13.......... 985,000 960,375
--------------
2,015,563
--------------
PERSONAL PRODUCTS (0.1%)
Estee Lauder Cos., Inc.
5.75%, due 10/15/33......... 1,388,000 1,353,042
--------------
REAL ESTATE (0.1%)
Healthcare Realty Trust, Inc.
8.125%, due 5/1/11.......... 525,000 581,859
Hospitality Properties Trust
7.00%, due 3/1/08........... 270,000 288,602
--------------
870,461
--------------
TEXTILES, APPAREL & LUXURY GOODS (0.0%)(b)
Phillips-Van Heusen Corp.
8.125%, due 5/1/13 (c)...... 410,000 432,550
--------------
THRIFTS & MORTGAGE FINANCE (0.1%)
Washington Mutual, Inc.
4.00%, due 1/15/09.......... 855,000 848,247
--------------
TOBACCO (0.0%)(b)
Standard Commercial Corp.
8.875%, due 8/1/05 (g)...... 389,000 396,294
--------------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
MainStay Total Return Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CORPORATE BONDS (CONTINUED)
WIRELESS TELECOMMUNICATION SERVICES (0.1%)
AT&T Wireless Services, Inc.
8.75%, due 3/1/31........... $ 687,000 $ 826,150
--------------
Total Corporate Bonds
(Cost $99,135,388).......... 99,807,506
--------------
FOREIGN BONDS (1.4%)
BEVERAGES (0.0%)(b)
Coca-Cola HBC Finance BV
5.125%, due 9/17/13 (c)..... 430,000 430,138
--------------
COMMERCIAL BANKS (0.0%)(b)
HSBC Holding PLC
5.25%, due 12/12/12......... 250,000 253,772
--------------
CONTAINERS & PACKAGING (0.0%)(b)
Norampac, Inc.
6.75%, due 6/1/13 (c)....... 375,000 390,000
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.2%)
INTELSAT Ltd.
6.50%, due 11/1/13 (c)...... 535,000 545,786
Telefonos de Mexico S.A. de
C.V.
8.25%, due 1/26/06.......... 655,000 724,594
--------------
1,270,380
--------------
ELECTRIC UTILITIES (0.1%)
SP POWERASSETS Ltd.
5.00%, due 10/22/13 (c)..... 625,000 623,048
--------------
FOREIGN GOVERNMENTS (0.3%)
Province of Quebec
5.00%, due 7/17/09.......... 1,720,000 1,810,646
Russian Federation
5.00%, due 3/31/30.......... 630,000 588,105
United Mexican States
6.625%, due 3/3/15.......... 530,000 544,575
--------------
2,943,326
--------------
MARINE (0.1%)
Stena AB
9.625%, due 12/1/12......... 560,000 610,400
--------------
METALS & MINING (0.2%)
BHP Finance USA Ltd.
4.80%, due 4/15/13.......... 1,240,000 1,233,939
Codelco, Inc.
5.50%, due 10/15/13 (c)..... 1,000,000 1,004,525
--------------
2,238,464
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
PAPER & FOREST PRODUCTS (0.0%)(b)
Norske Skog Canada Ltd.
Series D
8.625%, due 6/15/11......... $ 255,000 $ 261,375
--------------
TRANSPORTATION INFRASTRUCTURE (0.2%)
PSA Corp. Ltd.
7.125%, due 8/1/05 (c)...... 1,750,000 1,903,540
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.3%)
Vodafone Group PLC
5.00%, due 12/16/13......... 2,560,000 2,521,756
--------------
Total Foreign Bonds
(Cost $13,158,517).......... 13,446,199
--------------
MUNICIPAL BONDS (0.0%)(b)
NEW JERSEY (0.0%)(b)
Tobacco Settlement Financing
Corp.
6.00%, due 6/1/37........... 20,000 16,408
6.25%, due 6/1/43........... 115,000 96,429
6.375%, due 6/1/32.......... 25,000 22,416
6.75%, due 6/1/39........... 45,000 40,901
--------------
176,154
--------------
RHODE ISLAND (0.0%)(b)
Tobacco Settlement Financing
Corp.
Series A
6.25%, due 6/1/42........... 135,000 113,293
--------------
Total Municipal Bonds
(Cost $278,008)............. 289,447
--------------
MORTGAGE-BACKED SECURITIES (0.4%)
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (0.4%)
Fanniemae Grantor Trust
Series 2003-T1 Class B
4.491%, due 11/25/12........ 3,780,000 3,743,644
--------------
Total Mortgage-Backed
Securities (Cost
$3,727,047)................. 3,743,644
--------------
U.S. GOVERNMENT & FEDERAL AGENCIES (18.1%)
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (0.2%)
5.00%, due 8/1/33........... 2,333,171 2,297,646
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (6.5%)
4.50%, due 11/18/18 TBA
(e)......................... 10,860,000 10,846,425
4.625%, due 5/1/13 (g)...... 8,640,000 8,318,359
4.75%, due 1/2/07........... 5,345,000 5,608,060
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
Portfolio of Investments October 31, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (CONTINUED)
5.50%, due 5/2/06........... $2,160,000 $ 2,310,939
5.50%, due 11/13/33-1/14/34
TBA (e)..................... 17,400,000 17,488,986
6.00%, due 11/13/33-1/14/34
TBA (e)..................... 10,425,000 10,689,691
6.25%, due 2/1/11........... 7,165,000 7,836,769
--------------
63,099,229
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (4.8%)
4.00%, due 9/1/18 (f)....... 4,376,449 4,265,340
4.50%, due 7/1/18 (f)....... 7,578,882 7,577,245
5.50%, due 12/1/16-1/1/17
(f)......................... 8,734,891 8,996,387
6.00%, due 5/1/29-8/1/32
(f)......................... 9,808,446 10,079,604
6.50%, due 6/1/31-10/1/31
(f)......................... 6,589,858 6,847,159
7.00%, due 2/1/32 (f)....... 3,367,014 3,545,209
7.50%, due 8/1/31 (f)....... 5,336,640 5,686,468
--------------
46,997,412
--------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (1.7%)
6.00%, due
4/15/29-8/15/32............. 10,273,057 10,620,102
7.50%, due
12/15/23-12/15/28........... 5,674,099 6,080,866
--------------
16,700,968
--------------
UNITED STATES TREASURY BONDS (0.9%)
5.375%, due 2/15/31 (g)..... 1,759,000 1,817,747
6.25%, due
8/15/23-5/15/30............. 4,720,000 5,353,981
6.875%, due 8/15/25......... 935,000 1,133,358
7.50%, due 11/15/16......... 215,000 271,916
8.75%, due 8/15/20.......... 287,000 407,675
--------------
8,984,677
--------------
UNITED STATES TREASURY NOTES (4.0%)
3.00%, due 2/15/08 (g)...... 10,270,000 10,275,618
4.375%, due 5/15/07......... 4,726,000 5,000,330
4.625%, due 5/15/06 (g)..... 3,900,000 4,139,027
5.75%, due 11/15/05 (g)..... 10,745,000 11,576,061
6.00%, due 8/15/09.......... 1,025,000 1,158,971
6.75%, due 5/15/05 (g)...... 5,679,000 6,123,558
--------------
38,273,565
--------------
Total U.S. Government &
Federal Agencies
(Cost $174,011,714)......... 176,353,497
--------------
YANKEE BONDS (0.1%) (h)
INSURANCE (0.0%)(b)
Fairfax Financial Holdings
Ltd.
7.75%, due 12/15/03......... 115,000 115,000
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
MARINE (0.0%)(b)
Sea Containers Ltd.
Series B
10.75%, due 10/15/06........ $ 160,000 $ 162,800
--------------
MEDIA (0.0%)(b)
Rogers Cablesystem, Ltd.
11.00%, due 12/1/15......... 450,000 513,000
--------------
OIL & GAS (0.1%)
Husky Oil, Ltd.
8.90%, due 8/15/28.......... 765,000 881,663
--------------
Total Yankee Bonds
(Cost $1,577,017)........... 1,672,463
--------------
Total Long-Term Bonds
(Cost $310,599,490)......... 314,311,006
--------------
<Caption>
SHARES
-----------
COMMON STOCKS (68.3%)
AEROSPACE & DEFENSE (1.9%)
Lockheed Martin Corp......... 143,600 6,657,296
United Technologies Corp.
(g)......................... 144,000 12,195,360
--------------
18,852,656
--------------
AIR FREIGHT & LOGISTICS (1.3%)
FedEx Corp. ................. 164,000 12,424,640
--------------
AUTOMOBILES (1.2%)
Harley-Davidson, Inc. (g).... 256,400 12,155,924
--------------
BEVERAGES (1.5%)
Coca-Cola Co. (The).......... 148,200 6,876,480
PepsiCo, Inc. ............... 154,900 7,407,318
--------------
14,283,798
--------------
BIOTECHNOLOGY (1.4%)
Amgen, Inc. (a).............. 159,100 9,826,016
Genentech, Inc. (a).......... 50,600 4,147,682
--------------
13,973,698
--------------
CAPITAL MARKETS (1.1%)
Morgan Stanley............... 202,900 11,133,123
--------------
CHEMICALS (2.0%)
Air Products & Chemicals,
Inc. ....................... 187,400 8,509,834
Praxair, Inc. ............... 155,400 10,812,732
--------------
19,322,566
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
MainStay Total Return Fund
<Table>
<Caption>
SHARES VALUE
-------------------------------
COMMON STOCKS (CONTINUED)
COMMERCIAL BANKS (1.6%)
Bank of America Corp. ....... 114,600 $ 8,678,658
Fifth Third Bancorp.......... 115,800 6,711,768
--------------
15,390,426
--------------
COMMERCIAL SERVICES & SUPPLIES (1.1%)
Cendant Corp. (a)............ 537,400 10,979,082
--------------
COMMUNICATIONS EQUIPMENT (1.4%)
Cisco Systems, Inc. (a)...... 645,800 13,548,884
--------------
COMPUTERS & PERIPHERALS (3.4%)
Dell, Inc. (a)............... 293,900 10,615,668
Hewlett-Packard Co. ......... 530,200 11,828,762
International Business
Machines Corp. ............. 121,800 10,898,664
--------------
33,343,094
--------------
CONSUMER FINANCE (1.2%)
American Express Co. ........ 252,700 11,859,211
--------------
DIVERSIFIED FINANCIAL SERVICES (1.1%)
Citigroup, Inc. ............. 229,593 10,882,708
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.8%)
Agilent Technologies, Inc.
(a)......................... 324,500 8,086,540
--------------
ENERGY EQUIPMENT & SERVICES (1.1%)
Baker Hughes, Inc. .......... 118,700 3,354,462
BJ Services Co. (a).......... 123,300 4,045,473
Weatherford International
Ltd. (a).................... 89,700 3,117,075
--------------
10,517,010
--------------
FOOD & STAPLES RETAILING (3.2%)
Sysco Corp. ................. 291,300 9,805,158
Walgreen Co. ................ 307,500 10,707,150
Wal-Mart Stores, Inc. (g).... 176,300 10,392,885
--------------
30,905,193
--------------
HEALTH CARE EQUIPMENT & SUPPLIES (2.5%)
Baxter International,
Inc. ....................... 213,800 5,682,804
Boston Scientific Corp.
(a)......................... 147,900 10,015,788
Medtronic, Inc. ............. 194,700 8,872,479
--------------
24,571,071
--------------
HEALTH CARE PROVIDERS & SERVICES (4.8%)
Cardinal Health, Inc. ....... 168,700 10,010,658
Caremark Rx, Inc. (a)........ 135,600 3,396,780
HCA, Inc. ................... 258,500 9,887,625
UnitedHealth Group, Inc. .... 238,400 12,129,792
WellPoint Health Networks,
Inc. (a).................... 125,200 11,130,280
--------------
46,555,135
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
-------------------------------
HOTELS, RESTAURANTS & LEISURE (0.1%)
International Game
Technology.................. 37,200 $ 1,218,300
--------------
HOUSEHOLD DURABLES (0.4%)
Lennar Corp. Class A......... 37,700 3,462,745
--------------
HOUSEHOLD PRODUCTS (0.9%)
Colgate-Palmolive Co. ....... 172,100 9,153,999
--------------
INDUSTRIAL CONGLOMERATES (1.1%)
General Electric Co. ........ 355,100 10,301,451
--------------
INSURANCE (0.9%)
Marsh & McLennan Cos.,
Inc. ....................... 198,500 8,485,875
--------------
INTERNET & CATALOG RETAIL (1.1%)
InterActive Corp. (a)(g)..... 279,000 10,242,090
--------------
IT SERVICES (1.0%)
First Data Corp. ............ 265,500 9,478,350
--------------
MACHINERY (2.5%)
Danaher Corp. (g)............ 143,800 11,913,830
Illinois Tool Works, Inc.
(g)......................... 165,800 12,194,590
--------------
24,108,420
--------------
MEDIA (4.2%)
Clear Channel Communications,
Inc. ....................... 257,030 10,491,965
Gannett Co., Inc. (g)........ 102,900 8,654,919
Omnicom Group, Inc. ......... 141,300 11,275,740
Viacom, Inc. Class B......... 255,999 10,206,680
--------------
40,629,304
--------------
MULTILINE RETAIL (2.0%)
Kohl's Corp. (a)............. 178,700 10,019,709
Target Corp. ................ 248,200 9,863,468
--------------
19,883,177
--------------
PHARMACEUTICALS (4.5%)
Forest Laboratories, Inc.
(a)......................... 186,600 9,331,866
Johnson & Johnson (g)........ 236,300 11,892,979
Pfizer, Inc. ................ 403,300 12,744,280
Teva Pharmaceutical
Industries Ltd. (i)(g)...... 166,700 9,483,563
--------------
43,452,688
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (6.4%)
Analog Devices, Inc. (a)..... 294,700 13,064,051
Applied Materials, Inc.
(a)......................... 362,100 8,462,277
Intel Corp. ................. 421,500 13,930,575
KLA-Tencor Corp. (a)......... 132,600 7,601,958
Maxim Integrated Products,
Inc. ....................... 141,100 7,014,081
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
Portfolio of Investments October 31, 2003
<Table>
<Caption>
SHARES VALUE
-------------------------------
COMMON STOCKS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (CONTINUED)
Texas Instruments, Inc. ..... 429,300 $ 12,415,356
--------------
62,488,298
--------------
SOFTWARE (6.0%)
Electronic Arts, Inc. (a).... 111,200 11,013,248
Microsoft Corp............... 539,400 14,105,310
Oracle Corp. (a)............. 906,700 10,844,132
Symantec Corp. (a)........... 155,500 10,364,075
VERITAS Software Corp. (a)... 335,800 12,139,170
--------------
58,465,935
--------------
SPECIALTY RETAIL (3.4%)
Bed Bath & Beyond, Inc.
(a)(g)...................... 267,600 11,303,424
Lowe's Cos., Inc. (g)........ 188,400 11,102,412
TJX Cos., Inc. (The)......... 497,000 10,432,030
--------------
32,837,866
--------------
THRIFTS & MORTGAGE FINANCE (1.2%)
Fannie Mae................... 158,500 11,362,865
--------------
Total Common Stocks (Cost
$605,095,755)............... 664,356,122
--------------
<Caption>
PRINCIPAL
AMOUNT
-----------
SHORT-TERM INVESTMENTS (14.7%)
COMMERCIAL PAPER (1.7%)
American Express Credit Corp.
1.02%, due 11/4/03.......... $1,575,000 $ 1,574,866
Federal National Mortgage
Association
1.00%, due 11/5/03.......... 500,000 499,944
1.04%, due 12/3/03.......... 2,500,000 2,497,688
UBS Finance Delaware LLC
1.04%, due 11/3/03.......... 11,955,000 11,954,309
--------------
Total Commercial Paper
(Cost $16,526,807).......... 16,526,807
--------------
<Caption>
SHARES
-----------
INVESTMENT COMPANIES (4.5%)
AIM Institutional Funds Group
(j)......................... 23,537,120 23,537,120
Merrill Lynch Premier
Institutional Fund.......... 20,190,317 20,190,317
--------------
Total Investment Companies
(Cost $43,727,437) 43,727,437
--------------
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
MASTER NOTE (2.1%)
Banc of America Securities
LLC
1.19%, due 11/3/03 (j)...... $19,719,000 $ 19,719,000
--------------
Total Master Note
(Cost $19,719,000).......... 19,719,000
--------------
REPURCHASE AGREEMENTS (6.4%)
Banc One Capital Markets,
Inc.
1.180%, dated 10/31/03
due 11/3/03
Proceeds at Maturity
$1,000,096 (j)
(Collateralized by Various
Bonds with a Principal
Amount of $1,174,526 and a
Market Value of
$1,050,000)................. 1,000,000 1,000,000
--------------
Countrywide Securities Corp.
1.143%, dated 10/31/03
due 11/3/03
Proceeds at Maturity
$1,072,100 (j)
(Collateralized by Various
Bonds with a Principal
Amount of $1,265,458 and a
Market Value of
$1,098,539)................. 1,072,000 1,072,000
--------------
Credit Suisse First Boston
LLC
1.113%, dated 10/31/03
due 11/3/03
Proceeds at Maturity
$14,911,360 (j)
(Collateralized by Various
Bonds with a Principal
Amount of $13,854,605 and a
Market Value of
$15,097,341)................ 14,910,000 14,910,000
--------------
Lehman Brothers Inc.
1.113%, dated 10/31/03
due 11/3/03
Proceeds at Maturity
$6,893,629 (j)
(Collateralized by Various
Bonds with a Principal
Amount of $7,099,435 and a
Market Value of
$7,017,788)................. 6,893,000 6,893,000
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
MainStay Total Return Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
SHORT-TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENTS (CONTINUED)
Merrill Lynch Pierce Fenner &
Smith, Inc.
1.143%, dated 10/31/03
due 11/3/03
Proceeds at Maturity
$38,544,611 (j)
(Collateralized by Various
Bonds with a Principal
Amount of $37,186,154 and a
Market Value of
$40,000,741)................ $38,541,000 $ 38,541,000
--------------
Total Repurchase Agreements
(Cost $62,416,000).......... 62,416,000
--------------
Total Short-Term Investments
(Cost $142,389,244)......... 142,389,244
--------------
Total Investments
(Cost $1,058,084,489) (k)... 115.3% 1,121,056,372(l)
Liabilities in Excess of
Cash and Other Assets....... (15.3) (148,408,917)
----------- --------------
Net Assets................... 100.0% $ 972,647,455
=========== ==============
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Issue in default.
(e) 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.
(f) Segregated or partially segregated as collateral for TBA.
(g) Represent securities out on loan or a portion which is
out on loan. (See Note 2)
(h) Yankee Bond--Dollar denominated bonds issued in the
United States by foreign banks and corporations.
(i) ADR-American Depository Receipt
(j) Represents security, or portion thereof, purchased with
cash collateral received for securities on loan.
(k) The cost for federal income tax purposes is
$1,062,464,957.
(l) At October 31, 2003, net unrealized appreciation was
$58,591,415 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 $94,802,730 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $36,211,315.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$1,058,084,489) including $101,788,780
market value of securities loaned......................... $1,121,056,372
Cash........................................................ 54,777
Deposit with broker for securities loaned................... 5,580
Receivables:
Investment securities sold................................ 13,382,639
Dividends and interest.................................... 4,006,150
Fund shares sold.......................................... 197,551
Other assets................................................ 14,413
--------------
Total assets.......................................... 1,138,717,482
--------------
LIABILITIES:
Securities lending collateral............................... 105,677,700
Payables:
Investment securities purchased........................... 56,771,102
Fund shares redeemed...................................... 1,541,428
NYLIFE Distributors....................................... 737,256
Transfer agent............................................ 592,307
Manager................................................... 528,291
Trustees.................................................. 11,422
Custodian................................................. 9,454
Accrued expenses............................................ 201,067
--------------
Total liabilities..................................... 166,070,027
--------------
Net assets.................................................. $ 972,647,455
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 79,669
Class B................................................... 475,057
Class C................................................... 2,777
Additional paid-in capital.................................. 943,703,112
Accumulated undistributed net investment income............. 629,497
Accumulated net realized loss on investments................ (35,243,745)
Accumulated net realized gain on foreign currency
transactions.............................................. 29,205
Net unrealized appreciation on investments.................. 62,971,883
--------------
Net assets.................................................. $ 972,647,455
==============
CLASS A
Net assets applicable to outstanding shares................. $ 138,786,771
==============
Shares of beneficial interest outstanding................... 7,966,923
==============
Net asset value per share outstanding....................... $ 17.42
Maximum sales charge (5.50% of offering price).............. 1.01
--------------
Maximum offering price per share outstanding................ $ 18.43
==============
CLASS B
Net assets applicable to outstanding shares................. $ 829,015,584
==============
Shares of beneficial interest outstanding................... 47,505,709
==============
Net asset value and offering price per share outstanding.... $ 17.45
==============
CLASS C
Net assets applicable to outstanding shares................. $ 4,845,100
==============
Shares of beneficial interest outstanding................... 277,656
==============
Net asset value and offering price per share outstanding.... $ 17.45
==============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
------------- -------------
INVESTMENT INCOME:
Income:
Interest.................................................. $ 15,645,189 $ 27,059,160
Dividends (a)............................................. 4,154,195 5,203,922
Income from securities loaned - net....................... 151,955 182,804
------------ -------------
Total income............................................ 19,951,339 32,445,886
------------ -------------
Expenses:
Distribution--Class B..................................... 4,973,319 7,093,258
Distribution--Class C..................................... 29,170 45,706
Manager................................................... 4,891,225 7,041,860
Transfer agent............................................ 2,977,368 4,023,517
Service--Class A.......................................... 301,153 444,523
Service--Class B.......................................... 1,657,725 2,364,656
Service--Class C.......................................... 9,726 15,230
Shareholder communication................................. 161,294 260,299
Professional.............................................. 140,929 182,515
Recordkeeping............................................. 100,956 139,643
Custodian................................................. 96,038 127,159
Trustees.................................................. 40,041 54,677
Registration.............................................. 36,221 5,245
Miscellaneous............................................. 47,005 94,837
------------ -------------
Total expenses before waiver............................ 15,462,170 21,893,125
Fees waived by Manager and Subadvisor....................... -- (63,277)
------------ -------------
Net expenses............................................ 15,462,170 21,829,848
------------ -------------
Net investment income....................................... 4,489,169 10,616,038
------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on investments from:
Security transactions..................................... 1,570,194 (29,384,397)
Foreign currency transactions............................. 29,205 592,581
------------ -------------
Net realized gain (loss) on investments and foreign currency
transactions.............................................. 1,599,399 (28,791,816)
------------ -------------
Net change in unrealized depreciation on investments........ 121,630,260 (220,645,625)
------------ -------------
Net realized and unrealized gain (loss) on investments and
foreign currency transactions............................. 123,229,659 (249,437,441)
------------ -------------
Net increase (decrease) in net assets resulting from
operations................................................ $127,718,828 (238,821,403)
============ =============
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
(a) Dividends recorded net of foreign withholding taxes of $3,943 and $8,548 for
2003 and 2002, respectively.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
--------------- -------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 4,489,169 $ 10,616,038 16,291,953
Net realized gain (loss) on investments and foreign
currency translations................................... 1,599,399 (28,791,816) (6,219,169)
Net change in unrealized appreciation (depreciation) on
investments............................................. 121,630,260 (220,645,625) (220,836,904)
--------------- -------------- --------------
Net increase (decrease) in net assets resulting from
operations.............................................. 127,718,828 (238,821,403) (210,764,120)
--------------- -------------- --------------
Dividends to shareholders:
From net investment income:
Class A................................................. (1,369,286) (2,917,833) (4,003,522)
Class B................................................. (2,893,322) (8,537,041) (12,479,788)
Class C................................................. (17,144) (54,696) (84,650)
From net realized gain on investments:
Class A................................................. -- -- (2,578,185)
Class B................................................. -- -- (13,074,863)
Class C................................................. -- -- (86,251)
--------------- -------------- --------------
Total dividends and distributions to shareholders..... (4,279,752) (11,509,570) (32,307,259)
--------------- -------------- --------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 35,201,986 39,440,166 76,203,286
Class B................................................. 33,763,017 45,224,081 69,625,456
Class C................................................. 545,522 1,116,671 1,425,144
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 1,294,851 2,779,055 6,493,322
Class B................................................. 2,811,248 8,247,653 24,882,823
Class C................................................. 14,923 47,065 160,565
--------------- -------------- --------------
73,631,547 96,854,691 178,790,596
Cost of shares redeemed:
Class A................................................. (57,123,036) (82,365,310) (58,662,695)
Class B................................................. (104,608,118) (195,502,933) (201,154,466)
Class C................................................. (831,519) (2,821,262) (2,282,892)
--------------- -------------- --------------
Decrease in net assets derived from capital share
transactions........................................ (88,931,126) (183,834,814) (83,309,457)
--------------- -------------- --------------
Net increase (decrease) in net assets................. 34,507,950 (434,165,787) (326,380,836)
NET ASSETS:
Beginning of period......................................... 938,139,505 1,372,305,292 1,698,686,128
--------------- -------------- --------------
End of period............................................... $ 972,647,455 $ 938,139,505 $1,372,305,292
=============== ============== ==============
Accumulated undistributed (distributions in excess of) net
investment income at end of period........................ $ 629,497 $ (18,107) $ 283,585
=============== ============== ==============
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
---------------------------------------------------------------------------------
January 1,
2003
through Year ended December 31,
October 31, ----------------------------------------------------------------
2003* 2002 2001 2000 1999 1998
----------- -------- -------- -------- -------- --------
Net asset value at beginning of period........ $ 15.29 $ 18.92 $ 22.14 $ 27.23 $ 24.96 $ 21.44
-------- -------- -------- -------- -------- --------
Net investment income......................... 0.16(b) 0.27 0.34(c) 0.38 0.34 0.39
Net realized and unrealized gain (loss) on
investments.................................. 2.12 (3.62) (2.99)(c) (1.62) 3.69 5.29
-------- -------- -------- -------- -------- --------
Total from investment operations.............. 2.28 (3.35) (2.65) (1.24) 4.03 5.68
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income................... (0.15) (0.28) (0.35) (0.39) (0.34) (0.39)
From net realized gain on investments........ -- -- (0.22) (3.46) (1.42) (1.77)
-------- -------- -------- -------- -------- --------
Total dividends and distributions............. (0.15) (0.28) (0.57) (3.85) (1.76) (2.16)
-------- -------- -------- -------- -------- --------
Net asset value at end of period.............. $ 17.42 $ 15.29 $ 18.92 $ 22.14 $ 27.23 $ 24.96
======== ======== ======== ======== ======== ========
Total investment return (a)................... 15.02% (17.75%) (11.92%) (4.48%) 16.46% 26.93%
Ratios (to average net assets)/
Supplemental Data:
Net investment income...................... 1.21%+ 1.57% 1.74%(c) 1.42% 1.32% 1.66%
Net expenses............................... 1.33%+ 1.30% 1.18% 1.13% 1.13% 1.16%
Expenses (before waiver)................... 1.33%+ 1.31% 1.21% 1.15% 1.16% 1.18%
Portfolio turnover rate....................... 67% 96% 120% 123% 125% 169%
Net assets at end of period (in 000's)........ $138,787 $140,298 $221,022 $231,649 $203,924 $152,598
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
(b) Per share data based on average shares outstanding during
the period.
(c) As required, effective January 1, 2001 the Fund has adopted
the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt
securities. The effect of this change for the year ended
December 31, 2001 is shown below. Per share ratios and
supplemental data for periods prior to January 1, 2001 have
not been restated to reflect this change in presentation.
</Table>
<Table>
<Caption>
Class A Class B Class C
------- ------- -------
Decrease net investment income.............................. (0.02) (0.02) (0.02)
Increase net realized and unrealized gains and losses....... 0.02 0.02 0.02
Decrease ratio of net investment income..................... (0.10%) (0.10%) (0.10%)
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<Table>
<Caption>
Class B Class C
- ---------------------------------------------------------------------------- --------------------------------------------------
January 1, January 1,
2003 2003
through Year ended December 31, through Year ended December 31,
October 31, ------------------------------------------------------------ October 31, ------------------------------------
2003* 2002 2001 2000 1999 1998 2003* 2002 2001 2000 1999
----------- -------- ---------- ---------- ---------- ---------- ----------- ------- ------- ------ ------
$ 15.32 $ 18.95 $ 22.17 $ 27.23 $ 24.96 $ 21.45 $15.32 $ 18.95 $ 22.17 $27.23 $24.96
-------- -------- ---------- ---------- ---------- ---------- ------ ------- ------- ------ ------
0.06(b) 0.14 0.20(c) 0.18 0.15 0.21 0.06(b) 0.14 0.20(c) 0.18 0.15
2.13 (3.61) (3.00)(c) (1.60) 3.69 5.28 2.13 (3.61) (3.00)(c) (1.60) 3.69
-------- -------- ---------- ---------- ---------- ---------- ------ ------- ------- ------ ------
2.19 (3.47) (2.80) (1.42) 3.84 5.49 2.19 (3.47) (2.80) (1.42) 3.84
-------- -------- ---------- ---------- ---------- ---------- ------ ------- ------- ------ ------
(0.06) (0.16) (0.20) (0.18) (0.15) (0.21) (0.06) (0.16) (0.20) (0.18) (0.15)
-- -- (0.22) (3.46) (1.42) (1.77) -- -- (0.22) (3.46) (1.42)
-------- -------- ---------- ---------- ---------- ---------- ------ ------- ------- ------ ------
(0.06) (0.16) (0.42) (3.64) (1.57) (1.98) (0.06) (0.16) (0.42) (3.64) (1.57)
-------- -------- ---------- ---------- ---------- ---------- ------ ------- ------- ------ ------
$ 17.45 $ 15.32 $ 18.95 $ 22.17 $ 27.23 $ 24.96 $17.45 $ 15.32 $ 18.95 $22.17 $27.23
======== ======== ========== ========== ========== ========== ====== ======= ======= ====== ======
14.33% (18.37%) (12.61%) (5.10%) 15.60% 25.96% 14.33% (18.37%) (12.61%) (5.10%) 15.60%
0.46%+ 0.82% 0.99%(c) 0.67% 0.57% 0.91% 0.46%+ 0.82% 0.99%(c) 0.67% 0.57%
2.08%+ 2.05% 1.93% 1.88% 1.88% 1.91% 2.08%+ 2.05% 1.93% 1.88% 1.88%
2.08%+ 2.06% 1.96% 1.90% 1.91% 1.93% 2.08%+ 2.06% 1.96% 1.90% 1.91%
67% 96% 120% 123% 125% 169% 67% 96% 120% 123% 125%
$829,016 $793,340 $1,143,755 $1,457,366 $1,678,696 $1,482,411 $4,845 $ 4,501 $ 7,528 $9,671 $5,579
<Caption>
Class C
--------------
September 1**
through
December 31,
1998
--------------
$21.70
------
0.11
5.03
------
5.14
------
(0.11)
(1.77)
------
(1.88)
------
$24.96
======
23.94%
0.91%+
1.91%+
1.93%+
169%
$ 359
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
MainStay Total Return Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay Total
Return Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and within one year of purchase of Class C
shares. Distribution of Class B shares and Class C shares commenced on December
29, 1987 and September 1, 1998, respectively. Class A shares, Class B shares and
Class C shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares and Class C shares are subject to higher distribution fee rates.
Each class of shares bears distribution and/or service fee payments under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to realize current income consistent with
reasonable opportunity for future growth of capital and income.
The Fund also invests in Foreign securities which carry certain risks in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. The ability of issuers of debt
securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Debt securities are valued at prices supplied by a pricing agent
selected by the Fund's Manager, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
24
Notes to Financial Statements
by the Fund's Manager to be representative of market values at the regular close
of business of the New York Stock Exchange. Temporary cash investments acquired
over 60 days to maturity are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and ratings), both as furnished by independent
pricing services. Other temporary cash investments are valued at amortized cost,
which approximates market value. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value.
(B) MORTGAGE DOLLAR ROLLS. The fund enters into mortgage dollar roll ("MDR")
transactions for which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the portfolio of investments and liabilities for such purchase
commitments are included as payables for investments purchased. The Fund
maintains a segregated account with its custodian containing securities from its
portfolio having a value not less than the repurchase price, including accrued
interest. MDR transactions involve certain risks, including the risk that the
MBS returned to the Fund at the end of the roll, while substantially similar,
could be inferior to what was initially sold to the counterparty.
(C) SECURITIES LENDING. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are collateralized by cash or securities at
least equal at all times to the market value of the securities loaned. The Fund
may bear the risk of delay in recovery of, or loss of rights in, the securities
loaned should the borrower of the securities experience financial difficulty.
The Fund receives compensation for lending its securities in the form of fees or
it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(D) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(E) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These
25
MainStay Total Return Fund
"book/tax differences" are either considered temporary or permanent in nature.
To the extent these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal tax basis
treatment; temporary differences do not require reclassification.
The following table discloses the current year reclassification between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2003, are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT LOSS ON
INCOME INVESTMENTS
- -------------- ------------
$438,187 $(438,187)
</Table>
The reclassifications for the Fund are primarily due to foreign currency gain,
premium amortization adjustments and paydown gain (loss).
(F) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method and include gains
and losses from repayments of principal on mortgage backed securities. Dividend
income is recognized on the ex-dividend date and interest income is accrued as
earned. Discounts and premiums on securities purchased, other than short-term
securities, for the Fund are accreted and amortized, respectively, on the
constant yield method over the life of the respective securities or, in the case
of a callable security, over the period to the first date of call. Discounts and
premiums on short-term securities are accreted and amortized, respectively, on
the straight line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(G) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(H) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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.
Certain amounts have been reclassified to conform to current year presentation.
Such reclassifications had no effect on the Fund's net investment income or net
assets.
26
Notes to Financial Statements (continued)
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
Through March 11, 2002, the Trust, on behalf of the Fund, paid the Manager a
monthly fee for services performed and the facilities furnished at an annual
rate of 0.64% of the Fund's average daily net assets and had voluntarily
established a fee breakpoint of 0.60% on assets in excess of $500 million.
Effective March 12, 2002, the Manager established contractual fee breakpoints
for its management fee of 0.64% annually on assets up to $500 million and 0.60%
annually on assets in excess of $500 million. For the ten months ended October
31, 2003 and year ended December 31, 2002, the Manager earned from the Fund
$4,891,225 and $7,041,860, respectively.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor through March 11, 2002 a monthly fee at
an annual rate of 0.32% of the average daily net assets of the Fund. To the
extent that the Manager had voluntarily established a fee breakpoint, the
Subadvisor had voluntarily agreed to do so proportionately. Effective March 12,
2002, the Manager pays the Subadvisor a monthly fee of 0.32% on assets up to
$500 million and 0.30% on assets in excess of $500 million.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The distribution plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
27
MainStay Total Return Fund
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $3,483 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $21,440, $265,345 and $674, respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003, and the year ended December 31, 2002 amounted to
$2,977,368 and $4,023,517, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the Total Return
Fund only pays a portion of the fees identified above.
(F) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $19,667 for the ten months ended
October 31, 2003, and $21,492 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $100,956 for the ten months ended October
31, 2003, and $139,643 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED NET ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
INVESTMENT INCOME AND OTHER LOSSES APPRECIATION GAIN
- ----------------- ------------------- ------------ -----------------
632,625 (30,837,200) 58,591,415 28,386,840
</Table>
28
Notes to Financial Statements (continued)
The difference between the book-basis and tax-basis unrealized appreciation is
due to premium amortization adjustments and wash sale deferrals.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $30,837,200 were available, as shown in the table below, to the extent
provided by the regulations, to offset future realized gains through the years
indicated. To the extent that these carryforwards are used to offset future
capital gains, it is probable that the capital gains so offset will not be
distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
- ----------------------------- --------
2009................... $ 2,027
2010................... 28,810
-------
$30,837
=======
</Table>
The Fund utilized $3,506,043 of capital loss carryforwards for the ten months
ended October 31, 2003.
The tax character of distributions paid during the ten months ended October 31,
2003 and the years ended December 31, 2002 and December 31, 2001, shown in the
Statement of Changes in Net Assets, were as follows:
<Table>
<Caption>
2003 2002 2001
----------- ------------ ------------
Distributions paid from:
Ordinary Income $4,279,752 $11,509,502 $18,534,813
Long Term Capital Gain -- -- 13,772,446
---------- ----------- -----------
$4,279,752 $11,509,502 $32,307,259
========== =========== ===========
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the period ended October 31, 2003, purchases and sales of U.S. Government
securities, other than short-term securities, were $323,859 and $265,291,
respectively. Purchases and sales of securities, other than U.S. Government
securities and short-term securities, were $308,696 and $349,446, respectively.
As of October 31, 2003, the Fund had securities on loan with an aggregate market
value of $101,788,780. The Fund received $105,677,700 in cash as collateral for
securities on loan which was used to purchase highly liquid short-term
investments in accordance with the Fund's securities lending procedures. The
Fund also received $580,077 in securities as collateral for securities on loan.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the
29
MainStay Total Return Fund
average commitment amount, regardless of usage, to the Bank of New York, which
acts as agent to the syndicate. Such commitment fees are allocated among the
funds based upon net assets and other factors. Interest on any revolving credit
loan is charged based upon the Federal Funds Advances rate. There were no
borrowings on the line of credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
JANUARY 1 THROUGH ---------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold............. 2,173 2,089 33 2,346 2,672 64 3,871 3,485 70
Shares issued in
reinvestment of
dividends and
distributions......... 81 178 1 171 511 3 343 1,315 8
------ ------ --- ------ ------- ---- ------ ------- ----
2,254 2,267 34 2,517 3,183 67 4,214 4,800 78
Shares redeemed......... (3,466) (6,552) (50) (5,021) (11,742) (170) (2,992) (10,173) (117)
------ ------ --- ------ ------- ---- ------ ------- ----
Net decrease............ (1,212) (4,285) (16) (2,504) (8,559) (103) 1,222 (5,373) (39)
====== ====== === ====== ======= ==== ====== ======= ====
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
TAX INFORMATION (UNAUDITED)
The Fund intends to designate the maximum amount of dividends, qualified for the
reduced tax rate under The Jobs and Growth Tax Relief Reconciliation Act of
2003, allowable.
In addition, 71.7% of the ordinary income dividends paid during the ten months
ended October 31, 2003, qualify for the corporate dividends received deduction
under section 243 of the Internal Revenue Code.
30
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Total Return Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Total Return Fund (one of
the funds constituting The MainStay Funds, hereafter referred to as the "Fund")
at October 31, 2003, the results of its operations for the ten months ended
October 31, 2003 and the year ended December 31, 2002, the changes in its net
assets for the ten months ended October 31, 2003 and each of the two years in
the period ended December 31, 2002 and the financial highlights for each of the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
31
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
32
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
33
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
34
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MacKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
McMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
35
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. McGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSTR11-12/03
NYLIM-A04374 14
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
Total Return Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY LOGO]
Table of Contents
<Table>
President's Letter 2
$10,000 Invested in MainStay Value Fund
versus Russell 1000(R) Value Index and
Inflation--Class A, Class B, and Class C Shares 3
Portfolio Management Discussion and Analysis 4
Year-by-Year and 10-Month Performance 5
Portfolio of Investments 8
Financial Statements 11
Notes to Financial Statements 16
Report of Independent Auditors 23
Trustees and Officers 24
The MainStay(R) Funds 27
</Table>
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
2
$10,000 Invested in MainStay Value Fund versus Russell 1000(R) Value Index and
Inflation
CLASS A SHARES Total Returns with Sales Charges: 1 Year 14.14%, 5 Years 0.51%,
10 Years 6.18%
<Table>
<Caption>
RUSSELL 1000 VALUE
Period-end MAINSTAY VALUE FUND INFLATION (CPI)(2) INDEX(1)
- ----------- ------------------- ------------------ ------------------
10/31/93 $ 9,450.00 $ 10,000.00 $ 10,000.00
10/31/94 9,758.00 10,261.00 10,076.00
10/31/95 11,306.00 10,543.00 12,566.00
10/31/96 13,777.00 10,865.00 15,548.00
10/31/97 16,907.00 11,092.00 20,708.00
10/31/98 16,774.00 11,257.00 23,779.00
10/31/99 17,845.00 11,545.00 27,708.00
10/31/00 19,820.00 11,944.00 29,237.00
10/31/01 18,455.00 12,198.00 25,769.00
10/31/02 15,075.00 12,452.00 23,187.00
10/31/03 18,207.00 12,706.00 28,491.00
</Table>
CLASS B AND CLASS C SHARES
Class B Total Returns with Sales Charges: 1 Year 14.89%, 5 Years 0.56%, 10 Years
6.13%
Class C Total Returns with Sales Charges: 1 Year 18.89%, 5 Years 0.88%, 10 Years
6.13%
<Table>
<Caption>
RUSSELL 1000 VALUE
Period-end MAINSTAY VALUE FUND INFLATION (CPI)(2) INDEX(1)
- ----------- ------------------- ------------------ ------------------
10/31/93 $ 10,000.00 $ 10,000.00 $ 10,000.00
10/31/94 10,326.00 10,261.00 10,076.00
10/31/95 11,906.00 10,543.00 12,566.00
10/31/96 14,427.00 10,865.00 15,548.00
10/31/97 17,627.00 11,092.00 20,708.00
10/31/98 17,356.00 11,257.00 23,779.00
10/31/99 18,315.00 11,545.00 27,708.00
10/31/00 20,198.00 11,944.00 29,237.00
10/31/01 18,657.00 12,198.00 25,769.00
10/31/02 15,127.00 12,452.00 23,187.00
10/31/03 18,136.00 12,706.00 28,491.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION, PLEASE VISIT WWW.MAINSTAYFUNDS.COM. Performance tables and
graphs do not reflect the deduction of taxes that a shareholder would pay on
distributions or Fund-share redemptions. Total returns reflect change in
share price, reinvestment of dividend and capital gain distributions, and
maximum applicable sales charges explained in this paragraph. The graphs
assume an initial investment of $10,000 and reflect deduction of all sales
charges that would have applied for the period of investment. Class A share
performance reflects the effect of the maximum 5.5% initial sales charge and
includes the historical performance of the Class B shares for periods from
the Fund's inception on 5/1/86 through 12/31/94. Performance figures for the
two classes vary after 12/31/94, based on differences in their sales charges
and expense structures. Class C share performance includes the historical
performance of the Class B shares for periods from the Fund's inception on
5/1/86 through 8/31/98. Class B shares would be subject to a contingent
deferred sales charge (CDSC) of up to 5% if redeemed within the first six
years of purchase, and Class C shares would be subject to a CDSC of 1% if
redeemed within one year of purchase.
1. The Russell 1000(R) Value Index is an unmanaged index that measures the
performance of those Russell 1000(R) companies with lower price-to-book
ratios and lower forecasted growth values. The Russell 1000(R) Index is an
unmanaged index that measures the performance of the 1,000 largest U.S.
companies based on total market capitalization. Results assume
reinvestment of all income and capital gains. An investment cannot be made
directly into an index.
2. Inflation is measured 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. The rate of inflation does not represent an
investment return.
3
Portfolio Management Discussion and Analysis
The equity markets enjoyed strong performance during the first 10 months of
2003, and the Fund participated in the rally. Although stocks rose during the
first two weeks of the year, from mid-January through early March, stocks
declined on weak employment and consumer-sentiment trends, general geopolitical
uncertainty, and the possibility of a war in Iraq. Investors became increasingly
concerned that the economy might again shift into a recession and that corporate
profit growth would not materialize.
Investor sentiment shifted in mid-March, and a number of positive developments
helped equities post strong gains through the end of October 2003. Investors
reacted favorably to the progress of the war in Iraq, interest-rate policy
remained accommodative, a tax cut provided fiscal stimulus, most equity
valuations were reasonable, and a weakening U.S. dollar provided potential
benefits for U.S. exporters and companies traditionally subject to import
competition.
The equity rally appeared justified by a solid recovery in the economy and in
corporate earnings. Real gross domestic product rose 1.4% in the first quarter
of 2003, 3.3% in the second quarter, and according to preliminary estimates from
the Bureau of Economic Analysis, at a seasonally adjusted annual rate of 8.2% in
the third quarter. Operating earnings for companies in the S&P 500 Index(1) grew
6% in the second quarter of 2003 and an estimated 11% in the third quarter.
Investors must now weigh these positive trends--and recent evidence that the
stubbornly weak labor markets are improving--against higher stock valuations and
a geopolitical landscape that remains unpredictable.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Value Fund returned 18.02%
for Class A shares and 17.26% for Class B and Class C shares, excluding all
sales charges. All share classes underperformed the 19.22% return of the average
Lipper(2) large-cap value fund over the same period. All share classes also
underperformed the 20.84% return of the Russell 1000(R) Value Index(3) for the
10 months ended October 31, 2003.
STRONG AND WEAK PERFORMERS
Good stock selection in the industrials sector was a major positive contributor
to the Fund's performance. Shares of truck manufacturer Navistar International
advanced 66.31%(4) as signs of a recovery in the heavy-duty truck market
emerged. Investors were attracted to Navistar International's low-end valuation
and significant earnings leverage in such a recovery. Electrical-components
maker Cooper Industries was up 48.78%, helped by a cyclical recovery in the
company's end-markets and strong free cash flow.
- -------
1. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500 is
an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume reinvestment of all
income and capital gains. An investment cannot be made directly into an
index.
2. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
3. See footnote on page 3 for more information about the Russell 1000(R) Value
Index.
4. Performance percentages reflect the price performance of the securities
mentioned for the 10 months ended October 31, 2003, or for the portion of the
reporting period shares were held in the Fund, if shorter. Performance
percentages do not reflect the impact of dividends received, if any. Due to
purchases and sales, the performance of Fund holdings may differ from that of
the securities themselves.
4
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[CLASS A BAR CHART]
<Table>
<Caption>
Period-end Total Return %
- ----------- --------------
12/94 -0.22
12/95 28.74
12/96 21.84
12/97 21.88
12/98 -7.41
12/99 8.33
12/00 11.89
12/01 -1.74
12/02 -22.16
10/03 18.02
</Table>
CLASS B AND CLASS C SHARES
[CLASS B AND CLASS C BAR CHART]
<Table>
<Caption>
Period-end Total Return %
- ---------- --------------
12/94 -0.22
12/95 28.01
12/96 21.11
12/97 21.29
12/98 -8.09
12/99 7.51
12/00 11.05
12/01 -2.45
12/02 -22.76
10/03 17.26
</Table>
The Fund's holdings in the semiconductors & semiconductor equipment industry
performed well as demand for microprocessors rebounded while pricing held firm.
We took advantage of low valuations in Advanced Micro Devices and Intel. The
price of Advanced Micro Devices shares rose 135.29% as optimism surrounding the
launch of a new high-performance chip grew. The improving semiconductor cycle
also benefited Intel, which saw its stock price rise 112.29% from the beginning
of the year through the time we sold the Fund's entire position in October.
Intel shares had reached our price target.
In the information technology sector, shares of Apple Computer detracted from
the Fund's performance. The stock declined from the beginning of the year
5
until we sold the Fund's position in mid-April. We were concerned about
published reports that Apple was interested in buying a large music
company--reports that the company would not refute. Our concern was that a large
acquisition outside the company's area of core competence would present
considerable downside risk. No deal has yet been announced, and Apple Computer
shares have risen since the Fund sold its position.
In the financials sector, FleetBoston Financial was up 72.60%, helped by an
acquisition bid from Bank of America late in the reporting period. The Fund's
capital-markets-sensitive holdings rebounded with the rally in the equity
markets. Merrill Lynch led the way with a 57.80% gain, Goldman Sachs advanced
39.14%, and Citigroup gained 38.25%. Washington Mutual, which rose 31.23%, also
added value to the Fund. The mortgage lender benefited from a strong housing
market.
The consumer discretionary sector as a whole proved to be the biggest detractor
from the Fund's performance for the reporting period. Shares of McDonald's
suffered from a series of earnings-shortfall announcements and store closings.
In February, after determining that the company's fundamentals had deteriorated,
the Fund's entire position in the stock was sold. McDonald's shares were down
from the beginning of the reporting period through the time of our last sale.
A shifting competitive landscape continues to affect the Fund's
telecommunication services sector holdings. Local telecommunications providers
BellSouth (+5.21%), SBC Communications (-6.42%), and Verizon (-9.58%) had
disappointing results for the Fund.
Cash flow remains strong and dividend yields are high for the local incumbent
carriers. We have, however, tilted the Fund's holdings in this sector to an
underweighted position. It is our view that a new round of competitive pressure
is likely to come from cable operators in the form of voice services.
SECTOR WEIGHTINGS
At the end of October 2003, the Fund was overweighted in the industrials,
materials, and energy sectors and underweighted in the consumer discretionary,
financials, telecommunications services, and utilities sectors.
LOOKING AHEAD
Steadily improving GDP and employment trends continue to be the main drivers of
the stock market. Corporate earnings growth has also been steadily improving,
but we believe that the assumption of continued good growth may already be
embedded in most stock prices. Investors have been willing to give stocks the
benefit of the doubt, but continued economic growth and positive employment
trends will need to be maintained if the market is to sustain its current rally
into next year. These improving economic trends are very favorable for our
investment discipline, which has led us to many names that may benefit
6
from increased economic activity. We still find many attractive stocks in the
industrials, materials, and energy sectors that we believe may benefit from an
improving industrial economy.
Many companies in the industrials and materials sectors have spent much of the
past few years restructuring their manufacturing facilities, reducing their
break-even levels, and positioning themselves for what some believe to be an
inevitable economic recovery. Companies that took this bold action should
experience unprecedented efficiency and profitability once overall demand
rebounds. Despite this favorable outlook, many stocks in these sectors still
command valuation metrics at the lower end of their historical ranges. We have
taken meaningful positions in the shares of such companies and believe that they
many offer excellent prospects for capital appreciation over the next 12 to 18
months.
We continue to believe that since consumer balance sheets are stretched,
incremental consumer spending trends may be less encouraging when the
mortgage-refinancing boom begins to wane. For these reasons, we are under-
weighted in many consumer discretionary and consumer lending stocks. We are also
concerned that improved commercial-loan growth could be offset by very low
historical net interest margins and low investment yields at many banks, and we
continue to underweight the commercial banks industry in the Fund's portfolio.
The Fund's weighting in information technology has diminished throughout the
10-months as the sector rallied and many of the Fund's holdings reached our
price targets. We will continue to use our disciplined value-investing approach
to seize opportunities in quality companies with value-enhancing attributes when
they arise.
Whatever the markets or the economy may bring, the Fund will continue to seek
maximum long-term total return from a combination of capital growth and income.
Richard A. Rosen
Portfolio Manager
MacKay Shields LLC
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
7
MainStay Value Fund
<Table>
<Caption>
SHARES VALUE
-------------------------------
COMMON STOCKS (92.5%)+
AEROSPACE & DEFENSE (4.9%)
Boeing Co. (The) (b)..... 248,200 $ 9,553,218
Northrop Grumman
Corp. .................. 129,800 11,604,120
Raytheon Co. ............ 441,800 11,698,864
------------
32,856,202
------------
BUILDING PRODUCTS (1.5%)
American Standard Cos.,
Inc. (a)(b)............. 106,200 10,163,340
------------
CAPITAL MARKETS (4.8%)
Goldman Sachs Group, Inc.
(The)................... 223,000 20,939,700
Merrill Lynch & Co., Inc.
(a)(b).................. 196,600 11,638,720
------------
32,578,420
------------
COMMERCIAL BANKS (10.1%)
Bank of America Corp. ... 226,800 17,175,564
Bank One Corp. .......... 223,100 9,470,595
FleetBoston Financial
Corp. .................. 329,810 13,321,026
PNC Financial Services
Group, Inc. (The)....... 266,300 14,265,691
Wachovia Corp. .......... 310,300 14,233,461
------------
68,466,337
------------
COMMUNICATIONS EQUIPMENT (1.3%)
Motorola, Inc. .......... 676,400 9,151,692
------------
COMPUTERS & PERIPHERALS (2.1%)
International Business
Machines Corp. ......... 162,600 14,549,448
------------
CONTAINERS & PACKAGING (2.4%)
Smurfit-Stone Container
Corp. (a)(b)............ 1,032,900 16,009,950
------------
DIVERSIFIED FINANCIAL SERVICES (3.7%)
Citigroup, Inc. ......... 528,466 25,049,288
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (4.9%)
ALLTEL Corp. ............ 215,100 10,167,777
BellSouth Corp. ......... 329,400 8,666,514
SBC Communications,
Inc. ................... 150,400 3,606,592
Verizon Communications,
Inc. ................... 309,000 10,382,400
------------
32,823,283
------------
ELECTRIC UTILITIES (0.6%)
FirstEnergy Corp. ....... 117,300 4,033,947
------------
</Table>
<Table>
<Caption>
SHARES VALUE
-------------------------------
ELECTRICAL EQUIPMENT (2.8%)
Cooper Industries Ltd.
Class A................. 357,700 $ 18,922,330
------------
ENERGY EQUIPMENT & SERVICES (1.0%)
Transocean, Inc. (a)..... 365,900 7,021,621
------------
FOOD & STAPLES RETAILING (5.4%)
CVS Corp. ............... 593,000 20,861,740
Kroger Co. (The)
(a)(b).................. 899,900 15,739,251
------------
36,600,991
------------
FOOD PRODUCTS (1.2%)
Kraft Foods, Inc.
Class A (b)............. 275,600 8,019,960
------------
HEALTH CARE PROVIDERS & SERVICES (1.7%)
HCA, Inc. ............... 298,000 11,398,500
------------
HOUSEHOLD PRODUCTS (0.6%)
Kimberly-Clark Corp. .... 75,500 3,987,155
------------
INSURANCE (8.7%)
Allstate Corp. (The)..... 374,500 14,792,750
Hartford Financial
Services Group, Inc.
(The)................... 313,700 17,222,130
Prudential Financial,
Inc. ................... 368,500 14,238,840
Travelers Property
Casualty Corp. Class
B....................... 785,224 12,854,117
------------
59,107,837
------------
IT SERVICES (2.5%)
Computer Sciences Corp.
(a)(b).................. 424,700 16,826,614
------------
MACHINERY (3.5%)
Navistar International
Corp. (a)(b)............ 580,900 23,485,787
------------
METALS & MINING (3.3%)
Alcoa, Inc. ............. 712,456 22,492,236
------------
MULTILINE RETAIL (0.5%)
Target Corp. ............ 89,200 3,544,808
------------
OIL & GAS (9.7%)
ChevronTexaco Corp. ..... 250,152 18,586,294
ConocoPhillips........... 352,100 20,122,515
ExxonMobil Corp. ........ 471,700 17,254,786
Kerr-McGee Corp. ........ 232,800 9,661,200
------------
65,624,795
------------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
8
Portfolio of Investments October 31, 2003
<Table>
<Caption>
SHARES VALUE
-------------------------------
COMMON STOCKS (CONTINUED)
PAPER & FOREST PRODUCTS (5.2%)
Bowater, Inc. ........... 258,400 $ 10,550,472
International Paper
Co. .................... 454,200 17,872,770
MeadWestvaco Corp. ...... 254,637 6,600,191
------------
35,023,433
------------
PHARMACEUTICALS (3.6%)
Bristol-Myers Squibb
Co. .................... 354,100 8,983,517
Merck & Co., Inc. ....... 340,900 15,084,825
------------
24,068,342
------------
ROAD & RAIL (2.2%)
Burlington Northern Santa
Fe Corp. ............... 511,000 14,788,340
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (1.0%)
Advanced Micro Devices,
Inc. (a)(b)............. 431,300 6,555,760
------------
SPECIALTY RETAIL (1.1%)
Gap, Inc. (The).......... 401,800 7,666,344
------------
THRIFTS & MORTGAGE FINANCE (2.2%)
Washington Mutual, Inc.
(b)..................... 336,650 14,728,437
------------
Total Common Stocks
(Cost $576,743,281)..... 625,545,197
------------
CONVERTIBLE PREFERRED STOCK (0.9%)
OIL & GAS (0.9%)
Goldman Sachs Group, Inc.
3.0625%, Series VLO
(c) .................... 138,800 5,788,099
------------
Total Convertible
Preferred Stock
(Cost $5,480,018)....... 5,788,099
------------
<Caption>
NUMBER OF
CONTRACTS (D)
-------------
PURCHASED CALL OPTIONS (0.2%)
ENERGY EQUIPMENT & SERVICES (0.1%)
ENSCO International, Inc.
Strike Price @ $24.00
Expire 3/19/04 (a)(e)... 2,182 825,531
------------
</Table>
<Table>
<Caption>
NUMBER OF
CONTRACTS (D) VALUE
--------------------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.1%)
Micron Technology, Inc.
Strike Price @ $12.50
Expire 1/17/04 (a)(e)... 3,080 $ 723,800
------------
Total Purchased Call
Options
(Cost $1,387,263)....... 1,549,331
------------
<Caption>
PRINCIPAL
AMOUNT
-------------
SHORT-TERM INVESTMENTS (17.6%)
COMMERCIAL PAPER (6.1%)
Federal Home Loan Bank
0.95%, due 11/6/03...... $20,000,000 19,997,361
UBS Finance Delaware LLC
1.03%, due 11/3/03...... 21,530,000 21,528,768
------------
41,526,129
------------
Total Commercial Paper
(Cost $41,526,129)...... 41,526,129
------------
<Caption>
SHARES
-------------
INVESTMENT COMPANY (0.1%)
AIM Institutional Funds
Group (f)............... 667,690 667,690
------------
Total Investment Company
(Cost $667,690)......... 667,690
------------
<Caption>
PRINCIPAL
AMOUNT
-------------
MASTER NOTE (2.4%)
Banc of America
Securities LLC
1.1874%, due 11/3/03
(f)..................... $15,848,000 15,848,000
------------
Total Master Note
(Cost $15,848,000)...... 15,848,000
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
9
MainStay Value Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
SHORT-TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENTS (9.0%)
Countrywide Securities
Corp.
1.1424%, dated 10/31/03
due 11/3/03 (f)
Proceeds at Maturity
$31,088,919
(Collateralized by
Various Bonds with a
Principal Amount of
$36,695,913 and a Market
Value of $31,855,568)... $31,086,000 $ 31,086,000
------------
CS First Boston LLC
1.1124%, dated 10/31/03
due 11/3/03 (f)
Proceeds at Maturity
$2,193,201
(Collateralized by
Various Bonds with a
Principal Amount of
$2,037,770 and a Market
Value of $2,220,555).... 2,193,000 2,193,000
------------
Lehman Brothers, Inc.
1.1124%, dated 10/31/03
due 11/3/03 (f)
Proceeds at Maturity
$5,000,457
(Collateralized by
Various Bonds with a
Principal Amount of
$5,149,743 and a Market
Value of $5,090,518).... 5,000,000 5,000,000
------------
Merrill Lynch & Co., Inc.
1.1424%, dated 10/31/03
due 11/3/03 (f)
Proceeds at Maturity
$22,835,144
(Collateralized by
Various Bonds with a
Principal Amount of
$22,030,343 and a Market
Value of $23,697,800)... 22,833,000 22,833,000
------------
Total Repurchase
Agreements
(Cost $61,112,000)...... 61,112,000
------------
Total Short-Term
Investments (Cost
$119,153,819)........... 119,153,819
------------
Total Investments (Cost
$702,764,381) (g)....... 111.2% 752,036,446(h)
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
REPURCHASE AGREEMENTS (CONTINUED)
Liabilities in Excess of
Cash & Other Assets..... $ (11.2) $(75,456,791)
----------- ------------
Net Assets............... 100.0% $676,579,655
=========== ============
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is out
on loan.
(c) Synthetic Convertible -- an equity linked security issued
by an entity other than the issuer of the underlying
equity instrument.
(d) One contract relates to 100 shares.
(e) Options can be exercised into the underlying common
stock.
(f) Represents a security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(g) The cost for federal income tax purposes is $704,343,594.
(h) At October 31, 2003 net unrealized appreciation was
$47,692,852, based on cost for federal income tax
purposes. This consisted of aggregate gross unrealized
appreciation for all investments on which there was an
excess of market value over cost of $61,067,179 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $13,374,327.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$702,764,381) including $75,276,447 market value of
securities loaned......................................... $752,036,446
Cash........................................................ 493
Deposits with brokers for securities loaned................. 5,038
Receivables:
Investment securities sold................................ 29,011,834
Dividends and interest.................................... 1,057,543
Fund shares sold.......................................... 278,061
Other assets................................................ 14,808
------------
Total assets........................................ 782,404,223
------------
LIABILITIES:
Securities lending collateral............................... 77,632,728
Payables:
Investment securities purchased........................... 25,435,384
Fund shares redeemed...................................... 1,323,106
NYLIFE Distributors....................................... 496,230
Transfer agent............................................ 415,129
Manager................................................... 367,237
Trustees.................................................. 7,682
Custodian................................................. 5,776
Accrued expenses............................................ 141,296
------------
Total liabilities................................... 105,824,568
------------
Net assets.................................................. $676,579,655
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 68,102
Class B................................................... 338,826
Class C................................................... 1,870
Additional paid-in capital.................................. 714,903,172
Accumulated undistributed net investment income............. 575,023
Accumulated net realized loss on investments and written
option transactions....................................... (88,579,403)
Net unrealized appreciation on investments and written
option transactions....................................... 49,272,065
------------
Net assets.................................................. $676,579,655
============
CLASS A
Net assets applicable to outstanding shares................. $112,744,539
============
Shares of beneficial interest outstanding................... 6,810,246
============
Net asset value per share outstanding....................... $ 16.56
Maximum sales charge (5.50% of offering price).............. 0.96
------------
Maximum offering price per share outstanding................ $ 17.52
============
CLASS B
Net assets applicable to outstanding shares................. $560,740,389
============
Shares of beneficial interest outstanding................... 33,882,579
============
Net asset value and offering price per share outstanding.... $ 16.55
============
CLASS C
Net assets applicable to outstanding shares................. $ 3,094,727
============
Shares of beneficial interest outstanding................... 186,995
============
Net asset value and offering price per share outstanding.... $ 16.55
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
Statement of Operations for the period January 1, 2003 through
October 31, 2003* and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
------------ -------------
INVESTMENT INCOME:
Income:
Dividends................................................. $ 11,637,750 $ 15,310,646
Interest.................................................. 284,225 747,072
Income from securities loaned--net........................ 133,762 41,094
------------ -------------
Total income............................................ 12,055,737 16,098,812
------------ -------------
Expenses:
Manager................................................... 3,352,483 4,696,735
Distribution--Class B..................................... 3,255,253 4,806,238
Distribution--Class C..................................... 15,835 15,487
Transfer agent............................................ 2,097,292 2,683,742
Service--Class A.......................................... 215,249 296,126
Service--Class B.......................................... 1,085,084 1,602,079
Service--Class C.......................................... 5,278 5,162
Shareholder communication................................. 127,795 190,314
Professional.............................................. 89,133 120,083
Recordkeeping............................................. 74,436 102,803
Custodian................................................. 56,873 81,196
Registration.............................................. 38,991 33,753
Trustees.................................................. 27,442 38,137
Miscellaneous............................................. 25,585 35,954
------------ -------------
Total expenses.......................................... 10,466,729 14,707,809
------------ -------------
Net investment income....................................... 1,589,008 1,391,003
------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
WRITTEN OPTION TRANSACTIONS:
Net realized gain (loss) from:
Security transactions..................................... (13,136,168) (73,817,266)
Written option transactions............................... 646,327 4,307,209
------------ -------------
Net realized loss on investments and written option
transactions.............................................. (12,489,841) (69,510,057)
------------ -------------
Net change in unrealized appreciation (depreciation) on:
Security transactions:.................................... 111,930,339 (126,481,658)
Written option transactions:.............................. (74,311) 146,366
------------ -------------
Net unrealized gain (loss) on investments and written option
transactions.............................................. 111,856,028 (126,335,292)
------------ -------------
Net realized and unrealized gain (loss) on investments and
written option transactions............................... 99,366,187 (195,845,349)
------------ -------------
Net increase (decrease) in net assets resulting from
operations................................................ $100,955,195 $(194,454,346)
============ =============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and
December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ------------- -------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 1,589,008 $ 1,391,003 $ 3,113,997
Net realized gain (loss) on investments and written option
transactions............................................ (12,489,841) (69,510,057) 12,792,106
Net change in unrealized appreciation (depreciation) on
investments and written option transactions............. 111,856,028 (126,335,292) (37,116,128)
------------ ------------- -------------
Net increase (decrease) in net assets resulting from
operations.............................................. 100,955,195 (194,454,346) (21,210,025)
------------ ------------- -------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (715,302) (829,279) (1,303,048)
Class B................................................. (615,014) (295,185) (1,753,973)
Class C................................................. (3,236) (1,246) (3,052)
From net realized gain on investments:
Class A................................................. -- (1,242,187) (603,636)
Class B................................................. -- (6,335,113) (3,193,706)
Class C................................................. -- (28,151) (6,364)
------------ ------------- -------------
Total dividends and distributions to shareholders..... (1,333,552) (8,731,161) (6,863,779)
------------ ------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 32,974,027 105,753,757 123,490,233
Class B................................................. 26,713,170 45,457,546 61,834,698
Class C................................................. 2,004,101 2,710,624 1,217,119
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 699,669 2,019,522 1,900,229
Class B................................................. 594,905 6,434,917 4,810,706
Class C................................................. 2,445 21,560 2,628
------------ ------------- -------------
62,988,317 162,397,926 193,255,613
Cost of shares redeemed:
Class A................................................. (39,146,443) (115,637,418) (93,834,605)
Class B................................................. (66,610,376) (117,411,603) (107,272,547)
Class C................................................. (1,658,503) (1,412,165) (328,843)
------------ ------------- -------------
Decrease in net assets derived from capital share
transactions........................................ (44,427,005) (72,063,260) (8,180,382)
------------ ------------- -------------
Net increase (decrease) in net assets................. 55,194,638 (275,248,767) (36,254,186)
NET ASSETS:
Beginning of period......................................... 621,385,017 896,633,784 932,887,970
------------ ------------- -------------
End of period............................................... $676,579,655 $ 621,385,017 $ 896,633,784
============ ============= =============
Accumulated undistributed net investment income at end of
period.................................................... $ 575,023 $ 319,567 $ 53,924
============ ============= =============
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
-----------------------------------------------------------------------------------------------
January 1, 2003
through Year ended December 31,
October 31, --------------------------------------------------------------------------
2003* 2002 2001 2000 1999 1998
--------------- ---------- ---------- ---------- ---------- ----------
Net asset value at beginning of
period......................... $ 14.13 $ 18.52 $ 19.12 $ 18.18 $ 17.16 $ 21.76
---------- ---------- ---------- ---------- ---------- ----------
Net investment income (loss).... 0.11 0.12 0.19 0.15 0.12 0.23
Net realized and unrealized gain
(loss) on investments.......... 2.42 (4.23) (0.52) 1.96 1.29 (1.92)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations..................... 2.53 (4.11) (0.33) 2.11 1.41 (1.69)
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
From net investment income..... (0.10) (0.11) (0.19) (0.15) (0.00)(b) (0.23)
From net realized gain on
investments.................. -- (0.17) (0.08) (0.91) (0.32) (2.68)
Return of capital.............. -- -- -- (0.11) (0.07) --
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions.................. (0.10) (0.28) (0.27) (1.17) (0.39) (2.91)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end of
period......................... $ 16.56 $ 14.13 $ 18.52 $ 19.12 $ 18.18 $ 17.16
========== ========== ========== ========== ========== ==========
Total investment return (a)..... 18.02% (22.16%) (1.74%) 11.89% 8.33% (7.41%)
Ratios (to average net assets)/
Supplemental Data:
Net investment income
(loss)...................... 0.93%+ 0.82% 0.99% 0.73% 0.70% 1.03%
Expenses..................... 1.38%+ 1.30% 1.20% 1.20% 1.13% 1.09%
Portfolio turnover rate......... 47% 66% 88% 92% 61% 83%
Net assets at end of period (in
000's)......................... $ 112,745 $ 101,999 $ 141,703 $ 113,111 $ 117,036 $ 114,925
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
(b) Less than one cent per share.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<Table>
<Caption>
Class B Class C
-------------------------------------------------------------------------------- ---------------
January 1, 2003 January 1, 2003
through Year ended December 31, through
October 31, -------------------------------------------------------------- October 31,
2003* 2002 2001 2000 1999 1998 2003*
--------------- ---------- ---------- ---------- ---------- ---------- ---------------
$ 14.13 $ 18.53 $ 19.12 $ 18.09 $ 17.15 $ 21.74 $ 14.13
---------- ---------- ---------- ---------- ---------- ---------- ----------
0.02 0.01 0.04 0.01 (0.01) 0.06 0.02
2.42 (4.23) (0.51) 1.95 1.28 (1.91) 2.42
---------- ---------- ---------- ---------- ---------- ---------- ----------
2.44 (4.22) (0.47) 1.96 1.27 (1.85) 2.44
---------- ---------- ---------- ---------- ---------- ---------- ----------
(0.02) (0.01) (0.04) (0.01) (0.00)(b) (0.06) (0.02)
-- (0.17) (0.08) (0.91) (0.32) (2.68) --
-- -- -- (0.01) (0.01) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
(0.02) (0.18) (0.12) (0.93) (0.33) (2.74) (0.02)
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 16.55 $ 14.13 $ 18.53 $ 19.12 $ 18.09 $ 17.15 $ 16.55
========== ========== ========== ========== ========== ========== ==========
17.26% (22.76%) (2.45%) 11.05% 7.51% (8.09%) 17.26%
0.18%+ 0.07% 0.24% (0.02%) (0.05%) 0.28% 0.18%+
2.13%+ 2.05% 1.95% 1.95% 1.88% 1.84% 2.13%+
47% 66% 88% 92% 61% 83% 47%
$ 560,740 $ 517,050 $ 753,299 $ 819,003 $1,012,767 $1,174,554 $ 3,095
<Caption>
Class C
------------------------------------------------------------------
September 1,**
Year ended December 31, through
------------------------------------------------- December 31,
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- --------------
$ 18.53 $ 19.12 $ 18.09 $ 17.15 $ 18.16
---------- ---------- ---------- ---------- ----------
0.01 0.04 0.01 (0.01) 0.03
(4.23) (0.51) 1.95 1.28 1.67
---------- ---------- ---------- ---------- ----------
(4.22) (0.47) 1.96 1.27 1.70
---------- ---------- ---------- ---------- ----------
(0.01) (0.04) (0.01) (0.00)(b) (0.03)
(0.17) (0.08) (0.91) (0.32) (2.68)
-- -- (0.01) (0.01) --
---------- ---------- ---------- ---------- ----------
(0.18) (0.12) (0.93) (0.33) (2.71)
---------- ---------- ---------- ---------- ----------
$ 14.13 $ 18.53 $ 19.12 $ 18.09 $ 17.15
========== ========== ========== ========== ==========
(22.76%) (2.45%) 11.05% 7.51% 9.88%
0.07% 0.24% (0.02%) (0.05%) 0.28%+
2.05% 1.95% 1.95% 1.88% 1.84%+
66% 88% 92% 61% 83%
$ 2,336 $ 1,631 $ 774 $ 631 $ 80
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
MainStay Value Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay Value
Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and within one year of purchase of Class C
shares. Distribution of Class B shares and Class C shares commenced on May 1,
1986 and September 1, 1998, respectively. Class A shares, Class B shares and
Class C shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares and Class C shares are subject to higher distribution fee rates.
Each class of shares bears distribution and/or service fee payments under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to realize maximum long-term total return
from a combination of capital growth and income.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Options contracts are valued at the last posted settlement price on the
market where any such options are principally traded. Temporary cash investments
acquired over 60 days to maturity are valued using the latest bid prices or
using valuations based on a matrix system (which considers such factors as
security prices, yields, maturities, and ratings), both as furnished by
independent pricing services. Other temporary cash investments are valued at
amortized cost, which approximates market value. Securities
16
Notes to Financial Statements
for which market quotations are not readily available are valued by methods
deemed by the Board of Trustees to represent fair value.
(B) SECURITIES LENDING. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are collateralized by cash or securities at
least equal at all times to the market value of the securities loaned. The Fund
may bear the risk of delay in recovery of, or loss of rights in, the securities
loaned should the borrower of the securities experience financial difficulty.
The Fund receives compensation for lending its securities in the form of fees or
it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(C) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted to
reflect the current value of the options written. Premiums received from writing
options which expire are treated as realized gains. Premiums received from
writing options which are exercised or are canceled in closing purchase
transactions are added to the proceeds or netted against the amount paid on the
transaction to determine the realized gain or loss. By writing a covered call
option, the Fund foregoes in exchange for the premium the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security or foreign currency increase. By writing a covered put
option, the Fund, in exchange for the premium, accepts the risk of a decline in
the market value of the underlying security or foreign currency below the
exercise price. A call option may be covered by the call writer's owning the
underlying security throughout the option period. A call option may also be
covered by the call writer's maintaining liquid assets valued at greater than
the exercise price of the call written, in a segregated account with its
custodian.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security it anticipates purchasing. The Fund may purchase put options on its
securities to protect against a decline in the value of the security or to close
out covered written put positions. The Fund may also purchase options to seek to
enhance returns. Risks may arise from an imperfect correlation between the
change in market value of the securities held by the Fund and the prices of
options relating to the securities purchased or sold by the Fund and from the
possible lack of a liquid secondary market for an option. The maximum exposure
to loss for any purchased option is limited to the premium initially paid for
the option.
17
MainStay Value Fund
Written option activity for the ten months ended October 31, 2003 was as
follows:
<Table>
<Caption>
NUMBER
OF
CONTRACTS PREMIUM
--------- -----------
Options outstanding at December 31, 2002.................... (3,552) $ (415,571)
Options--written............................................ (7,631) (1,476,841)
Options--buybacks........................................... 10,035 1,697,958
Options--exercised.......................................... 562 67,296
Options--expired............................................ 586 127,158
------ -----------
Options outstanding at October 31, 2003..................... -- --
====== ===========
</Table>
(D) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(E) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay any
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
(F) 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 as earned.
Discounts and premiums on short-term securities are accreted and amortized,
respectively, on the straight line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
18
Notes to Financial Statements (continued)
(G) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(H) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.72% of the Fund's
average daily net assets on assets up to $200 million, 0.65% on assets from $200
million to $500 million and 0.50% on assets in excess of $500 million. For the
ten months ended October 31, 2003 the Manager earned from the Fund $3,352,483.
For the year ended December 31, 2002 the Manager earned from the Fund
$4,696,735.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager pays the Subadvisor a monthly fee at an annual rate of
0.36% of the Fund's average daily net assets up to $200 million, 0.325% on
assets from $200 million to $500 million and 0.25% on assets in excess of $500
million.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for
19
MainStay Value Fund
distribution or service activities as designated by the Distributor. Pursuant to
the Class B and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plans provide that the Class B and Class C shares of
the Fund also incur a service fee at the annual rate of 0.25% of the average
daily net asset value of the Class B or Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $1,794 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $29,058, $198,446 and $807, respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and year ended December 31, 2002, amounted to $2,097,292
and $2,683,742, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the Value Fund
only pays a portion of the fees identified above.
(F) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $13,041 for the ten months ended
October 31, 2003 and $14,703 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30
20
Notes to Financial Statements (continued)
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
recordkeeping services provided to the Fund by the Manager amounted to $74,436
for the ten months ended October 31, 2003 and $102,803 for the year ended
December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED UNDISTRIBUTED ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
NET INVESTMENT INCOME AND OTHER LOSSES APPRECIATION LOSS
- ------------------------- ------------------- ------------- -----------------
$575,023 $(87,000,190) $47,692,852 $(38,732,315)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $87,000,190 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. 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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
----------------- -------
2010................................................... $64,572
2011................................................... 22,428
-------
$87,000
=======
</Table>
The tax character of distributions paid during the ten months ended October 31,
2003 and years ended December 31, 2002 and 2001, shown in the Statement of
Changes in Net Assets, was as follows:
<Table>
<Caption>
2003 2002 2001
----------- ----------- -----------
Distributions paid from:
Ordinary Income $1,333,552 $1,125,710 $3,060,073
Long-Term Gains -- 7,605,451 3,803,706
---------- ---------- ----------
$1,333,552 $8,731,161 $6,863,779
========== ========== ==========
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $278,298 and $322,895, respectively.
21
MainStay Value Fund
As of October 31, 2003, the Fund had securities on loan with an aggregate market
value of $75,276,447. The Fund received $77,632,728 in cash as collateral for
securities on loan which was used to purchase highly liquid short-term
investments in accordance with the Fund's securities lending procedures.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
JANUARY 1, THROUGH ----------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- ----------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- --------
Shares sold.................... 2,226 1,797 139 6,321 2,723 169 6,636 3,288 66
Shares issued in reinvestment
of dividends and
distributions................ 47 39 --(a) 141 456 1 103 261 --(a)
------ ------ ---- ------ ------ --- ------ ------ ---
2,273 1,836 139 6,462 3,179 170 6,739 3,549 66
Shares redeemed................ (2,683) (4,545) (117) (6,894) (7,250) (93) (5,003) (5,722) (18)
------ ------ ---- ------ ------ --- ------ ------ ---
Net increase (decrease)........ (410) (2,709) 22 (432) (4,071) 77 1,736 (2,173) 48
====== ====== ==== ====== ====== === ====== ====== ===
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
(a) Less than one-thousand.
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
22
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Value Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Value Fund (one of the
funds constituting The MainStay Funds, hereafter referred to as the "Fund") at
October 31, 2003, the results of its operations for the ten months ended October
31, 2003 and the year ended December 31, 2002, the changes in its net assets for
the ten months ended October 31, 2003 and each of the two years in the period
ended December 31, 2002 and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. 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 auditing standards generally accepted in
the United States of America, 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 October 31, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
TAX INFORMATION (UNAUDITED)
MainStay Value Fund designates 100% of the dividends it paid during 2003 from
net investment company taxable income as qualifying for the reduced tax rate
under the Jobs and Growth Tax Relief and Reconciliation Act of 2003.
In addition, 100% of the ordinary income dividends paid during the ten months
ended October 31, 2003 qualify for the corporate dividends received deduction
under Section 243 of the Internal Revenue Code.
23
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
24
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
25
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
26
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
D/B/A MERCURY ADVISORS
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
27
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY FUNDS LOGO]
MainStay is a division of New York Life Investment
Management LLC, the investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSV11- 12/03
NYLIM-A04336 15
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
Value Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY FUNDS LOGO]
Table of Contents
<Table>
President's Letter 2
Portfolio Management Discussion and Analysis 3
Portfolio of Investments 6
Financial Statements 9
Notes to Financial Statements 14
Report of Independent Auditors 18
Trustees and Officers 19
The MainStay(R) Funds 22
</Table>
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
2
Portfolio Management Discussion and Analysis
During the first few months of 2003, the Iraqi crisis had a major influence on
the financial markets. Both the equity and fixed-income markets experienced huge
swings in performance on the back of diplomatic and military developments
related to Iraq. Financial conditions improved during the second quarter as
major combat operations in Iraq came to a conclusion. Oil prices declined and
consumer confidence rebounded sharply. Equity markets recovered from their March
lows, and yield spreads between corporate bonds and U.S. Treasuries narrowed.
In May of 2003, the Federal Reserve adopted a new approach by separately
assessing economic-growth prospects and the inflation outlook. Until then, the
Federal Reserve had issued a one-dimensional risk assessment. By adopting a two-
dimensional approach, the Fed attempted to convey that higher economic growth in
the future would not necessarily entail an immediate tightening of monetary
policy.
The Federal Open Market Committee's press release in May highlighted the
probability, though minor, of "an unwelcome substantial fall in inflation" from
a level that was already low. Following this release, interest rates dropped
sharply across the money-market yield curve. As the June meeting approached,
rates continued to fall, as various Fed members spoke of the need to act
preemptively to prevent the economy from slipping into a deflationary mode. On
June 25, 2003, the Federal Open Market Committee lowered the targeted federal
funds rate by 25 basis points to a low 1.0%.
The decline in interest rates sparked a significant wave of mortgage refinancing
during the spring and summer. Also during that time, the Federal government
added fiscal stimulus to the economy in the form of tax cuts. Largely supported
by this monetary and fiscal stimulus, consumer spending remained strong through
the first 10 months of 2003, despite a poor labor market. According to
preliminary estimates by the Bureau of Economic Analysis, real gross domestic
product rose at a seasonally adjusted annual rate of 8.2% in the third quarter
of 2003, the fastest growth since early 1984.
Overall, the yield on the three-month U.S. Treasury bill fell from 1.20% at
year-end 2002 to 0.95% on October 31, 2003, while three-month LIBOR(1) declined
from 1.38% to 1.17% over the same period.
PERFORMANCE REVIEW
For the 7-day period ended October 31, 2003, MainStay Money Market Fund
provided a current yield of 0.37% and a seven-day effective yield of 0.37% for
Class A, Class B, and Class C shares. For the 10 months ended October 31, 2003,
the Fund returned 0.44% for Class A, Class B, and Class C shares.(2) All share
classes outperformed the 0.38% return of the average Lipper(3) money market
- -------
1. The London interbank offered rate (LIBOR) is a floating interest rate that is
widely used as a base rate in bank, corporate, and government lending
agreements.
2. The current yield more closely reflects the current earnings of the Fund than
the total return.
3. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
3
fund over the same period. All share classes also outperformed the 0.42% return
of the iMoneyNet First Tier Retail Fund Average(4) for the 10 months ended
October 31, 2003.
STRATEGIC POSITIONING
Throughout the first 10 months of 2003, the Fund's assets were invested in
securities issued by the U.S. Treasury and government-sponsored entities as well
as in high-quality instruments issued by finance, insurance, and brokerage
companies, industrial enterprises, banks, and bank holding companies.
All securities purchased for the portfolio were rated A-1/P-1 or higher. These
are first-tier securities, or generally those money-market instruments in the
highest rating category. The Fund was not invested in any second-tier securities
nor did it invest in split-rated issues (those rated in the highest rating
category by one credit rating agency and in the second-highest rating category
by another). The Fund's concentration on the highest-quality securities helped
manage portfolio risk. At the end of October 2003, the Fund's duration was
longer than average.
LOOKING AHEAD
At the end of the 10-month period, the Federal Open Market Committee maintained
that the risks of a fall in inflation outweighed the risks of faster economic
growth, and the Committee noted that an accommodative monetary policy could be
maintained for a considerable period. Given the ongoing slack in the economy--in
particular, the low capacity-utilization rate and the uncertain labor market--we
believe that it may take several quarters of above-trend economic growth to
convince the Federal Reserve that deflationary pressures have weakened and that
raising the targeted federal funds rate is in the best interests of the economy.
Clearly, the future direction of interest rates is dependent on whether the
recent momentum in economic growth can be sustained over the coming months.
Federal tax cuts have enabled disposable income to grow faster than personal
income, helping to keep consumer spending strong. In our opinion, however,
consumer spending cannot outstrip personal income gains for long. We further
believe that in the absence of additional fiscal stimulus, developments in the
labor market will determine spending trends. In our view, the U.S. economy needs
to generate more than 100,000 jobs each month over the next year to maintain
consumer spending at current levels.
At least for the time being, we intend to maintain the Fund's
longer-than-average duration. As the market continues to look for signs of a
sustainable economic recovery, we also intend to remain focused on high-quality,
liquid
- -------
4. The iMoneyNet First Tier Retail Fund Average is unmanaged and includes only
nongovernment retail funds that are not holding any second-tier securities.
Portfolio holdings of first-tier funds include U.S. Treasury securities, U.S.
repurchase agreements, time deposits, domestic bank obligations, foreign bank
obligations, first-tier commercial paper, floating-rate notes, and
asset-backed commercial paper. Results assume reinvestment of all income and
capital gains. An investment cannot be made directly into an index or an
average.
4
investments. Whatever the markets or the economy may bring, the Fund will
continue to seek a high level of current income while preserving capital and
maintaining liquidity.
Claude Athaide, Ph.D., CFA
Portfolio Manager
MacKay Shields LLC
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund. The current yield is a more accurate reflection
of the Fund's earnings than the annualized return.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
5
MainStay Money Market Fund
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
-----------------------------
SHORT-TERM INVESTMENTS (101.0%)+
BANK NOTES (2.2%)
Bank One Corp. Chicago,
Illinois
1.16%, due 11/10/03 (c).... $6,000,000 $ 5,999,985
Bayerische Landesbank N.Y.
5.00%, due 7/20/04 (c)..... 6,000,000 6,156,742
------------
12,156,727
------------
CERTIFICATES OF DEPOSIT (1.1%)
Citibank of North America
1.065%, due 12/19/03 (c)... 6,000,000 6,000,000
------------
COMMERCIAL PAPER (42.1%)
Allianz Finance Corp.
1.07%, due 12/17/03 (a).... 6,000,000 5,991,797
1.08%, due 11/20/03 (a).... 6,000,000 5,996,580
American Express Credit Corp
1.02%, due 11/24/03........ 4,800,000 4,796,872
American General Finance
Corp.
1.04%, due 11/20/03........ 6,000,000 5,996,707
ANZ (DE), Inc.
1.03%, due 12/29/03........ 6,000,000 5,990,043
1.08%, due 1/12/04......... 3,400,000 3,392,656
Atlantis One Funding Corp.
1.14%, due 1/28/04 (a)..... 5,393,000 5,377,971
Barclays U.S. Funding Corp.
1.04%, due 11/19/03........ 6,000,000 5,996,880
1.08%, due 1/12/04......... 6,000,000 5,987,040
ChevronTexaco Corp.
1.02%, due 12/4/03......... 3,675,000 3,671,564
General Electric Capital
Corp.
1.08%, due 12/10/03........ 5,600,000 5,593,448
Goldman Sachs Group, Inc.
0.63%, due 6/6/04.......... 6,000,000 5,977,248
1.26%, due 11/17/03........ 6,000,000 5,996,640
Harvard University
1.02%, due 11/6/03......... 6,000,000 5,999,150
HBOS Treasury Services
1.04%, due 12/8/03......... 6,000,000 5,993,617
1.05%, due 11/4/03......... 6,400,000 6,399,440
ING America Insurance
Holdings
1.07%, due 11/17/03........ 6,000,000 5,997,147
ING U. S. Funding LLC
1.09%, due 3/10/04......... 6,000,000 5,976,383
International Business
Machines Corp.
1.03%, due 11/21/03........ 8,525,000 8,520,122
KfW International Finance,
Inc.
1.06%, due 1/23/04......... 5,850,000 5,835,703
Lloyds Bank PLC
1.03%, due 12/1/03......... 6,000,000 5,994,800
Merck & Co. Inc.
1.03%, due 11/25/03........ 6,000,000 5,995,880
</Table>
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
-----------------------------
COMMERCIAL PAPER (CONTINUED)
Nationwide Building Society
1.06%, due 12/9/03......... $6,000,000 $ 5,993,287
1.07%, due 12/16/03........ 6,000,000 5,991,975
Nestle Capital Corp.
1.02%, due 12/31/03 (a).... 6,075,000 6,064,672
1.04%, due 12/12/03 (a).... 8,500,000 8,489,932
Pfizer, Inc.
0.90%, due 12/9/03 (a)..... 6,000,000 5,994,300
1.02%, due 12/11/03 (a).... 5,325,000 5,318,965
Prudential Funding LLC
0.98%, due 11/18/03........ 6,000,000 5,997,223
1.08%, due 3/22/04......... 4,400,000 4,381,256
Quebec Province
0.91%, due 12/3/03......... 6,000,000 5,995,147
1.13%, due 3/29/04......... 1,375,000 1,368,569
Shell Finance (U.K.) PLC
1.03%, due 11/13/03 (a).... 7,300,000 7,297,494
Societe Generale N.A., Inc.
1.03%, due 11/10/03........ 6,000,000 5,998,455
1.15%, due 11/14/03........ 6,000,000 5,997,508
Svenska Handelsbanken AB
1.03%, due 12/15/03........ 2,600,000 2,596,727
Swiss Re Financial Products
1.05%, due 12/2/03 (a)..... 7,125,000 7,118,558
1.10%, due 2/13/04 (a)..... 3,625,000 3,613,481
UBS Finance Delaware LLC
1.08%, due 2/25/04......... 7,750,000 7,723,030
Unicredit Delaware Inc.
1.06%, due 12/30/03........ 6,000,000 5,989,626
------------
229,407,893
------------
CORPORATE BONDS (11.5%)
Abbott Laboratories
5.125%, due 7/1/04 (c)..... 6,000,000 6,148,802
Bank of America Corp.
6.125%, due 7/15/04 (c).... 4,545,000 4,700,515
6.625%, due 6/15/04 (c).... 5,254,000 5,433,983
First Security Corp.
5.875%, due 11/1/03 (c).... 6,500,000 6,500,000
J.P. Morgan Chase & Co.
5.75%, due 4/15/04 (c)..... 8,000,000 8,164,119
Metropolitan Life Insurance
Co. Series EXL
1.13%, due 4/28/08
(a)(b)(c).................. 6,000,000 6,000,000
Morgan Stanley Dean Witter &
Co.
5.625%, due 1/20/04 (c).... 7,030,000 7,099,916
Unilever Capital Corp.
6.75%, due 11/1/03 (c)..... 5,000,000 5,000,000
Wachovia Corp.
6.625%, due 6/15/04 (c).... 6,000,000 6,206,851
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
6
Portfolio of Investments October 31, 2003
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
-----------------------------
SHORT-TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS (CONTINUED)
Wells Fargo & Co.
6.625%, due 7/15/04 (c).... $7,000,000 $ 7,262,260
------------
62,516,446
------------
MEDIUM TERM NOTES (6.7%)
American Express Credit
Corp. Series B
1.161%, due 3/5/08
(b)(c)..................... 6,000,000 6,000,000
American General Finance Co.
Series G
1.31%, due 8/6/04 (b)(c)... 3,500,000 3,505,314
Bank One Corp. Series C
1.41%, due 5/7/04 (b)(c)... 6,000,000 6,009,800
General Electric Capital Co.
Series A
1.239%, due 5/7/04
(b)(c)..................... 6,000,000 6,004,013
Merrill Lynch & Co. Series B
1.43%, due 5/21/04
(b)(c)..................... 3,800,000 3,807,199
5.46%, due 5/7/04 (c)...... 6,700,000 6,844,575
Morgan Stanley Dean Witter &
Co. Series C
1.414%, due 2/2/04
(b)(c)..................... 4,300,000 4,303,286
------------
36,474,187
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (33.4%)
Federal Home Loan Banks
(Discount Notes)
0.92%, due 1/7/04.......... 9,443,000 9,426,831
1.01%, due 11/28/03........ 7,400,000 7,394,422
1.04%, due 1/21/04......... 6,000,000 5,985,960
1.07%, due 1/14/04......... 7,000,000 6,984,676
1.08%, due 3/19/04......... 6,000,000 5,974,980
1.11%, due 11/19/03........ 9,000,000 8,995,005
1.14%, due 11/7/03......... 5,975,000 5,973,865
Federal Mortgage Corporation
(Discount Notes)
1.08%, due
2/10/04-2/18/04............ 12,000,000 11,962,200
1.12%, due 3/12/04......... 5,600,000 5,577,003
1.24%, due 12/15/03........ 6,800,000 6,789,694
1.27%, due 12/29/03........ 7,000,000 6,985,677
</Table>
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
-----------------------------
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
Federal National Mortgage
Association (Discount
Notes)
1.06%, due
11/5/03-1/21/04............ $13,097,000 $ 13,081,858
1.10%, due 2/4/04-3/3/04... 10,100,000 10,067,174
1.11%, due 1/28/04......... 6,000,000 5,983,720
1.12%, due 2/4/04.......... 2,900,000 2,891,429
1.25%, due 12/12/03........ 5,000,000 4,992,882
United States Treasury Bills
(Discount Notes)
0.95%, due 1/15/04......... 9,100,000 9,082,060
0.96%, due
12/18/03-1/8/04............ 18,600,000 18,571,846
0.98%, due 3/18/04......... 7,400,000 7,372,201
1.00%, due 1/22/04......... 9,100,000 9,079,334
1.01%, due
1/29/04-2/12/04............ 6,500,000 6,481,413
1.02%, due
2/5/04-2/12/04............. 12,400,000 12,365,898
------------
182,020,128
------------
<Caption>
SHARES VALUE
-----------------------------
INVESTMENT COMPANY (4.0%)
Merrill Lynch Premier
Institutional Fund......... 21,866,993 $ 21,866,993
------------
Total Short-Term Investments
(Amortized Cost
$550,442,374) (d).......... 101.0% 550,442,374
Liabilities in Excess
of Cash and Other Assets... (1.0) (5,291,574)
----------- ------------
Net Assets.................. 100.0% $545,150,800
=========== ============
</Table>
<Table>
- -------
(a) May be sold to institutional investors only.
(b) Floating rate. Rate shown is the rate in effect at
October 31, 2003
(c) Coupon interest bearing security.
(d) The cost stated also represents the aggregate cost for
federal income tax purposes.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
7
MainStay Money Market Fund
The table below sets forth the diversification of the Money Market Fund
investments by industry.
<Table>
<Caption>
AMORTIZED
COST PERCENT+
------------------------
INDUSTRY DIVERSIFICATION
Banks #....................... $145,525,759 26.7%
Computer Systems.............. 8,520,122 1.6
Conglomerates................. 11,597,461 2.1
Consumer Financial Services... 19,034,224 3.5
Education..................... 5,999,150 1.1
Finance....................... 33,252,412 6.1
Food.......................... 11,064,672 2.0
Foreign Government............ 7,363,716 1.3
Health Care--Drugs............ 11,313,265 2.1
Health Care--Medical
Products..................... 5,995,880 1.1
Health Technology............. 6,148,802 1.1
Insurance..................... 22,375,186 4.1
Investment Bank/Brokerage..... 26,928,948 4.9
Investment Company*........... 21,866,993 4.0
Oil--Integrated Domestic...... 3,671,564 0.7
Special Purpose Entity........ 27,764,092 5.2
U.S. Government & Federal
Agencies..................... 182,020,128 33.4
------------ -----
550,442,374 101.0
Liabilities in Excess of Cash
and Other Assets............. (5,291,574) (1.0)
------------ -----
Net Assets.................... $545,150,800 100.0%
============ =====
</Table>
- -------
+ Percentages indicated are based on Fund net assets.
# The Portfolio 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.
* Merrill Lynch Premier Institutional Fund is valued at market value.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
8
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (amortized cost
$550,442,374)............................................. $550,442,374
Cash........................................................ 1,077,096
Receivables:
Fund shares sold.......................................... 1,748,136
Interest.................................................. 1,504,962
Other assets................................................ 29,620
------------
Total assets........................................ 554,802,188
------------
LIABILITIES:
Payables:
Fund shares redeemed...................................... 7,838,269
Investment securities purchased........................... 1,056,707
Transfer agent............................................ 532,632
Manager................................................... 30,642
Trustees.................................................. 7,372
Custodian................................................. 5,420
Accrued expenses............................................ 134,580
Dividend payable............................................ 45,766
------------
Total liabilities................................... 9,651,388
------------
Net assets.................................................. $545,150,800
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 1,739,769
Class B................................................... 3,542,043
Class C................................................... 169,569
Additional paid-in capital.................................. 539,689,698
Accumulated net realized gain on investments................ 9,721
------------
Net assets.................................................. $545,150,800
============
CLASS A
Net assets applicable to outstanding shares................. $173,978,126
============
Shares of beneficial interest outstanding................... 173,976,922
============
Net asset value and offering price per share outstanding.... $ 1.00
============
CLASS B
Net assets applicable to outstanding shares................. $354,215,156
============
Shares of beneficial interest outstanding................... 354,204,296
============
Net asset value and offering price per share outstanding.... $ 1.00
============
CLASS C
Net assets applicable to outstanding shares................. $ 16,957,518
============
Shares of beneficial interest outstanding................... 16,956,912
============
Net asset value and offering price per share outstanding.... $ 1.00
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
9
Statement of Operations for the period January 1, 2003 through
October 31, 2003* and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
----------- ------------
INVESTMENT INCOME:
Income:
Interest.................................................. $6,811,009 $13,230,825
---------- -----------
Expenses:
Manager................................................... 2,609,728 3,267,617
Transfer agent............................................ 2,490,939 2,736,871
Shareholder communication................................. 108,653 136,612
Professional.............................................. 91,507 113,418
Registration.............................................. 88,494 71,695
Recordkeeping............................................. 77,589 96,221
Custodian................................................. 56,285 73,131
Trustees.................................................. 27,725 33,467
Miscellaneous............................................. 20,741 21,764
---------- -----------
Total expenses before reimbursement..................... 5,571,661 6,550,796
Expense reimbursement from Manager and Subadvisor........... (1,695,034) (1,681,471)
---------- -----------
Net expenses............................................ 3,876,627 4,869,325
---------- -----------
Net investment income....................................... 2,934,382 8,361,500
---------- -----------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments............................ 6,339 26,655
---------- -----------
Net increase in net assets resulting from operations........ $2,940,721 $ 8,388,155
========== ===========
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
-------------- --------------- ---------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 2,934,382 $ 8,361,500 $ 23,132,850
Net realized gain (loss) on investments................... 6,339 26,655 (14)
-------------- --------------- ---------------
Net increase in net assets resulting from operations...... 2,940,721 8,388,155 23,132,836
-------------- --------------- ---------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (1,046,256) (2,899,885) (7,106,029)
Class B................................................. (1,805,015) (5,265,499) (15,519,568)
Class C................................................. (83,111) (196,116) (507,253)
From net realized gain on investments:
Class A................................................. -- (5,184) --
Class B................................................. -- (8,975) --
Class C................................................. -- (233) --
-------------- --------------- ---------------
Total dividends and distributions to shareholders..... (2,934,382) (8,375,892) (23,132,850)
-------------- --------------- ---------------
Capital share transactions:
Net proceeds from sales of shares:
Class A................................................. 662,753,783 1,088,735,323 669,255,386
Class B................................................. 302,617,702 471,236,622 526,962,473
Class C................................................. 87,517,076 55,296,456 52,469,443
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 898,678 2,527,921 6,526,092
Class B................................................. 1,667,763 4,902,168 14,595,365
Class C................................................. 60,857 152,853 440,601
-------------- --------------- ---------------
1,055,515,859 1,622,851,343 1,270,249,360
Cost of shares redeemed:
Class A................................................. (710,782,198) (1,093,968,714) (619,694,701)
Class B................................................. (379,562,407) (486,584,778) (509,906,388)
Class C................................................. (81,828,038) (60,948,200) (45,567,603)
-------------- --------------- ---------------
Increase (decrease) in net assets derived from capital
share transactions.................................. (116,656,784) (18,650,349) 95,080,668
-------------- --------------- ---------------
Net increase (decrease) in net assets................. (116,650,445) (18,638,086) 95,080,654
NET ASSETS:
Beginning of period......................................... $ 661,801,245 $ 680,439,331 $ 585,358,677
-------------- --------------- ---------------
End of period............................................... $ 545,150,800 $ 661,801,245 $ 680,439,331
============== =============== ===============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
---------------------------------------------------------------------------------
January 1,
2003
through Year ended December 31,
October 31, ----------------------------------------------------------------
2003* 2002 2001 2000 1999 1998
----------- -------- -------- -------- -------- --------
Net asset value at beginning of period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Net investment income..................... 0.00(b) 0.01 0.04 0.06 0.05 0.05
Net realized gain on investments.......... -- 0.00(b) -- -- -- --
-------- -------- -------- -------- -------- --------
Total from investment operations.......... 0.00(b) 0.01 0.04 0.06 0.05 0.05
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income............... (0.00)(b) (0.01) (0.04) (0.06) (0.05) (0.05)
From net realized gain on investments.... -- (0.00)(b) -- -- -- --
-------- -------- -------- -------- -------- --------
Total dividends and distributions......... (0.00)(b) (0.01) (0.04) (0.06) (0.05) (0.05)
-------- -------- -------- -------- -------- --------
Net asset value at end of period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
Total investment return (a)............... 0.44% 1.22% 3.72% 5.87% 4.65% 5.01%
Ratios (to average net assets)/
Supplemental Data:
Net investment income.................. 0.53%+ 1.20% 3.59% 5.71% 4.56% 4.90%
Net expenses........................... 0.70%+ 0.70% 0.70% 0.70% 0.70% 0.70%
Expenses (before reimbursement)........ 1.01%+ 0.94% 0.90% 0.89% 0.85% 0.93%
Net assets at end of period (in 000's).... $173,978 $221,106 $223,807 $167,720 $189,336 $149,751
</Table>
- -------
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is not annualized.
(b) Less than one cent per share.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<Table>
<Caption>
Class B Class C
------------------------------------------------------------------ -------------------------------------------------
January 1, January 1,
2003 Year ended 2003 Year ended
through December 31, through December 31,
October 31, ---------------------------------------------------- October 31, -----------------------------------
2003* 2002 2001 2000 1999 1998 2003* 2002 2001 2000 1999
----------- -------- -------- -------- -------- -------- ----------- ------- ------- ------ ------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------ ------
0.00(b) 0.01 0.04 0.06 0.05 0.05 0.00(b) 0.01 0.04 0.06 0.05
-- 0.00(b) -- -- -- -- -- 0.00(b) -- -- --
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------ ------
0.00(b) 0.01 0.04 0.06 0.05 0.05 0.00(b) 0.01 0.04 0.06 0.05
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------ ------
(0.00)(b) (0.01) (0.04) (0.06) (0.05) (0.05) (0.00)(b) (0.01) (0.04) (0.06) (0.05)
-- (0.00)(b) -- -- -- -- -- (0.00)(b) -- -- --
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------ ------
(0.00)(b) (0.01) (0.04) (0.06) (0.05) (0.05) (0.00)(b) (0.01) (0.04) (0.06) (0.05)
-------- -------- -------- -------- -------- -------- ------- ------- ------- ------ ------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======= ======= ======= ====== ======
0.44% 1.22% 3.72% 5.87% 4.65% 5.01% 0.44% 1.22% 3.72% 5.87% 4.65%
0.53%+ 1.20% 3.59% 5.71% 4.56% 4.90% 0.53%+ 1.20% 3.59% 5.71% 4.56%
0.70%+ 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%+ 0.70% 0.70% 0.70% 0.70%
1.01%+ 0.94% 0.90% 0.89% 0.85% 0.93% 1.01%+ 0.94% 0.90% 0.89% 0.85%
$354,215 $429,488 $439,927 $408,275 $458,391 $424,174 $16,958 $11,207 $16,706 $9,364 $2,154
<Caption>
Class C
-------------
September 1**
through
December 31,
1998
-------------
$ 1.00
------
0.02
--
------
0.02
------
(0.02)
--
------
(0.02)
------
$ 1.00
======
1.60%
4.90%+
0.70%+
0.93%+
$ 18
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
MainStay Money Market Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay Money
Market Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares, Class B
shares and Class C shares whose distribution commenced on January 3, 1995, May
1, 1986 and September 1, 1998, respectively. The shares bear the same voting
(except for issues that relate solely to one class), dividend, liquidation and
other rights and conditions.
The Fund's investment objective is to seek as high a level of current income as
is considered consistent with the preservation of capital and liquidity.
The Fund's principal investments include derivatives such as variable rate
master demand notes, "floating-rate notes" and mortgage-related and asset-backed
securities. If expectations about change in interest rates, or assessments of an
issuer's creditworthiness or market conditions are wrong, the use of derivatives
or other investments could result in a loss.
The Fund also invests in foreign securities which carry certain risks 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 and restrictions.
The ability of issuers of debt securities held by the Fund to meet their
obligations may be affected by economic and political developments in a specific
country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) 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. An investment
in the Fund is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
(B) SECURITIES VALUATION. Securities are valued at their amortized cost, which
approximates market value except for the Merrill Lynch Premier Institutional
Fund which is valued at market value. The amortized cost method involves valuing
a security at its cost on the date of purchase and thereafter
14
Notes to Financial Statements
assuming a constant amortization to maturity of the difference between such cost
and the value on maturity date.
(C) 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.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. Dividends are declared daily and paid
monthly and capital gain distributions, if any, annually. Income dividends and
capital gain distributions are determined in accordance with federal income tax
regulations, which may differ from generally accepted accounting principles.
(E) 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 and discounts and premiums on securities purchased for the Fund
are accreted and amortized, respectively, on the straight line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(F) 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 where direct allocations of expenses can be made. Expenses are
allocated to separate classes of shares based upon their relative net asset
value on the date the expenses are incurred. The expenses borne by the Fund,
including those of related parties to the Fund, are shown in the Statement of
Operations.
(G) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the
15
MainStay Money Market Fund
"Subadvisor"), a registered investment adviser and indirect wholly-owned
subsidiary of New York Life, is responsible for the day-to-day portfolio
management of the Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 0.50% up to $300 million, 0.45% on assets from $300 million
to $700 million, 0.40% on assets from $700 million to $1 billion and 0.35% on
assets in excess of $1 billion. The Manager has voluntarily agreed to assume the
expenses of the Fund to the extent that such expenses would exceed on an annual
basis 0.70% of the average daily net assets of the Fund. For the ten months
ended October 31, 2003 and year ended December 31, 2002, the Manager earned from
the Fund $2,609,728 and $3,267,617, respectively. For the ten months ending
October 31, 2003 and year ended December 31, 2002, the Manager reimbursed the
Fund $1,695,034 and $1,681,471, respectively.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor a monthly fee at an annual rate of the
Fund's average daily net assets of 0.25% up to $300 million, 0.225% on assets
from $300 million to $700 million, 0.20% on assets from $700
million to $1 billion and 0.175% on assets in excess of $1 billion. To the
extent the Manager has agreed to reimburse expenses of the Fund, the Subadvisor
has voluntarily agreed to do so proportionately.
(B) CONTINGENT DEFERRED SALES CHARGE. Although the Fund does not assess a
contingent deferred sales charge upon redemption of Class B or Class C shares of
the Fund, the applicable contingent deferred sales charge will be assessed when
shares are redeemed from the Fund if the shareholder previously exchanged his or
her investment into the Fund from another Fund in the Trust. The Fund was
advised that NYLIFE Distributors LLC (the "Distributor"), an indirect wholly
owned subsidiary of New York Life, received from shareholders the proceeds from
contingent deferred sales charges for the ten months ended October 31, 2003, in
the amount of $1,334,814.
(C) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and year ended December 31, 2002 amounted to $2,490,939
and $2,736,871, respectively.
(D) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee
16
Notes to Financial Statements (continued)
and Operations Committee attended, respectively. The Trust allocates trustees
fees in proportion to the net assets of the respective Funds. Thus the Money
Market Fund only pays a portion of the fees identified above.
(E) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $13,052 for the ten months ended
October 31, 2003 and $13,843 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $77,589 for the ten months ended October
31, 2003 and $96,221 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated gain on a tax basis were
$9,721.
Dividends to shareholders from net investment income and distributions to
shareholders from net realized gains shown in the Statement of Changes in Net
Assets represent tax-based distributions of ordinary income.
NOTE 5--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
JANUARY 1 YEAR ENDED
THROUGH DECEMBER 31,
OCTOBER 31, ---------------------------------------------------------------
2003* 2002 2001
----------------------------- ------------------------------- -----------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
-------- -------- ------- ---------- -------- ------- -------- -------- -------
Shares sold................. 662,754 302,618 87,517 1,088,735 471,237 55,296 669,254 526,957 52,469
Shares issued in
reinvestment of dividends
and distributions......... 899 1,667 61 2,528 4,902 153 6,526 14,595 441
-------- -------- ------- ---------- -------- ------- -------- -------- -------
663,653 304,285 87,578 1,091,263 476,139 55,449 675,780 541,552 52,910
Shares redeemed............. (710,776) (379,565) (81,828) (1,093,969) (486,585) (60,948) (619,695) (509,906) (45,568)
-------- -------- ------- ---------- -------- ------- -------- -------- -------
Net increase (decrease)..... (47,123) (75,280) 5,750 (2,706) (10,446) (5,499) 56,085 31,646 7,342
======== ======== ======= ========== ======== ======= ======== ======== =======
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
</Table>
NOTE 6--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
17
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Money Market Fund
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 funds constituting The MainStay Funds, hereafter referred to as the "Fund")
at October 31, 2003, the results of its operations for the ten months ended
October 31, 2003 and the year ended December 31, 2002, the changes in its net
assets for the ten months ended October 31, 2003 and each of the two years in
the period ended December 31, 2002 and the financial highlights for each of the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
18
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
19
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
20
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
21
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
22
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY FUNDS LOGO]
MainStay is a division of New York Life Investment
Management LLC, the investment advisor to The MainStay Funds.
- ------------------------------------------------------
YNot FDIC insured. Y No bank guarantee. Y May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSMM11- 12/03
NYLIM-A04426 12
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
Money Market Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY FUNDS LOGO]
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay Research Value
Fund versus Russell 1000(R) Value Index and
Inflation--Class A, Class B, and Class C
Shares 4
Portfolio Management Discussion and Analysis 6
Year-by-Year and 10-Month Performance 7
Portfolio of Investments 10
Financial Statements 11
Notes to Financial Statements 16
Report of Independent Auditors 22
Trustees and Officers 23
The MainStay(R) Funds 26
</Table>
2
This page intentionally left blank
3
-
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
4
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
$10,000 Invested in MainStay
Research Value Fund versus Russell
1000(R) Value Index and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 12.10%, 5 Years 1.90%, Since Inception
(6/1/98) 0.76%
<Table>
<Caption>
MAINSTAY RESEARCH VALUE RUSSELL 1000 VALUE
FUND INFLATION (CPI)(2) INDEX(1)
----------------------- ------------------ ------------------
06/01/98 9450.00 10000.00 10000.00
10/31/98 8959.00 10080.00 9648.00
10/31/99 10934.00 10338.00 11243.00
10/31/00 13512.00 10695.00 11863.00
10/31/01 11244.00 10923.00 10456.00
10/31/02 8782.00 11150.00 9408.00
10/31/03 10418.00 11378.00 11561.00
</Table>
CLASS B SHARES
Total Returns with Sales Charges: 1 Year 12.92%, 5 Years 1.97%, Since Inception
(6/1/98) 0.91%
<Table>
<Caption>
MAINSTAY RESEARCH VALUE RUSSELL 1000 VALUE
FUND INFLATION (CPI)(2) INDEX(1)
----------------------- ------------------ ------------------
06/01/98 10000.00 10000.00 10000.00
10/31/98 9440.00 10080.00 9648.00
10/31/99 11450.00 10338.00 11243.00
10/31/00 14044.00 10695.00 11863.00
10/31/01 11607.00 10923.00 10456.00
10/31/02 8985.00 11150.00 9408.00
10/31/03 10502.00 11378.00 11561.00
</Table>
CLASS C SHARES
Total Returns with Sales Charges: 1 Year 16.92%, 5 Years 2.34%, Since Inception
(6/1/98) 1.07%
<Table>
<Caption>
MAINSTAY RESEARCH VALUE RUSSELL 1000 VALUE
FUND INFLATION (CPI)(2) INDEX(1)
----------------------- ------------------ ------------------
06/01/98 10000.00 10000.00 10000.00
10/31/98 9440.00 10080.00 9648.00
10/31/99 11450.00 10338.00 11243.00
10/31/00 14044.00 10695.00 11863.00
10/31/01 11607.00 10923.00 10456.00
10/31/02 8985.00 11150.00 9408.00
10/31/03 10595.00 11378.00 11561.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION, PLEASE VISIT WWW.MAINSTAYFUNDS.COM.
5
-
- ----------
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect change in share price, reinvestment of dividend and capital gain
distributions, and maximum applicable sales charges explained in this paragraph.
The graphs assume an initial investment of $10,000 and reflect deduction of all
sales charges that would have applied for the period of investment. Class A
share performance reflects the effect of the maximum 5.5% initial sales charge.
Class B shares are subject to a contingent deferred sales charge (CDSC) of up to
5% if shares are redeemed within the first six years of purchase. Class B share
performance reflects a CDSC of 1%, which would apply for the period shown. Class
C share performance includes the historical performance of the Class B shares
for periods from 6/1/98 through 8/31/98. Class C shares would be subject to a
CDSC of 1% if redeemed within one year of purchase.
1. The Russell 1000(R) Value Index is an unmanaged index that measures the
performance of those Russell 1000(R) companies with lower price-to-book
ratios and lower forecasted growth values. The Russell 1000(R) Index is an
unmanaged index that measures the performance of the 1,000 largest U.S.
companies based on total market capitalization. Results assume
reinvestment of all income and capital gains. An investment cannot be made
directly into an index.
2. Inflation is measured 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. The rate of inflation does not represent an
investment return.
6
- -------
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 5 for more information about the Russell 1000(R) Value
Index.
Portfolio Management Discussion and Analysis
After generally trending downward from mid-January through early March of 2003,
the U.S. stock market rose significantly from mid-March through the end of
October. The stock market's advance was supported by renewed strength in the
U.S. economy, including improved consumer spending and a revival of corporate
earnings.
Real gross domestic product grew at a meager 1.4% in the first quarter of 2003
and 3.3% in the second quarter. According to preliminary estimates by the Bureau
of Economic Analysis, in third quarter of 2003, real gross domestic product rose
at a seasonally adjusted annual rate of 8.2%, its highest rate since the first
quarter of 1984. The recent tax-cut package may have contributed to positive
consumer-spending trends. At the same time, corporate cost cutting and a weaker
dollar appear to have helped raise corporate-earnings forecasts for the third
quarter of 2003. During the reporting period, however, investors in general
appeared to favor higher-valuation, lower-quality stocks--a trend we view as
somewhat speculative.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Research Value Fund returned
16.59% for Class A shares and 15.97% for Class B and Class C shares, excluding
all sales charges. All share classes underperformed the 22.13% return of the
average Lipper(1) multi-cap value fund over the same period. All share classes
also underperformed the 20.84% return of the Russell 1000(R) Value Index(2) for
the 10 months ended October 31, 2003.
The Fund's relative performance was primarily the result of our protective
approach, which favors higher-quality companies with attractive valuation
characteristics. The Fund's investments in the energy and materials sectors made
the most significant positive contributions to relative performance during the
10-month period. ConocoPhillips and Weyerhauser were the Fund's top performers
in these sectors, respectively. These positive contributions, however, were not
enough to outweigh the drag on relative performance from investments in the
consumer discretionary and utilities sectors. Mattel, J.C. Penney, Energy East,
and FPL Group each produced only single-digit returns. Throughout the reporting
period, we strictly adhered to the Fund's fundamental research disciplines and
portfolio diversification guidelines.
STRONG AND WEAK PERFORMERS
The Fund's best-performing securities for the 10 months ended October 31, 2003,
were spread across several economic sectors.
7
- ------- -
3. Percentages reflect the total return performance of indicated securities for
the 10 months ended October 31, 2003. Due to purchases and sales, the
performance of Fund holdings may differ from the performance of the
securities themselves.
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
<Table>
<Caption>
CLASS A SHARES
--------------
12/98 3.00
12/99 18.35
12/00 14.89
12/01 -6.14
12/02 -28.07
10/03 16.59
</Table>
CLASS B AND CLASS C SHARES
<Table>
<Caption>
CLASS B AND CLASS C SHARES
--------------------------
12/98 2.50
12/99 17.56
12/00 14.03
12/01 -6.84
12/02 -28.62
10/03 15.97
</Table>
FleetBoston Financial (+72.6%)(3) benefited during the period from the low
interest-rate environment and from the fact that investor concerns about the
company's Latin American loan book were subsiding. FleetBoston Financial further
gained investor confidence by focusing on organic growth in its core businesses.
During the last week of October 2003, the company agreed to be acquired by Bank
of America in a deal valued at more than $40 billion. This announcement gave
FleetBoston Financial's stock price a considerable boost.
Beckman Coulter (+69.8%), a leading name in clinical diagnostics and a major
supplier to the genome-science segment of the marketplace, posted strong revenue
and earnings growth for the 10-month period.
8
Ingersoll-Rand (+41.9%) showed strong performance as the U.S. economy expanded.
Like other companies in the industrials sector, Ingersoll-Rand tends to do well
in the early stages of an economic recovery. The company's acquisition of
Hussman has proved beneficial, and the new division appears to be a good fit
with Ingersoll-Rand's other industrial-products businesses.
Some of the Fund's holdings that showed weak performance during the 10-month
period were Merck (-15.8%), Verizon Communications (-9.6%), and SBC
Communications (-6.4%).
Merck suffered when concerns about new-drug pipelines and drug-patent
expirations led the health care sector in general--and the pharmaceutical
industry in particular--to lag the broader equity market. We continue to view
Merck's positioning within the health care sector in a positive light. We are
attracted to Merck's balance-sheet strength and the low relative valuation and
high relative dividend yield of the company's stock.
Verizon Communications was weighed down primarily by labor and pension liability
issues. We still like the company, however, because of its positioning in the
telecommunication services sector, its valuation characteristics, its attractive
4.6% dividend yield, and its superior cellular-telephone business.
SBC Communications was hampered by a lack of penetration in the long-distance
market (because of regulatory restraints) and in the cable market. Yet the
company has a strong balance sheet and a compelling 4.7% dividend yield. SBC
Communications has a minimal debt load and may be well-positioned to rebound
when the telecommunication services sector strengthens.
STRATEGIC MANAGEMENT DECISIONS
Our one major sale during the reporting period was the elimination of the Fund's
position in AT&T in early January 2003. When AT&T sold its cable television
assets to Comcast, we became less comfortable with AT&T as a pure-play
long-distance carrier.
By selling the stock in January, we successfully avoided nearly all of AT&T's
26% share-price decline during the 10 months ended October 31, 2003. We used the
proceeds from the sale to add to the Fund's holdings in Weyerhauser and
ConocoPhillips.
During the third calendar quarter, we sold the Fund's modest position in health
care company Medco, shares of which had been received when the company was spun
off by Merck, one of the Fund's existing holdings. We also trimmed the Fund's
position in Beckman Coulter, which at the time had risen approximately 50%. We
redeployed those proceeds to add to the Fund's position in Merck.
9
- ------- -
4. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500 is
an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock market performance. Results assume reinvestment of all
income and capital gains. An investment cannot be made directly into an
index.
At the end of the 10-month period, the Fund's portfolio remained broadly neutral
to the sector weightings of the S&P 500 Index,(4) with a few key exceptions. The
Fund continued to have a meaningfully underweighted position in the information
technology sector. We continued to overweight energy, telecommunication
services, and utilities in the portfolio. During the second calendar quarter,
Wal-Mart's stock was reclassified within the S&P 500 Index, moving from consumer
discretionary to consumer staples. As a result of this sector composition shift,
the portfolio continued to have a modestly underweighted position in both the
consumer discretionary and consumer staples sectors.
LOOKING AHEAD
Despite signs of generally improving economic fundamentals, we remain concerned
about the high valuations in the U.S. stock market. We find it difficult to
envision long-term economic expansion of a magnitude to justify the high price
multiples of U.S. large-cap stocks. In our view, valuations are more consistent
with those of a late-stage bull market. As a result, we continue to believe that
the year-to-date run-up in stock prices represents a cyclical bull market within
a secular bear market. We expect low but positive single-digit annualized U.S.
equity-market returns on average over the next three to five years.
Even so, we believe there will always be opportunities to purchase good
companies at significant discounts to fair value. Whatever the markets may
bring, the Fund will continue to seek long-term capital appreciation by
investing primarily in securities of large-capitalization companies.
Jordan L. Irving
Anthony A. Lombardi
D. Tysen Nutt, Jr.
Robert A. Vogel, Jr.
Portfolio Managers
Mercury Advisors
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
10
- -
Portfolio of Investments October 31, 2003
<Table>
<Caption>
SHARES VALUE
--------------------------
COMMON STOCKS (98.8%)+
AEROSPACE & DEFENSE (3.2%)
Boeing Co. (The)................ 50,753 $ 1,953,483
-----------
COMMERCIAL BANKS (12.7%)
FleetBoston Financial Corp. .... 56,961 2,300,655
Huntington Bancshares, Inc. .... 79,131 1,713,977
Marshall & Ilsley Corp. ........ 53,685 1,922,997
Wachovia Corp. ................. 37,717 1,730,079
-----------
7,667,708
-----------
COMPUTERS & PERIPHERALS (6.0%)
Hewlett-Packard Co. ............ 86,387 1,927,294
International Business Machines
Corp. ......................... 19,284 1,725,532
-----------
3,652,826
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES (6.4%)
SBC Communications, Inc. ....... 82,517 1,978,758
Verizon Communications, Inc. ... 56,121 1,885,666
-----------
3,864,424
-----------
ELECTRIC UTILITIES (2.8%)
FPL Group, Inc. ................ 26,003 1,657,431
-----------
FOOD PRODUCTS (5.9%)
Archer-Daniels-Midland Co. ..... 120,529 1,729,591
ConAgra Foods, Inc. ............ 77,677 1,851,820
-----------
3,581,411
-----------
HEALTH CARE EQUIPMENT & SUPPLIES (5.7%)
Baxter International, Inc. ..... 59,948 1,593,418
Beckman Coulter, Inc. .......... 37,772 1,875,380
-----------
3,468,798
-----------
HOUSEHOLD PRODUCTS (2.8%)
Kimberly-Clark Corp. ........... 31,453 1,661,033
-----------
INSURANCE (6.2%)
Allstate Corp. (The)............ 45,881 1,812,300
Hartford Financial Services
Group, Inc. (The).............. 34,656 1,902,614
-----------
3,714,914
-----------
LEISURE EQUIPMENT & PRODUCTS (2.7%)
Mattel, Inc. ................... 83,247 1,611,662
-----------
MACHINERY (3.4%)
Ingersoll-Rand Co. Class A...... 34,033 2,055,593
-----------
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
<Table>
<Caption>
SHARES VALUE
--------------------------
MULTILINE RETAIL (3.3%)
J.C. Penney Co., Inc. .......... 85,428 $ 2,020,372
-----------
MULTI-UTILITIES & UNREGULATED POWER (2.8%)
Energy East Corp. .............. 73,820 1,657,259
-----------
OFFICE ELECTRONICS (2.9%)
Xerox Corp. (a)................. 168,547 1,769,743
-----------
OIL & GAS (8.4%)
ChevronTexaco Corp. ............ 23,888 1,774,878
ConocoPhillips.................. 29,919 1,709,871
ExxonMobil Corp. ............... 43,010 1,573,306
-----------
5,058,055
-----------
PAPER & FOREST PRODUCTS (2.9%)
Weyerhaeuser Co. ............... 29,524 1,778,230
-----------
PHARMACEUTICALS (8.5%)
Abbott Laboratories............. 40,923 1,744,138
Merck & Co., Inc. .............. 38,713 1,713,050
Wyeth........................... 38,691 1,707,821
-----------
5,165,009
-----------
ROAD & RAIL (6.1%)
Burlington Northern Santa Fe
Corp........................... 62,521 1,809,358
Union Pacific Corp. ............ 30,357 1,900,348
-----------
3,709,706
-----------
SPECIALTY RETAIL (3.2%)
Limited Brands.................. 109,761 1,931,794
-----------
THRIFTS & MORTGAGE FINANCE (2.9%)
Washington Mutual, Inc. ........ 40,659 1,778,831
-----------
Total Investments
(Cost $53,256,872) (b)......... 98.8% 59,758,282(c)
Cash and Other Assets, Less
Liabilities.................... 1.2 742,270
----- -----------
Net Assets...................... 100.0% $60,500,552
======= ===========
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) The cost for federal income tax purposes is $53,275,828.
(c) At October 31, 2003, net unrealized appreciation was
$6,482,454, 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 $7,631,519 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $1,149,065.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
-
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$53,256,872).............................................. $ 59,758,282
Cash........................................................ 675,792
Receivables:
Dividends................................................. 151,701
Fund shares sold.......................................... 144,825
Other assets................................................ 11,321
------------
Total assets........................................ 60,741,921
------------
LIABILITIES:
Payables:
Fund shares redeemed...................................... 83,381
Transfer agent............................................ 42,129
NYLIFE Distributors....................................... 33,338
Manager................................................... 27,063
Shareholder Communication................................. 25,701
Professional.............................................. 22,191
Custodian................................................. 1,286
Accrued expenses............................................ 6,280
------------
Total liabilities................................... 241,369
------------
Net assets.................................................. $ 60,500,552
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 26,775
Class B................................................... 25,342
Class C................................................... 11,306
Additional paid-in capital.................................. 69,436,783
Accumulated undistributed net investment income............. 211,873
Accumulated net realized loss on investments................ (15,712,937)
Net unrealized appreciation on investments.................. 6,501,410
------------
Net assets.................................................. $ 60,500,552
============
CLASS A
Net assets applicable to outstanding shares................. $ 26,171,890
============
Shares of beneficial interest outstanding................... 2,677,480
============
Net asset value per share outstanding....................... $ 9.77
Maximum sales charge (5.50% of offering price).............. 0.57
------------
Maximum offering price per share outstanding................ $ 10.34
============
CLASS B
Net assets applicable to outstanding shares................. $ 23,737,639
============
Shares of beneficial interest outstanding................... 2,534,174
============
Net asset value and offering price per share outstanding.... $ 9.37
============
CLASS C
Net assets applicable to outstanding shares................. $ 10,591,023
============
Shares of beneficial interest outstanding................... 1,130,589
============
Net asset value and offering price per share outstanding.... $ 9.37
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
- -
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
----------- ------------
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $1,066,537 $ 927,037
Interest.................................................. 1,352 40,283
---------- ------------
Total income............................................ 1,067,889 967,320
---------- ------------
Expenses:
Manager................................................... 347,391 423,987
Transfer agent............................................ 205,595 235,660
Distribution--Class B..................................... 125,496 176,717
Distribution--Class C..................................... 41,372 37,263
Service--Class A.......................................... 46,551 53,375
Service--Class B.......................................... 41,832 58,906
Service--Class C.......................................... 13,791 12,421
Professional.............................................. 34,217 25,697
Registration.............................................. 29,506 28,417
Shareholder communication................................. 26,860 46,859
Recordkeeping............................................. 16,399 19,959
Custodian................................................. 7,773 7,966
Amortization of organization expense...................... 5,633 13,490
Trustees.................................................. 4,472 5,992
Miscellaneous............................................. 18,318 20,190
---------- ------------
Total expenses before reimbursement..................... 965,206 1,166,899
Expense reimbursement from Manager.......................... (103,557) (104,871)
---------- ------------
Net expenses............................................ 861,649 1,062,028
---------- ------------
Net investment income (loss)................................ 206,240 (94,708)
---------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments..................... 298,498 (15,895,812)
Net change in unrealized appreciation (depreciation) on
investments............................................... 7,503,492 (1,420,991)
---------- ------------
Net realized and unrealized gain (loss) on investments...... 7,801,990 (17,316,803)
---------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ $8,008,230 $(17,411,511)
========== ============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
(a) Dividends recorded net of foreign withholding taxes of $0
and $2,623 for 2003 and 2002, respectively.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
-
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
----------- ------------ -----------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss).............................. $ 206,240 $ (94,708) $ (210,177)
Net realized gain (loss) on investments................... 298,498 (15,895,812) 41,736
Net change in unrealized appreciation (depreciation) on
investments............................................. 7,503,492 (1,420,991) (3,633,217)
----------- ------------ -----------
Net increase (decrease) in net assets resulting from
operations.............................................. 8,008,230 (17,411,511) (3,801,658)
----------- ------------ -----------
Distributions to shareholders:
From net realized gain on investments:
Class A................................................. -- (29,926) (229,042)
Class B................................................. -- (33,343) (287,073)
Class C................................................. -- (6,670) (59,490)
----------- ------------ -----------
Total distributions to shareholders................... -- (69,939) (575,605)
----------- ------------ -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 9,081,876 7,500,281 5,123,867
Class B................................................. 5,478,696 4,990,637 11,830,716
Class C................................................. 6,757,467 2,164,087 3,499,206
Net asset value of shares issued to shareholders in
reinvestment of distributions:
Class A................................................. -- 27,070 199,555
Class B................................................. -- 27,824 238,459
Class C................................................. -- 2,853 22,795
----------- ------------ -----------
21,318,039 14,712,752 20,914,598
Cost of shares redeemed:
Class A................................................. (5,189,955) (4,983,316) (2,850,802)
Class B................................................. (3,794,299) (6,310,427) (4,429,426)
Class C................................................. (1,071,349) (2,460,364) (1,556,377)
----------- ------------ -----------
Increase in net assets derived from capital share
transactions........................................ 11,262,436 958,645 12,077,993
----------- ------------ -----------
Net increase (decrease) in net assets................. 19,270,666 (16,522,805) 7,700,730
NET ASSETS:
Beginning of period......................................... 41,229,886 57,752,691 50,051,961
----------- ------------ -----------
End of period............................................... $60,500,552.. $ 41,229,886 $57,752,691
=========== ============ ===========
Accumulated undistributed net investment income at end of
period.................................................... $ 211,873 $ -- $ --
=========== ============ ===========
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
-------------------------------------------------------------------------------------
January 1, 2003 June 1**
through Year ended December 31, through
October 31, ---------------------------------------------- December 31,
2003* 2002 2001 2000 1999 1998
--------------- ------- ------- ------- ------- ------------
Net asset value at beginning of
period............................... $ 8.38 $ 11.67 $ 12.56 $ 11.62 $ 10.30 $ 10.00
------- ------- ------- ------- ------- -------
Net investment income (loss) (a)...... 0.07 0.02 0.01 0.00(b) (0.03) (0.07)
Net realized and unrealized gain
(loss) on investments................ 1.32 (3.30) (0.78) 1.70 1.90 0.37
------- ------- ------- ------- ------- -------
Total from investment operations...... 1.39 (3.28) (0.77) 1.70 1.87 0.30
------- ------- ------- ------- ------- -------
Less distributions:
From net realized gain on
investments........................ -- (0.01) (0.12) (0.76) (0.37) --
In excess of net realized gain on
investments........................ -- -- -- -- (0.18) --
------- ------- ------- ------- ------- -------
Total distributions to shareholders... -- (0.01) (0.12) (0.76) (0.55) --
------- ------- ------- ------- ------- -------
Net asset value at end of period...... $ 9.77 $ 8.38 $ 11.67 $ 12.56 $ 11.62 $ 10.30
======= ======= ======= ======= ======= =======
Total investment return (c)........... 16.59% (28.07%) (6.14%) 14.89% 18.35% 3.00%
Ratios (to average net assets)/
Supplemental Data:
Net investment income (loss)....... 0.91%+ 0.24% 0.05% 0.06% (0.33%) (1.48%)+
Net expenses....................... 1.70%+ 1.70% 1.74% 1.80% 1.80% 3.15%+
Expenses (before reimbursement).... 1.95%+ 1.91% 1.74% 1.89% 2.14% 3.15%+
Portfolio turnover rate............... 5% 120% 44% 60% 63% 53%
Net assets at end of period (in
000's)............................... $26,172 $18,532 $23,360 $22,619 $13,987 $10,378
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Commencement of Operations.
*** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges and is
not annualized.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
<Table>
<Caption>
Class B Class C
------------------------------------------------------------------ ---------------------------------------------------
January 1 June 1** January 1
through Year ended December 31, through through Year ended December 31,
October 31, ------------------------------------- December 31, October 31, -------------------------------------
2003* 2002 2001 2000 1999 1998 2003* 2002 2001 2000 1999
----------- ------- ------- ------- ------- ------------ ----------- ------- ------- ------- -------
$ 8.08 $ 11.34 $ 12.30 $ 11.48 $ 10.25 $ 10.00 $ 8.08 $ 11.34 $ 12.30 $ 11.48 $ 10.25
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
0.01 (0.05) (0.08) (0.08) (0.09) (0.10) 0.01 (0.05) (0.08) (0.08) (0.09)
1.28 (3.20) (0.76) 1.66 1.87 0.35 1.28 (3.20) (0.76) 1.66 1.87
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
1.29 (3.25) (0.84) 1.58 1.78 0.25 1.29 (3.25) (0.84) 1.58 1.78
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
-- (0.01) (0.12) (0.76) (0.37) -- -- (0.01) (0.12) (0.76) (0.37)
-- -- -- -- (0.18) -- -- -- -- -- (0.18)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
-- (0.01) (0.12) (0.76) (0.55) -- -- (0.01) (0.12) (0.76) (0.55)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 9.37 $ 8.08 $ 11.34 $ 12.30 $ 11.48 $ 10.25 $ 9.37 $ 8.08 $ 11.34 $ 12.30 $ 11.48
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
15.97% (28.62%) (6.84%) 14.03% 17.56% 2.50% 15.97% (28.62%) (6.84%) 14.03% 17.56%
0.16%+ (0.51%) (0.70%) (0.69%) (1.08%) (2.23%)+ 0.16%+ (0.51%) (0.70%) (0.69%) (1.08%)
2.45%+ 2.45% 2.49% 2.55% 2.55% 3.90%+ 2.45%+ 2.45% 2.49% 2.55% 2.55%
2.70%+ 2.66% 2.49% 2.64% 2.89% 3.90%+ 2.70%+ 2.66% 2.49% 2.64% 2.89%
5% 120% 44% 60% 63% 53% 5% 120% 44% 60% 63%
$23,738 $18,961 $28,562 $23,087 $10,176 $ 4,589 $10,591 $ 3,737 $ 5,831 $ 4,345 $ 1,146
<Caption>
Class C
--------------
September 1***
through
December 31,
1998
--------------
$ 8.30
-------
(0.06)
2.01
-------
1.95
-------
--
--
-------
--
-------
$ 10.25
=======
23.49%
(2.23%)+
3.90%+
3.90%+
53%
$ 138
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
MainStay Research Value Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
Research Value Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and within one year of purchase
of Class C shares. Class A shares, Class B shares and Class C shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions except that the Class B shares and
Class C shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek long-term capital appreciation by
investing primarily in securities of large-capitalization companies.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
(B) ORGANIZATION COSTS. Costs incurred in connection with the Fund's initial
organization and registration totalled $67,459 and were amortized over 60 months
beginning at the commencement of operations.
Notes to Financial Statements
17
-
(C) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay any
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current period reclassification between
accumulated undistributed net investment income and additional paid-in-capital
arising from permanent differences; net assets at October 31, 2003, are not
affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED
NET INVESTMENT ADDITIONAL
INCOME PAID-IN CAPITAL
- -------------- ---------------
$5,633 $(5,633)
</Table>
The reclassification for the Fund is primarily due to non-deductible expenses
(organizational costs).
(E) 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 as earned.
Discounts and premiums on short-term securities are accreted and amortized,
respectively, on the straight line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(F) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plan) are allocated to
separate
MainStay Research Value Fund
18
- -
classes of shares based upon their relative net asset value on the date the
expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(G) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. Fund Asset
Management, L.P., d/b/a Mercury Advisors ("Mercury" or the "Subadvisor") is
responsible for the day-to-day portfolio management of the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.85% of the Fund's
average daily net assets. Through March 11, 2002 the Manager had voluntarily
agreed to reimburse the expenses of the Fund to the extent that operating
expenses would exceed on an annualized basis 1.80%, 2.55% and 2.55% of the
average daily net assets of the Class A, Class B and Class C shares,
respectively. Effective March 12, 2002, the Manager voluntarily agreed to
reimburse the expenses of the Fund to the extent that operating expenses would
exceed on an annualized basis 1.70%, 2.45% and 2.45% of the average daily net
assets of the Class A, Class B and Class C shares, respectively. For the ten
months ended October 31, 2003, the Manager earned from the Fund $347,391 and
reimbursed the Fund $103,557. For the year ended December 31, 2002, the Manager
earned from the Fund $423,987 and reimbursed the Fund $104,871.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and the
Subadvisor, the Manager paid the Subadvisor a monthly fee at an annual rate of
0.425% on assets up to $250 million, 0.3825% on assets from $250 million to $500
million and 0.34% on assets in excess of $500 million.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
Notes to Financial Statements (continued)
19
-
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Distribution Plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $4,652 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemption of Class A, Class B and Class C
shares of $2,784, $34,210 and $1,124, respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and year ended December 31, 2002, amounted to $205,595
and $235,660, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the Research Value
Fund only pays a portion of the fees identified above.
(F) CAPITAL. At October 31, 2003, New York Life held shares of Class A with a
value of $9,921,581. This represents 37.9% of the net assets for Class A and
16.4% of the Fund's total net assets at period end.
(G) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $1,071 for the ten months ended October
31, 2003 and $957 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1%
MainStay Research Value Fund
20
- -
of the next $80 million of average monthly net assets and 1/100 of 1% of any
amount in excess of $100 million of average monthly net assets. Fees for
recordkeeping services provided to the Fund by the Manager amounted to $16,399
for the ten months ended October 31, 2003 and $19,959 for the year ended
December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
UNDISTRIBUTED
NET INVESTMENT ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
INCOME AND OTHER LOSSES APPRECIATION LOSS
- -------------- ------------------- ------------ -----------------
$211,873 $(15,693,981) $6,482,454 $(8,999,654)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is due
to wash sale deferrals.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $15,693,981 were available, as shown in the table below, to offset future
realized gains of the Fund through the years indicated. 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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
----------------- -------
2010.................................................. $ 3,613
2011.................................................. 12,081
-------
$15,694
=======
</Table>
The tax character of distributions paid during the year ended December 31, 2002
and December 31, 2001, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2002 2001
------- --------
Distributions paid from:
Ordinary income $ -- $434,239
Long-term capital gains 69,939 141,366
------- --------
$69,939 $575,605
======= ========
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $15,341 and $2,559, respectively.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average
Notes to Financial Statements (continued)
21
-
commitment amount, regardless of usage, to The Bank of New York, which acts as
agent to the syndicate. Such commitment fees are allocated among the funds based
upon net assets and other factors. Interest on any revolving credit loan is
charged based upon the Federal Funds Advances rate. There were no borrowings on
the line of credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
JANUARY 1 DECEMBER 31,
THROUGH ------------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold............... 1,063 643 797 731 511 220 427 1,011 296
Shares issued in
reinvestment of
distributions........... -- -- -- 3 3 -- 17 21 2
----- ---- ---- ---- ---- ---- ---- ----- ----
1,063 643 797 734 514 220 444 1,032 298
Shares redeemed........... (597) (455) (128) (525) (687) (272) (244) (391) (137)
----- ---- ---- ---- ---- ---- ---- ----- ----
Net increase (decrease)... 466 188 669 209 (173) (52) 200 641 161
===== ==== ==== ==== ==== ==== ==== ===== ====
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
22
- -
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Research Value Fund
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 Research Value Fund (one
of the funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
23
-
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
24
- -
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
25
-
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
26
- -
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY.LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSRV11- 12/03
NYLIM-A04325 22
RECYCLE.LOGO
[MAINSTAY FUNDS LOGO]
MainStay(R)
Research Value Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY.LOGO]
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay International
Equity Fund versus Morgan Stanley Capital
International EAFE(R) Index--Class A, Class
B, and Class C Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year and 10-Month Performance 6
Portfolio of Investments 10
Financial Statements 13
Notes to Financial Statements 18
Report of Independent Auditors 26
Trustees and Officers 27
The MainStay(R) Funds 30
</Table>
2
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3
-
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
4
$10,000 Invested in MainStay International
Equity Fund versus Morgan Stanley
Capital International EAFE(R) Index
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 13.01%, 5 Years 0.31%, Since Inception
(9/12/94) 2.97%
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX(1)
----------------------------- ------------------
09/12/94 9450 10000
10/31/94 9469 10008
10/31/95 9044 9970
10/31/96 10211 11014
10/31/97 11035 11524
10/31/98 12155 12636
10/31/99 14805 15546
10/31/00 13219 15096
10/31/01 10790 11333
10/31/02 10926 9835
10/31/03 13066 12494
</Table>
Period-end
CLASS B AND CLASS C SHARES
Class B Total Returns with Sales Charges: 1 Year 13.71%, 5 Years 0.37%, Since
Inception (9/12/94) 2.88%
Class C Total Returns with Sales Charges: 1 Year 17.71%, 5 Years 0.73%, Since
Inception (9/12/94) 2.88%
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX(1)
----------------------------- ------------------
09/12/94 10000 10000
10/31/94 10020 10008
10/31/95 9500 9970
10/31/96 10647 11014
10/31/97 11419 11524
10/31/98 12499 12636
10/31/99 15103 15546
10/31/00 13399 15096
10/31/01 10871 11333
10/31/02 10920 9835
10/31/03 12963 12494
</Table>
Period-end
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION PLEASE VISIT WWW.MAINSTAYFUNDS.COM.
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect change in share price, reinvestment of dividend and capital
gain distributions, and maximum applicable sales charges explained in this
paragraph. The graphs assume an initial investment of $10,000 and reflect
deduction of all sales charges that would have applied for the period of
investment. Class A share performance reflects the effect of the maximum 5.5%
initial sales charge and includes the historical performance of the Class B
shares for periods from 9/13/94 through 12/31/94. Performance figures for the
two classes vary after 12/31/94, based on differences in their sales charges
and expense structures. Class C share performance includes the historical
performance of the Class B shares for periods from 9/13/94 through 8/31/98.
Class B shares are subject to a contingent deferred sales charge (CDSC) of up
to 5% if shares are redeemed within the first six years of purchase, and
Class C shares would be subject to a CDSC of 1% if redeemed within one year
of purchase.
1. The Morgan Stanley Capital International Europe, Australasia, and Far East
Index--the MSCI EAFE(R) Index--is an unmanaged index that is considered to
be representative of the international stock market. Results assume
reinvestment of all income and capital gains. An investment cannot be made
directly into an index.
5
- ------- -
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 4 for more information about the MSCI EAFE Index.
3. For each fund with at least a three-year history, Morningstar calculates a
Morningstar Rating(TM) based on a Morningstar Risk-Adjusted Return measure
that accounts for variation in a fund's monthly performance (including the
effects of sales charges, loads, and redemption fees), placing more emphasis
on downward variations and rewarding consistent performance. The top 10% of
funds in each category receive five stars, the next 22.5% receive four stars,
the middle 35% receive three stars, the next 22.5% receive two stars, and the
bottom 10% receive one star. The Overall Morningstar Rating(TM) for a fund is
derived from a weighted average of the performance figures associated with
its three-, five- and 10-year (if applicable) Morningstar Rating(TM) metrics.
Portfolio Management Discussion and Analysis
For the 10 months ended October 31, 2003, international stock markets generally
showed strong performance both in U.S. dollars and local currency terms.
Overall, the global markets have surged in tandem since March of 2003, as some
economic data suggested that the worst is over and that a recovery is just
around the corner. In Europe, business expectations are improving, but activity
and demand have provided no discernible signs of recovery. Business-sentiment
indicators are rising moderately, but consumer confidence remains stalled at low
levels. Foreign currencies--particularly the euro and Japanese yen--gained
considerably against the U.S. dollar.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay International Equity Fund
returned 20.27% for Class A shares and 19.55% for Class B and Class C shares,
excluding all sales charges. All share classes underperformed the 23.53% return
of the average Lipper(1) international fund over the same period. All share
classes also underperformed the 25.75% return of the Morgan Stanley Capital
International Europe, Australasia, and Far East Index(2) for the 10 months ended
October 31, 2003.
The Fund's underperformance resulted from its being underweighted in high-beta
sectors such as technology and insurance. High-beta companies showed
particularly strong performance in the first 10 months of 2003. All of the
companies in which the Fund was invested, however, continued to perform well
operationally.
As of October 31, 2003, all share classes of MainStay International Equity Fund
received an overall rating of four stars out of 163 foreign large growth funds
by Morningstar.(3) All of the Fund's share classes were rated five stars out of
163 foreign large growth funds for the three-year period then ended. All of the
Fund's share classes were rated four stars out of 125 foreign large growth funds
for the five-year period then ended.
STRATEGIC POSITIONING
The Fund uses a bottom-up stock-by-stock selection process to select securities
for the portfolio. This process often leads us to out-of-favor companies with
quality brands. The Fund's country, sector, and market-capitalization weightings
were the result of individual stock selection and did not reflect predetermined
target allocations. The Fund does not make top-down selections by country or
sector. The Fund's bottom-up selection process has resulted in overweighted
positions in the consumer staples and utilities sectors and underweighted
positions in telecommunications services, health care, energy, and basic
materials. Generally speaking, we find less compelling investment potential in
Japan than we do in Europe and other Asian nations. As a result the portfolio
was
6
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
<Table>
<Caption>
CLASS A SHARES
--------------
12/94 -2.30
12/95 5.25
12/96 9.78
12/97 4.52
12/98 20.17
12/99 27.54
12/00 -21.32
12/01 -15.70
12/02 -4.12
10/03 20.27
</Table>
Period-end Total Return %
Returns reflect the historical performance of the Class B shares through
12/31/94. See footnote on page 4 for more information on performance.
CLASS B SHARES
<Table>
<Caption>
CLASS B SHARES
--------------
12/94 -2.30
12/95 4.27
12/96 9.05
12/97 3.78
12/98 19.34
12/99 26.60
12/00 -21.71
12/01 -16.34
12/02 -4.95
10/03 19.55
</Table>
Period-end Total Return %
See footnote on page 4 for more information on performance.
underweighted in Japanese stocks relative to the MSCI EAFE Index at the end of
the reporting period.
STRONG AND WEAK PERFORMERS
Among the leading contributors to performance for the 10-month period ended
October 31, 2003, were Deutsche Boerse, Next PLC, TPG, and Bayerishe Motoren
Werke. Deutsche Boerse provides a securities-exchange platform through the
German Exchange, derivatives trading on the Eurex, and clearing services
7
-
CLASS C SHARES
<Table>
<Caption>
CLASS C SHARES
--------------
12/94 -2.30
12/95 4.27
12/96 9.05
12/97 3.78
12/98 19.34
12/99 26.60
12/00 -21.71
12/01 -16.44
12/02 -4.85
10/03 19.55
</Table>
Period-end
Total Return %
Class C share returns reflect the historical performance of the Class B shares
through 8/31/98. See footnote on page 4 for more information on performance.
through its subsidiary Clearstream. As the markets have risen and volume has
increased in the equity and derivatives markets, Deutsche Boerse has continued
to surprise the market operationally. Despite some uncertainty surrounding
debate over a new European Union investment directive, we believe the new
directive will not adversely affect the company.
Other notable contributors to the Fund's performance during the 10-month
reporting period included Porsche, Cannon, and Iberdrola. Canon, the well-known
copier and printer company, surprised analysts by continuing to perform well in
difficult times. Porsche enjoyed strong performance on the back of robust sales
from its newly introduced performance SUV, the Cayenne. Iberdola, a Spanish
utility, is in the middle of a five-year investment plan that involves divesting
noncore assets and reinvesting in cleaner, more efficient electricity generation
to satisfy faster-than-average growth in demand. Midway through the refocus, the
company appears to be well on its way on becoming the cleanest and most
profitable utility in Europe. Due to its solid performance, the company
increased its dividend more than analysts expected.
One large detractor from the Fund's performance during the reporting period was
Nintendo, a manufacturer and marketer of home-use games including Gamecube and
Gameboy systems. The Fund's position in Nintendo was reduced when sales
expectations were not met for the current generation of the in-home game system
Gamecube.
Other holdings that detracted from performance during the reporting period
included Aventis and Julius Baer Holding, which were eliminated from the
portfolio. Aventis reported lower same-period sales than last year for its
product line and was affected when some currencies weakened against the euro.
Julius
8
Baer Holding, Switzerland's largest independent private bank, struggled to trim
its cost base in the three-year bear market. The market's difficulties hurt the
company's private-banking business and its brokerage unit. Julius Baer's shares
declined on the news of a restructuring charge for the sale of the company's
pan-European institutional-brokerage operations at a loss. A larger-than-
anticipated first-half loss at the brokerage unit also affected the stock price.
Low-fare airline Ryanair also contributed negatively to performance after its
share price dropped on the news that the company might lose a crucial court
ruling in Brussels. The court will decide whether incentive payments received by
Ryanair from local or regional airports are lawful under EU competition and
government-aid rules. Ryanair's business model is based on servicing cheaper
secondary or regional airports, and the company has been able to undercut the
prices of major European carriers. A negative ruling could affect Ryanair's
ability to offer discounted prices.
We added to the Fund's position in Hennes & Mauritz, the Swedish-based designer
and retailer of clothing for men, women, and children. H&M has been successful
where most clothing retailers have failed--in international expansion. The
company continues to expand in many countries and appears to be breaking down
the borders of fashion.
We trimmed the Fund's position in FANUC, the Japanese manufacturer of
factory-automation systems, when the stock reached our price target.
LOOKING AHEAD
While the world economy has improved, we believe that a large portion of the
market has already reflected the change. We remain concerned that in a number of
industries, valuations may have surpassed what is justified by the magnitude of
the recovery in the world economy or in earnings. We take a cautious view and
remain underweighted in high-beta sectors such as media and information
technology.
As always, we remain alert for selective opportunities in stocks, and we
continue to take advantage of selloffs to accumulate positions in solid
franchises that are undergoing temporary difficulty. Whatever the markets or the
world economy may bring, the Fund will continue to seek to provide long-term
growth of capital with an acceptable level of risk by investing in a portfolio
9
-
consisting primarily of non-U.S. equity securities. Current income will remain a
secondary objective.
Rupal J. Bhansali
Portfolio Manager
MacKay Shields LLC
Foreign securities may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information, and changes in tax or currency laws or monetary policy. These risks
are likely to be greater in emerging markets than in developed markets. The Fund
may invest in derivatives, which may increase the volatility of the Fund's net
asset value and may result in a loss to the Fund.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
MainStay International Equity Fund
10
- -
<Table>
<Caption>
SHARES VALUE
----------------------------
COMMON STOCKS (93.4%)+
AUSTRALIA (0.6%)
Australian Gas Light Co., Ltd.
(energy sources).............. 18,600 $ 141,215
Cochlear Ltd. (health &
personal care)................ 23,300 520,774
------------
661,989
------------
BELGIUM (2.7%)
Electrabel, S.A.
(utilities-electrical &
gas).......................... 9,827 2,717,743
------------
BERMUDA (0.5%)
XL Capital Ltd. Class A
(insurance)................... 7,400 514,300
------------
DENMARK (2.2%)
Danske Bank A/S (banking)...... 110,705 2,233,299
------------
FRANCE (1.7%)
BNP Paribas, S.A. (banking).... 29,180 1,533,263
Dexia (business & public
services)..................... 15,200 239,252
------------
1,772,515
------------
GERMANY (9.6%)
BASF AG (chemicals)............ 6,000 275,513
Bayerische Motoren Werke AG
(automobiles)................. 92,988 3,729,400
Deutsche Boerse AG (financial
services)..................... 64,721 3,600,146
Schering AG (health & personal
care)......................... 48,038 2,258,897
------------
9,863,956
------------
HONG KONG (2.9%)
Hongkong Electric Holdings,
Ltd. (utilities-electrical &
gas).......................... 775,300 3,025,045
------------
INDIA (1.5%)
HDFC Bank Ltd. ADR (banking)
(b)........................... 26,495 685,955
ITC, Ltd. GDR
(beverages & tobacco)
(a)(c)........................ 46,500 891,317
------------
1,577,272
------------
IRELAND (3.7%)
Anglo Irish Bank Corp. PLC
(banking)..................... 30,900 371,066
Bank of Ireland (banking)...... 215,703 2,660,508
iShares DJ Euro STOXX 50 Index
Fund (financial services)
(e)........................... 25,300 760,281
------------
3,791,855
------------
ITALY (4.5%)
Eni S.p.A. (energy sources).... 70,100 1,113,170
Eni S.p.A. PLC ADR
(energy sources) (b).......... 2,700 214,650
</Table>
<Table>
<Caption>
SHARES VALUE
----------------------------
ITALY (CONTINUED)
Riunione Adriatica di Sicurta
S.p.A. (insurance)............ 15,700 $ 245,297
Snam Rete Gas S.p.A.
(utilities-electrical &
gas).......................... 798,395 3,007,155
------------
4,580,272
------------
JAPAN (9.7%)
Canon, Inc.
(data processing &
reproduction)................. 56,000 2,709,965
Canon, Inc. ADR
(data processing &
reproduction) (b)............. 11,823 578,736
FANUC, Ltd. (electronic
components & instruments)..... 5,400 324,683
Murata Manufacturing Co., Ltd.
(electronic components &
instruments).................. 12,700 722,018
Nintendo Co., Ltd. (recreation
& other consumer goods)....... 25,900 2,000,191
Nitto Denko Corp.
(chemicals)................... 13,200 692,809
Nomura Research Institute, Ltd.
(business & public
services)..................... 3,400 341,747
Secom Co., Ltd. (business &
public services).............. 6,900 269,887
Takeda Chemical Industries,
Ltd. (health & personal
care)......................... 66,600 2,356,611
------------
9,996,647
------------
NETHERLANDS (10.9%)
Euronext N.V. (financial
services)..................... 113,285 2,772,155
Reed Elsevier N.V.
(broadcasting & publishing)... 182,770 2,035,464
Royal Dutch Petroleum Co.
(utilities electrical &
gas).......................... 43,600 1,934,968
TPG N.V. (business & public
services)..................... 205,746 4,436,784
------------
11,179,371
------------
SINGAPORE (0.8%)
Venture Corp., Ltd. (electrical
& electronics)................ 73,400 796,841
------------
SPAIN (5.5%)
Banco Popular Espanol, S.A.
(banking)..................... 67,634 3,516,875
Iberdrola, S.A.
(utilities-electrical &
gas).......................... 92,202 1,538,103
Indra Sistemas, S.A.
(business & public
services)..................... 52,100 586,281
------------
5,641,259
------------
SWEDEN (1.7%)
Autoliv, Inc. (automobiles).... 15,200 503,424
Hennes & Mauritz AB
(merchandising)............... 12,100 256,709
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003
11
-
<Table>
<Caption>
SHARES VALUE
----------------------------
COMMON STOCKS (CONTINUED)
SWEDEN (CONTINUED)
Sandvik AB (machinery &
engineering).................. 25,310 $ 752,728
Svenska Handelsbanken AB Class
A (banking)................... 14,400 253,819
------------
1,766,680
------------
SWITZERLAND (10.6%)
Credit Suisse Group ADR
(banking) (b)................. 22,200 783,216
Nestle, S.A. Registered (food &
household products)........... 15,160 3,337,732
Novartis AG Registered (health
& personal care).............. 15,248 581,213
Novartis AG ADR (health &
personal care) (b)............ 38,400 1,473,408
Syngenta AG (chemicals)........ 14,100 755,499
Synthes-Stratec, Inc. (health &
personal care)................ 900 826,300
UBS AG Registered (banking).... 43,194 2,652,419
UBS AG Registered (banking)
(d)(f)........................ 8,115 497,774
------------
10,907,561
------------
UNITED KINGDOM (22.2%)
BP PLC ADR
(utilities-electrical & gas)
(b)........................... 5,200 220,376
Capita Group PLC (business &
public services).............. 22,800 95,662
Diageo PLC (beverages &
tobacco)...................... 280,661 3,302,914
Diageo Capital PLC ADR
(beverages & tobacco) (b)..... 8,690 415,469
Exel PLC
(transportation-shipping)..... 154,640 1,987,802
Lloyds TSB Group PLC
(banking)..................... 335,600 2,329,239
Lloyds TSB Group PLC ADR
(banking) (b)(f).............. 26,950 760,529
Man Group PLC (financial
services)..................... 34,500 849,484
Provident Financial PLC
(financial services).......... 69,600 763,566
Reckitt Benckiser PLC (food &
household products)........... 161,609 3,395,118
Rentokil Initial PLC (business
& public services)............ 1,026,019 3,900,068
Scottish & Southern Energy PLC
(utilities-electric & gas).... 67,230 701,628
Tesco PLC (merchandising)...... 1,036,571 4,155,656
------------
22,877,511
------------
UNITED STATES (2.1%)
AFLAC, Inc. (insurance)........ 18,890 689,107
iShares MSCI United Kingdom
Index Fund (financial
services) (e)................. 105,200 1,522,244
------------
2,211,351
------------
Total Common Stocks
(Cost $84,049,945)............ 96,115,467
------------
</Table>
<Table>
<Caption>
SHARES VALUE
----------------------------
PREFERRED STOCK (3.3%)
GERMANY (3.3%)
Porsche AG
E1.53
(automobiles) (k)............. 6,897 $ 3,383,496
------------
Total Preferred Stock
(Cost $2,437,365)............. 3,383,496
------------
WARRANT (0.9%)
IRELAND (0.9%)
Ryanair Holdings PLC
Strike Price E0.000001
Expire 3/21/08
(transportation-airlines)
(a)(h)(k)..................... 106,256 919,996
------------
Total Warrants
(Cost $736,716)............... 919,996
------------
<Caption>
PRINCIPAL
AMOUNT
----------
SHORT-TERM INVESTMENTS (4.9%)
COMMERCIAL PAPER (3.7%)
UNITED STATES (3.7%)
UBS Finance Delaware LLC
1.00%, due 11/3/03
(financial services).......... $3,865,000 3,864,779
------------
Total Commercial Paper
(Cost $3,864,779)............. 3,864,779
------------
<Caption>
SHARES
----------
INVESTMENT COMPANY (0.3%)
UNITED STATES (0.3%)
AIM Institutional Funds Group
(investment company) (g)...... 310,725 310,725
------------
Total Investment Company
(Cost $310,725)............... 310,725
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay International Equity Fund
12
- -
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
----------------------------
SHORT-TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENT (0.9%)
UNITED STATES (0.9%)
Countrywide Securities Corp.
1.062%, dated 10/31/03
due 11/3/03
Proceeds at Maturity
$890,072
(financial services) (g)
(Collateralized by Various
Bonds
with a Principal Amount of
$1,050,613 and a Market Value
of $912,033).................. $ 890,000 $ 890,000
------------
Total Repurchase Agreement
(Cost $890,000)............... 890,000
------------
Total Short-Term Investments
(Cost $5,065,504)............. 5,065,504
------------
Total Investments
(Cost $92,289,530) (i)........ 102.5% 105,484,463(j)
Liabilities in Excess of
Cash and Other Assets......... (2.5) (2,531,808)
---------- ------------
Net Assets..................... 100.0% $102,952,655
========== ============
</Table>
<Table>
- -------
(a) May be sold to institutional investors only.
(b) ADR--American Depositary Receipt.
(c) GDR--Global Depositary Receipt.
(d) Security primarily trades on the New York Stock Exchange.
(e) Exchange Traded Fund-represents a basket of securities
that are traded on an exchange.
(f) Represents a security, or a portion thereof, which is out
on loan.
(g) Represents a security, or portion thereof, purchased with
cash collateral received for securities on loan.
(h) Non-income producing security.
(i) The cost for federal income tax purposes is $92,559,351.
(j) At October 31, 2003 net unrealized appreciation for
securities was $12,925,112 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
$14,277,037 and aggregate gross unrealized depreciation
for all investments on which there was an excess of cost
over market value of $1,351,925.
(k) The following abbreviation is used in the above
portfolio:
E--Euro.
</Table>
The table below sets forth the diversification of International Equity Fund
investments by industry.
<Table>
<Caption>
VALUE PERCENT+
------------------------
INDUSTRY DIVERSIFICATION
Automobiles....................... $ 7,616,320 7.4%
Banking........................... 18,277,962 17.8
Beverages & Tobacco............... 4,609,700 4.5
Broadcasting & Publishing......... 2,035,464 2.0
Business & Public Services........ 9,869,681 9.6
Chemicals......................... 1,723,821 1.7
Data Processing & Reproduction.... 3,288,701 3.2
Electrical & Electronics.......... 796,841 0.8
Electronic Components &
Instruments...................... 1,046,701 1.0
Energy Sources.................... 1,469,035 1.4
Financial Services................ 15,022,655 14.6
Food & Household Products......... 6,732,850 6.5
Health & Personal Care............ 8,017,203 7.8
Investment Company................ 310,725 0.3
Insurance......................... 1,448,704 1.4
Machinery & Engineering........... 752,728 0.7
Merchandising..................... 4,412,365 4.3
Recreation & Other Consumer
Goods............................ 2,000,191 1.9
Transportation-Airlines........... 919,996 0.9
Transportation-Shipping........... 1,987,802 1.9
Utilities-Electrical & Gas........ 13,145,018 12.8
------------ -----
105,484,463 102.5
Liabilities in Excess of
Cash and Other Assets............ (2,531,808) (2.5)
------------ -----
Net Assets........................ $102,952,655 100.0%
============ =====
</Table>
- -------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
-
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$92,289,530) including $1,168,000 market value of
securities loaned......................................... $105,484,463
Cash denominated in foreign currencies (identified cost
$39,994).................................................. 40,026
Cash........................................................ 2,161
Receivables:
Investment securities sold................................ 653,303
Fund shares sold.......................................... 473,920
Dividends................................................. 270,151
Other assets................................................ 10,299
Unrealized appreciation on foreign currency forward
contracts................................................. 417,949
------------
Total assets.............................................. 107,352,272
------------
LIABILITIES:
Payables:
Securities lending collateral............................. 1,200,725
Investment securities purchased........................... 2,481,137
Fund shares redeemed...................................... 344,548
Transfer agent............................................ 100,687
Manager................................................... 88,915
NYLIFE Distributors....................................... 58,712
Custodian................................................. 11,718
Accrued expenses............................................ 75,874
Unrealized depreciation on foreign currency forward
contracts................................................. 37,301
------------
Total liabilities......................................... 4,399,617
------------
Net assets.................................................. $102,952,655
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 41,659
Class B................................................... 56,010
Class C................................................... 2,692
Additional paid-in capital.................................. 98,502,008
Undistributed net investment income......................... 573,777
Accumulated net realized loss on investments................ (9,820,278)
Net unrealized appreciation on investments.................. 13,194,933
Net unrealized appreciation on translation of other assets
and liabilities in foreign currencies and foreign currency
forward contracts......................................... 401,854
------------
Net assets.................................................. $102,952,655
============
CLASS A
Net assets applicable to outstanding shares................. $ 43,747,247
============
Shares of beneficial interest outstanding................... 4,165,920
============
Net asset value per share outstanding....................... $ 10.50
Maximum sales charge (5.50% of offering price).............. 0.61
------------
Maximum offering price per share outstanding................ $ 11.11
============
CLASS B
Net assets applicable to outstanding shares................. $ 56,490,080
============
Shares of beneficial interest outstanding................... 5,601,011
============
Net asset value and offering price per share outstanding.... $ 10.09
============
CLASS C
Net assets applicable to outstanding shares................. $ 2,715,328
============
Shares of beneficial interest outstanding................... 269,242
============
Net asset value and offering price per share outstanding.... $ 10.09
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
----------- ------------
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 2,335,848 $ 1,734,599
Interest.................................................. 17,114 30,348
Income from securities loaned--net........................ 579 --
----------- ------------
Total income............................................ 2,353,541 1,764,947
----------- ------------
Expenses:
Manager................................................... 722,685 793,000
Transfer agent............................................ 488,747 540,749
Distribution--Class B..................................... 307,561 374,052
Distribution--Class C..................................... 10,473 5,477
Service--Class A.......................................... 74,660 71,740
Service--Class B.......................................... 102,520 124,684
Service--Class C.......................................... 3,491 1,826
Custodian................................................. 57,488 73,775
Professional.............................................. 46,415 36,074
Shareholder communication................................. 40,927 41,162
Registration.............................................. 33,801 30,443
Recordkeeping............................................. 26,838 29,766
Trustees.................................................. 6,004 7,383
Miscellaneous............................................. 35,554 40,584
----------- ------------
Total expenses.......................................... 1,957,164 2,170,715
----------- ------------
Net investment income (loss)................................ 396,377 (405,768)
----------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions..................................... 3,483,683 (3,158,726)
Foreign currency transactions............................. 176,517 256,757
----------- ------------
Net realized gain (loss) on investments and foreign currency
transactions.............................................. 3,660,200 (2,901,969)
----------- ------------
Net change in unrealized appreciation on:
Security transactions..................................... 12,061,515 (776,076)
Translation of other assets and liabilities in foreign
currencies and foreign currency forward contracts....... 235,711 212,828
----------- ------------
Net unrealized gain (loss) on investments and foreign
currency transactions..................................... 12,297,226 (563,248)
----------- ------------
Net realized and unrealized gain (loss) on investments and
foreign currency transactions............................. 15,957,426 (3,465,217)
----------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ $16,353,803 $ (3,870,985)
=========== ============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
(a) Dividends recorded net of foreign withholding taxes of
$269,304 and $171,380 for 2003 and 2002, respectively.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss).............................. $ 396,377 $ (405,768) $ (497,042)
Net realized gain (loss) on investments and foreign
currency transactions................................... 3,660,200 (2,901,969) (8,203,514)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency transactions........... 12,297,226 (563,248) (6,657,048)
------------ ------------ ------------
Net increase (decrease) in net assets resulting from
operations.............................................. 16,353,803 (3,870,985) (15,357,604)
------------ ------------ ------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. -- -- (247,278)
Class B................................................. -- -- (60,773)
Class C................................................. -- -- (933)
From net realized gain on investments and foreign currency
transactions:
Class A................................................. -- -- (160,606)
Class B................................................. -- -- (342,517)
Class C................................................. -- -- (2,374)
------------ ------------ ------------
Total dividends and distributions to shareholders..... -- -- (814,481)
------------ ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 47,829,220 92,489,033 153,091,318
Class B................................................. 8,237,192 7,219,163 15,602,193
Class C................................................. 2,705,299 4,458,095 9,115,855
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. -- -- 376,637
Class B................................................. -- -- 403,290
Class C................................................. -- -- 3,133
------------ ------------ ------------
58,771,711 104,166,291 178,592,426
Cost of shares redeemed+:
Class A................................................. (41,284,589) (86,563,792) (153,188,961)
Class B................................................. (7,424,618) (9,803,245) (22,708,964)
Class C................................................. (1,610,072) (3,509,376) (9,399,634)
------------ ------------ ------------
Increase (decrease) in net assets derived from capital
share transactions.................................. 8,452,432 4,289,878 (6,705,133)
------------ ------------ ------------
Net increase (decrease) in net assets................. 24,806,235 418,893 (22,877,218)
NET ASSETS:
Beginning of period......................................... 78,146,420 77,727,527 100,604,745
------------ ------------ ------------
End of period............................................... $102,952,655 $ 78,146,420 $ 77,727,527
============ ============ ============
Undistributed net investment income (distribution in excess
of) at end of period...................................... $ 573,777 $ -- (29,175)
============ ============ ============
</Table>
- -------
<Table>
* The fund changed its fiscal year end from December 31 to
October 31.
+ Cost of shares redeemed net of redemption fee of $187,392
and $1,039 for ten months ended October 31, 2003 and year
ended December 31, 2002, respectively.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
-----------------------------------------------------------------------------------------------
January 1, 2003
through Year ended December 31,
October 31, --------------------------------------------------------------------------
2003* 2002 2001 2000 1999 1998
--------------- ------- ------- ------- ------- -------
Net asset value at beginning of
period......................... $ 8.73 $ 9.11 $ 10.98 $ 15.23 $ 12.21 $ 10.33
------- ------- ------- ------- ------- -------
Net investment income (loss).... 0.08(a) (0.00)(a)(c) (0.01)(a) (0.08)(a) (0.07) 0.01
Net realized and unrealized gain
(loss) on investments.......... 1.63 (0.43) (1.82) (3.07) 3.54 2.13
Net realized and unrealized gain
(loss) on foreign currency
transactions................... 0.04 0.05 0.11 (0.12) (0.13) (0.06)
------- ------- ------- ------- ------- -------
Total from investment
operations..................... 1.75 (0.38) (1.72) (3.27) 3.34 2.08
------- ------- ------- ------- ------- -------
Less dividends and
distributions:
From net investment income..... -- -- (0.09) -- (0.03) --
From net realized gain on
investments and foreign
currency transactions........ -- -- (0.06) (0.98) (0.29) (0.20)
------- ------- ------- ------- ------- -------
Total dividends and
distributions.................. -- -- (0.15) (0.98) (0.32) (0.20)
------- ------- ------- ------- ------- -------
Redemption fee (a).............. 0.02 -- -- -- -- --
------- ------- ------- ------- ------- -------
Net asset value at end of
period......................... $ 10.50 $ 8.73 $ 9.11 $ 10.98 $ 15.23 $ 12.21
======= ======= ======= ======= ======= =======
Total investment return (b)..... 20.27% (4.17%) (15.70%) (21.32%) 27.54% 20.17%
Ratios (to average net assets)/
Supplemental Data:
Net investment income
(loss)...................... 0.99%+ (0.05%) (0.07%) (0.56%) (0.14%) 0.08%
Expenses..................... 2.27%+ 2.26% 2.17% 2.15% 1.94% 2.01%
Portfolio turnover rate......... 71% 102% 129% 30% 38% 54%
Net assets at end of period (in
000's)......................... $43,747 $30,084 $25,470 $29,730 $34,407 $24,115
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
(c) Less than one cent per share.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
-
<Table>
<Caption>
Class B
----------------------------------------------------------------------------------
January 1, 2003
through Year ended December 31,
October 31, ----------------------------------------------------------------
2003* 2002 2001 2000 1999 1998
--------------- ------- ------- ------- ------- -------
$ 8.44 $ 8.88 $ 10.70 $ 14.95 $ 12.08 $ 10.22
------- ------- ------- ------- ------- -------
0.02(a) (0.08)(a) (0.07)(a) (0.17)(a) (0.09) (0.08)
1.57 (0.41) (1.79) (2.98) 3.41 2.10
0.04 0.05 0.11 (0.12) (0.13) (0.05)
------- ------- ------- ------- ------- -------
1.63 (0.44) (1.75) (3.27) 3.19 1.97
------- ------- ------- ------- ------- -------
-- -- (0.01) -- (0.03) --
-- -- (0.06) (0.98) (0.29) (0.11)
------- ------- ------- ------- ------- -------
-- -- (0.07) (0.98) (0.32) (0.11)
------- ------- ------- ------- ------- -------
0.02 -- -- -- -- --
------- ------- ------- ------- ------- -------
$ 10.09 $ 8.44 $ 8.88 $ 10.70 $ 14.95 $ 12.08
======= ======= ======= ======= ======= =======
19.55% (4.95%) (16.34%) (21.71%) 26.60% 19.34%
0.24%+ (0.80%) (0.82%) (1.31%) (0.89%) (0.67%)
3.02%+ 3.01% 2.92% 2.90% 2.69% 2.76%
71% 102% 129% 30% 38% 54%
$56,490 $46,779 $51,887 $70,182 $94,698 $75,516
<Caption>
Class C
------------------------------------------------------------------------------------------
January 1, 2003 September 1**
through Year ended December 31, through
October 31, --------------------------------------------------- December 31,
2003* 2002 2001 2000 1999 1998
--------------- ------- ------- ------- ------- -------------
$ 8.44 $ 8.87 $ 10.70 $ 14.95 $ 12.08 $ 10.60
------ ------- ------- ------- ------- -------
0.02(a) (0.08)(a) (0.07)(a) (0.17)(a) (0.09) (0.09)
1.57 (0.40) (1.80) (2.98) 3.41 1.72
0.04 0.05 0.11 (0.12) (0.13) (0.04)
------ ------- ------- ------- ------- -------
1.63 (0.43) (1.76) (3.27) 3.19 1.59
------ ------- ------- ------- ------- -------
-- -- (0.01) -- (0.03) --
-- -- (0.06) (0.98) (0.29) (0.11)
------ ------- ------- ------- ------- -------
-- -- (0.07) (0.98) (0.32) (0.11)
------ ------- ------- ------- ------- -------
0.02 -- -- -- -- --
------ ------- ------- ------- ------- -------
$10.09 $ 8.44 $ 8.87 $ 10.70 $ 14.95 $ 12.08
====== ======= ======= ======= ======= =======
19.55% (4.85%) (16.44%) (21.71%) 26.60% 15.07%
0.24%+ (0.80%) (0.82%) (1.31%) (0.89%) (0.67%)+
3.02%+ 3.01% 2.92% 2.90% 2.69% 2.76% +
71% 102% 129% 30% 38% 54%
$2,715 $ 1,284 $371 $ 692 $ 343 $ 11
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
- -
MainStay International Equity Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
International Equity Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and within one year of purchase of Class C
shares. Distribution of Class B shares and Class C shares commenced on September
13, 1994 and September 1, 1998, respectively. Class A shares, Class B shares and
Class C shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares and Class C shares are subject to higher distribution fee rates.
Each class of shares bears distribution and/or service fee payments under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to provide long-term growth of capital
commensurate with an acceptable level of risk by investing in a portfolio
consisting primarily of non-U.S. equity securities. Current income is a
secondary objective.
The Fund invests in foreign securities which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices representative of market values as of the close of trading on the
New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation
date; such securities not traded on the valuation date are valued at the mean of
the latest noted bid and asked prices. Prices are taken from the primary market
in which each security trades. Temporary cash investments acquired over 60 days
to maturity are valued using the latest bid prices or using valuations based on
a matrix system (which considers such factors as security prices,
Notes to Financial Statements
19
-
yields, maturities, and ratings), both as furnished by independent pricing
services. Other temporary cash investments are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. Should the Manager or Subadvisor conclude that such events
may have effected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund, adjust the value of the local price to reflect the impact on the price of
such securities as a result of such events.
(B) SECURITIES LENDING. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are collateralized by cash or securities at
least equal at all times to the market value of the securities loaned. The Fund
may bear the risk of delay in recovery of, or loss of rights in, the securities
loaned should the borrower of the securities experience financial difficulty.
The Fund receives compensation for lending its securities in the form of fees or
it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(C) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward 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 may enter into foreign currency
forward contracts primarily to hedge its foreign currency denominated
investments and receivables and payables against adverse movements in future
foreign exchange rates or to try to enhance the Fund's returns.
The use of foreign currency 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
period end to credit loss in the event of a counterparty's failure to perform
its obligations.
MainStay International Equity Fund
20
- -
Foreign currency forward contracts open at October 31, 2003:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
SOLD PURCHASED (DEPRECIATION)
--------------- -------------- --------------
Foreign Currency Sale Contracts
Euro vs. U.S. Dollar, expiring 12/12/03............ E 1,216,682 $ 1,426,000 $ 13,620
Hong Kong Dollar vs. U.S. Dollar, expiring
12/12/03......................................... HK$ 35,926,290 $ 4,600,000 $ (29,127)
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT
PURCHASED SOLD
--------------- --------------
Foreign Currency Buy Contracts
Euro vs. U.S. Dollar, expiring 12/12/03............ E 4,310,934 $ 4,600,000 $ 404,329
Hong Kong Dollar vs. U.S. Dollar, expiring
12/12/03......................................... HK$ 11,020,000 $ 1,428,109 $ (8,174)
---------
Net unrealized appreciation on foreign currency forward contracts.................... $ 380,648
=========
</Table>
(D) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(E) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current period reclassification between
undistributed net investment income, accumulated net realized loss on
investments and net realized loss on foreign currency transactions arising from
permanent differences; net assets at October 31, 2003, are not affected.
<Table>
<Caption>
ACCUMULATED NET REALIZED LOSS
UNDISTRIBUTED NET REALIZED ON FOREIGN CURRENCY
NET INVESTMENT INCOME LOSS ON INVESTMENTS TRANSACTIONS
--------------------- ------------------- -------------------
$177,400 $(883) $(176,517)
</Table>
The reclassification for the Fund is primarily due to foreign currency gain
(loss) and gain (loss) on sales of passive foreign investment companies.
Notes to Financial Statements (continued)
21
-
(F) 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 as earned.
Discounts and premiums on short-term securities are accreted and amortized,
respectively, on the straight line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(G) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(H) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
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 are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented. Accordingly, gains and losses from foreign currency
transactions are included in the reported net realized gain (loss) on investment
transactions.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains and 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 foreign currency denominated
assets and liabilities, other than investments, at period end exchange rates are
reflected in unrealized foreign exchange gains or losses.
MainStay International Equity Fund
22
- -
Foreign currency held at October 31, 2003:
<Table>
<Caption>
CURRENCY COST VALUE
- --------------------------------- ------- -------
Euro E 199 $ 235 $ 232
Pound Sterling L 23,450 39,759 39,794
------- -------
$39,994 $40,026
======= =======
</Table>
(I) REDEMPTION FEE. Effective December 8, 2002, the Fund imposes a 2.00%
redemption fee on redemptions (including exchanges) of Fund shares in amounts of
$50,000 or more made within 60 days of their date of purchase. The redemption
fee is designed to offset brokerage commissions and other costs associated with
short-term trading and is not assessed on shares acquired through the
reinvestment of dividends or distributions paid by the Fund. The redemption fees
are included in the Statement of Changes in Net Assets' shares redeemed amount
and retained by the Fund.
(J) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 1.00% of the Fund's
average daily net assets. For the ten months ended October 31, 2003 and year
ended December 31, 2002, the Manager earned from the Fund $722,685 and $793,000,
respectively.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor a monthly fee at an annual rate of
0.60% of the average daily net assets of the Fund.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in
Notes to Financial Statements (continued)
23
-
accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the
Class A Plan, the Distributor receives a monthly fee from the Fund at an annual
rate of 0.25% of the average daily net assets of the Fund's Class A shares,
which is an expense of the Class A shares of the Fund for distribution or
service activities as designated by the Distributor. Pursuant to the Class B and
Class C Plans, the Fund pays the Distributor a monthly fee, which is an expense
of the Class B and Class C shares of the Fund, at the annual rate of 0.75% of
the average daily net assets of the Fund's Class B and Class C shares. The
Distribution Plans provide that the Class B and Class C shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B or Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $5,236 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $17,552, $39,506 and $7,765, respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and year ended December 31, 2002, amounted to $488,747
and $540,749, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the International
Equity Fund only pays a portion of the fees identified above.
(F) CAPITAL. At October 31, 2003, NYLIFE Distributors held shares of Class A
with a net value of $7,355,364. This represents 16.8% of Class A net assets and
7.1% of the Fund's total net assets at period end.
MainStay International Equity Fund
24
- -
(G) OTHER. Fees for the cost of legal services, included in Professional fees
as shown in the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $1,892 for the ten months ended October
31, 2003 and $1,596 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $26,838 for the ten months ended October
31, 2003 and $29,766 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
UNDISTRIBUTED TOTAL
NET INVESTMENT ACCUMULATED CAPITAL UNREALIZED ACCUMULATED
INCOME AND OTHER LOSSES APPRECIATION GAIN
-------------- ------------------- ------------ -----------
$991,726 $(9,550,457) $12,909,017 $4,350,286
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals and mark-to-market of foreign currency
forward transactions.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $9,550,457 were available as shown in the table below, to the extent provided
by the regulations, to offset future realized gains through the years indicated.
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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
----------------- -------
2009................................................... $6,707
2010................................................... 2,843
------
$9,550
======
</Table>
The Fund utilized $3,221,097 of capital loss carryforward during the ten months
ended October 31, 2003.
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than U.S. Government securities and short-term securities, were $68,493
and $59,287, respectively.
As of October 31, 2003, the Fund had securities on loan with an aggregate market
value of $1,168,000. The Fund received $1,200,725 in cash as collateral for
securities on loan which was used to purchase highly liquid short-term
investments in accordance with Fund's securities lending procedures.
Notes to Financial Statements (continued)
25
-
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
Year ended
December 31,
January 1 through ----------------------------------------------------------
October 31, 2003* 2002 2001
---------------------------- --------------------------- ----------------------------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
------- ------- -------- ------- ------- ------- ------- ------- --------
Shares sold.................. 5,418 912 299 10,255 821 497 15,785 1,653 978
Shares issued in reinvestment
of dividends
and distributions.......... -- -- -- -- -- -- 41 45 0(a)
------ ---- ---- ------ ------ ---- ------- ------ ------
Shares sold.................. 5,418 912 299 10,255 821 497 15,826 1,698 978
Shares redeemed.............. (4,699) (856) (182) (9,604) (1,119) (386) (15,739) (2,415) (1,001)
------ ---- ---- ------ ------ ---- ------- ------ ------
Net increase (decrease)...... 719 56 117 651 (298) 111 87 (717) (23)
====== ==== ==== ====== ====== ==== ======= ====== ======
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
(a) Less than one thousand shares.
</Table>
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
26
- -
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay International Equity Fund
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 funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
TAX INFORMATION (UNAUDITED)
MainStay International Equity Fund intends to make an election under Internal
Revenue Code Section 853 to pass through foreign taxes paid by the Fund to its
shareholders. The total amount of foreign taxes that may be passed through to
shareholders for the ten months ended October 31, 2003 was $269,304. The foreign
sources of income for information reporting purposes was $2,595,727.
27
-
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
28
- -
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
29
-
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
30
- -
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a/ Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY.LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC All rights reserved. MSIE10- 12/03
NYLIM-A04349 10
[RECYCLE.LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
International Equity Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY.LOGO]
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay Small Cap Growth
Fund versus Russell 2000(R) Index, Russell
2000(R) Growth Index, and Inflation--Class A,
Class B, and Class C Shares 4
Portfolio Management Discussion and Analysis 6
Year-by-Year and 10-Month Performance 7
Portfolio of Investments 10
Financial Statements 13
Notes to Financial Statements 18
Report of Independent Auditors 24
Trustees and Officers 25
The MainStay(R) Funds 28
</Table>
2
This page intentionally left blank
3
-
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be
stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
4
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
$10,000 Invested in MainStay Small Cap
Growth Fund versus Russell 2000(R) Index,
Russell 2000(R) Growth Index, and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 26.06%, 5 Years 7.03%, Since Inception
(6/1/98) 4.87%
<Table>
<Caption>
MAINSTAY SMALL CAP RUSSELL 2000 GROWTH
GROWTH FUND RUSSELL 2000 INDEX(1) INDEX(2) INFLATION (CPI)(3)
------------------ --------------------- ------------------- ------------------
06/01/98 9450.00 10000.00 10000.00 10000.00
10/31/98 8703.00 8329.00 8252.00 10080.00
10/31/99 15252.00 9567.00 10669.00 10338.00
10/31/00 19514.00 11232.00 12393.00 10695.00
10/31/01 11698.00 9806.00 8489.00 10923.00
10/31/02 9699.00 8671.00 6658.00 11150.00
10/31/03 12938.00 12432.00 9758.00 11378.00
</Table>
CLASS B SHARES
Total Returns with Sales Charges: 1 Year 27.31%, 5 Years 7.11%, Since Inception
(6/1/98) 5.00%
<Table>
<Caption>
MAINSTAY SMALL CAP RUSSELL 2000 GROWTH
GROWTH FUND RUSSELL 2000 INDEX(1) INDEX(2) INFLATION (CPI)(3)
------------------ --------------------- ------------------- ------------------
06/01/98 10000.00 10000.00 10000.00 10000.00
10/31/98 9180.00 8329.00 8252.00 10080.00
10/31/99 15960.00 9567.00 10669.00 10338.00
10/31/00 20260.00 11232.00 12393.00 10695.00
10/31/01 12048.00 9806.00 8489.00 10923.00
10/31/02 9921.00 8671.00 6658.00 11150.00
10/31/03 13026.00 12432.00 9758.00 11378.00
</Table>
CLASS C SHARES
Total Returns with Sales Charges: 1 Year 31.31%, 5 Years 7.41%, Since Inception
(6/1/98) 5.15%
<Table>
<Caption>
MAINSTAY SMALL CAP RUSSELL 2000 GROWTH
GROWTH FUND RUSSELL 2000 INDEX(1) INDEX(2) INFLATION (CPI)(3)
------------------ --------------------- ------------------- ------------------
06/01/98 10000.00 10000.00 10000.00 10000.00
10/31/98 9180.00 8329.00 8252.00 10080.00
10/31/99 15960.00 9567.00 10669.00 10338.00
10/31/00 20260.00 11232.00 12393.00 10695.00
10/31/01 12048.00 9806.00 8489.00 10923.00
10/31/02 9921.00 8671.00 6658.00 11150.00
10/31/03 13126.00 12432.00 9758.00 11378.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION, PLEASE VISIT WWW.MAINSTAYFUNDS.COM.
5
-
- ----------
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect change in share price, reinvestment of dividend and capital
gain distributions, and maximum applicable sales charges, as explained in
this paragraph. The graphs assume an initial investment of $10,000 and
reflect deduction of all sales charges that would have applied for the period
of investment. Class A share performance reflects the effect of the maximum
5.5% initial sales charge. Class B shares are subject to a contingent
deferred sales charge (CDSC) of up to 5% if shares are redeemed within the
first six years of purchase. Class B share performance reflects a CDSC of 1%,
which would apply for the period shown. Class C share performance includes
the historical performance of the Class B shares for periods from 6/1/98
through 8/31/98. Class C shares would be subject to a CDSC of 1% if redeemed
within one year of purchase.
1. The Russell 2000(R) Index is an unmanaged index that measures the
performance of the 2,000 smallest companies in the Russell 3000(R) Index,
which, in turn, is an unmanaged index that measures the performance of a
the 3,000 largest U.S. companies based on total market capitalization.
Results assume the reinvestment of all income and capital gains. An
investment cannot be made directly into an index.
2. The Russell 2000(R) Growth Index is an unmanaged index that measures the
performance of those Russell 2000(R) companies with higher price-to-book
ratios and higher forecasted growth values. Results assume the
reinvestment of all income and capital gains. An investment cannot be made
directly into an index.
3. Inflation is measured 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. The rate of inflation does not represent an
investment return.
6
- -------
1. The Russell 1000(R) Index is an unmanaged index that measures the performance
of the 1,000 largest U.S. companies based on total market capitalization. The
Russell Midcap(R) Index is an unmanaged index that measures the performance
of the 800 smallest companies in the Russell 1000(R) Index. The Russell
2000(R) Index is an unmanaged index that measures the performance of the
2,000 smallest companies in the Russell 3000(R) Index, which in turn, is an
unmanaged index that measures the performance of the 3,000 largest U.S.
companies based on total market capitalization. Results for all indices
assume reinvestment of all income and capital gains. An investment cannot be
made directly into an index.
2. For each of the Russell indices mentioned in the previous footnote, the
corresponding Growth Index measures the performance of those companies in the
index with higher price-to-book ratios and higher forecasted growth values,
and the corresponding Value Index measures the performance of those companies
in the index with lower price-to-book ratios and lower forecasted growth
values. Results for all indices assume rein-vestment of all income and
capital gains. An investment cannot be made directly into an index.
3. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
Portfolio Management Discussion and Analysis
The first 10 months of 2003 presented a number of challenges for equity
investors. In addition to facing the volatility associated with military action
in Iraq, investors had to contend with a constant stream of mixed economic
indicators, which added to the volatility and uncertainty of the stock market.
After the market reached its year-to-date low in mid-March, however, stocks
trended upward through the end of October.
Upward momentum in stock prices was buttressed by the Federal Reserve's 25 basis
point reduction in the targeted federal funds rate in June 2003, to a low of
1.0%. Real gross domestic product grew at a modest 1.4% in the first quarter of
2003, and the growth rate increased to 3.3% in the second quarter. According to
preliminary estimates by the Bureau of Economic Analysis, real GDP grew at a
seasonally adjusted annual rate of 8.2% in the third quarter of 2003, its
fastest pace since the first quarter of 1984.
During the first 10 months of 2003, small-cap and mid-cap stocks generally
outperformed large caps.(1) Based on Russell indices, growth stocks outperformed
value equities at all capitalization levels.(2) During much of the reporting
period, the smallest of small-cap stocks and issues of many unprofitable, more-
speculative enterprises strongly outperformed securities of larger, more
profitable, and higher-quality small-cap companies.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Small Cap Growth Fund
returned 36.23% for Class A shares and 35.22% for Class B and Class C shares,
excluding all sales charges. All share classes underperformed the 39.82% return
of the average Lipper small-cap growth fund over the same period. All share
classes also underperformed the 39.38% return of the Russell 2000(R) Index and
the 43.21% return of the Russell 2000(R) Growth Index for the first 10 months of
2003.
Security selection in the consumer discretionary and financials sectors made a
positive contribution to performance during the reporting period, as did an
underweighted position in the financials and utilities sectors. These positives
were more than offset by relatively weaker stock performance in the information
technology, health care, energy, consumer staples, industrials, and materials
sectors as well as by an underweighted position in the telecommunication
services sector.
7
-
- -------
4. Performance percentages reflect total returns of the securities mentioned for
the 10 months ended October 31, 2003, or for the portion of the reporting
period such securities were held in the Fund, if shorter. Due to purchases
and sales, the performance of Fund holdings may differ from the performance
of the securities themselves.
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
<Table>
<Caption>
PERIOD-END TOTAL RETURN %
- ---------- --------------
12/98 5.10
12/99 107.61
12/00 -20.24
12/01 -18.76
12/02 -28.92
10/03 36.23
</Table>
See footnotes on pages 4 and 5 for more information on performance.
CLASS B AND CLASS C SHARES
<Table>
<Caption>
PERIOD-END TOTAL RETURN %
- ---------- --------------
12/98 4.60
12/99 106.02
12/00 -20.91
12/01 -19.34
12/02 -29.39
10/03 35.22
</Table>
Class C share returns reflect the historical performance of the Class B shares
through 8/31/98. See footnotes on pages 4 and 5 for more information on
performance.
STRONG AND WEAK PERFORMERS
The top performer for the reporting period was online-entertainment subscription
service provider Netflix (+420.44%),(4) a holding in the consumer discretionary
sector. Other notable contributors within this sector included homebuilders
Ryland Group and MDC Holdings, high-fidelity audio-products manufacturer Harman
International Industries, furniture and fixtures maker Select Comfort, gaming
and entertainment company Station Casino, and specialty retailers Fred's Inc.,
A.C. Moore Arts & Crafts, and Hot Topic.
8
During the reporting period, UCBH Holdings was the greatest positive contributor
to the Fund's performance in the financials sector. UCBH Holdings is the parent
company of United Commercial Bank, the leading U.S. commercial bank serving the
ethnic Chinese community. The price of UCBH Holdings shares rose on the back of
strong financial performance and the company's ability to sustain loan-portfolio
and core-deposit growth. Other positive contributors in the financials sector
included Jefferies Group, Doral Financial, Wintrust Financial, Affiliated
Managers Group, Southwest Bancorp of Texas, and Dime Community Bancorp.
The information technology sector had a few positions that performed well for
the period, including Fairchild Semiconductor International, Integrated Circuit
Systems, Applied Films, and Avocent. Despite strong absolute returns, however,
the Fund's information technology holdings took the largest toll on the Fund's
relative performance. Stocks that detracted from the Fund's relative performance
were electronic equipment manufacturers Planar Systems and Merix, software and
programming company Internet Security Systems, computer hardware supplier
Pinnacle Systems, computer-services company The BISYS Group, software and
programming company NetIQ, and communications equipment provider Inter-Tel.
After an outstanding year in 2002, the Fund's holdings in the health care
sector--although positive--were the second-greatest detractors from relative
performance during the first 10 months of 2003. Health care facilities operator
LifePoint Hospitals was the leading detractor in the health care sector during
the reporting period. Other stocks with positive returns but poor relative
performance included biotechnology & drug firms Affymetrix, NPS Pharmaceuticals,
CV Therapeutics, Able Laboratories, InterMune, Alkermes, Techne, and OSI
Pharmaceuticals. Scientific and technical instrument maker Cytyc and speciality
pharmacy and health care services company provider Priority Healthcare also
disappointed.
Although energy stocks had only a small weighting, the Fund's energy holdings
posted the only absolute negative performance during the period. Cal Dive
International, W-H Energy Services, Superior Energy Services, and Key Energy
Services all detracted from performance for the 10 months.
The remaining sectors of the portfolio generally had a less significant impact
on Fund performance for the 10-month period.
STRATEGIC POSITIONING
During the second quarter of 2003, we took steps to position the Fund less
defensively and to increase the weighting of more economically cyclical issues.
At the end of October 2003, the Fund was overweighted in the consumer
9
-
discretionary and information technology sectors and underweighted in the
financials sector. We sought to position the Fund in favor of the likelihood of
a gradual global economic recovery. As always, we favor stocks of high-quality
companies with good intermediate- and longer-term growth prospects.
LOOKING AHEAD
As 2004 approaches, the U.S. equity market has maintained its positive
direction. We believe that the key to sustained equity-market gains lies in
further improvement in the U.S. economy. Recent GDP figures have been
encouraging.
We intend to continue to invest in high-quality growth companies in major
sectors that are poised for further growth, including the information
technology, consumer, health care, industrials, and financials sectors. Whatever
the markets or the economy may bring, the Fund will continue to seek long-term
appreciation by investing primarily in securities of small-cap companies.
Rudolph C. Carryl
Edmund C. Spelman
Portfolio Managers
MacKay Shields LLC
Stocks of small companies may be subject to higher price volatility,
significantly lower trading volumes, and greater spreads between bid and ask
prices, than stocks of larger companies. Small companies may be more vulnerable
to adverse business or market developments than mid- or large-capitalization
companies.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAVE NOT BEEN AUDITED.
10
- -
MainStay Small Cap Growth Fund
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (97.2%)+
AIRLINES (1.7%)
Mesa Air Group, Inc. (a)(b).... 173,800 $ 1,871,826
SkyWest, Inc. ................. 134,600 2,488,754
------------
4,360,580
------------
AUTOMOBILES (1.2%)
Winnebago Industries, Inc. .... 51,800 3,019,940
------------
BIOTECHNOLOGY (3.9%)
Alkermes, Inc. (a)............. 77,900 1,010,363
CV Therapeutics, Inc. (a)(b)... 32,900 580,027
ILEX Oncology, Inc. (a)........ 89,200 1,860,712
Neurocrine Biosciences, Inc.
(a)........................... 37,500 1,756,125
NPS Pharmaceuticals, Inc.
(a)(b)........................ 58,900 1,550,837
OSI Pharmaceuticals, Inc.
(a)........................... 43,600 1,220,800
Telik, Inc. (a)................ 56,900 1,156,208
XOMA Ltd. (a).................. 140,300 1,050,847
------------
10,185,919
------------
CAPITAL MARKETS (2.3%)
Affiliated Managers Group, Inc.
(a)........................... 38,681 2,804,372
Jefferies Group, Inc. ......... 96,800 3,000,800
------------
5,805,172
------------
COMMERCIAL BANKS (4.1%)
Southwest Bancorp. of Texas,
Inc. ......................... 64,400 2,312,604
UCBH Holdings, Inc. ........... 78,000 2,785,380
Westcorp....................... 69,900 2,643,618
Wintrust Financial Corp. ...... 63,200 2,739,088
------------
10,480,690
------------
COMMERCIAL SERVICES & SUPPLIES (3.3%)
Corinthian Colleges, Inc.
(a)........................... 22,306 1,381,188
Corporate Executive Board Co.
(The) (a)..................... 56,087 2,860,998
Education Management Corp.
(a)........................... 36,400 2,299,752
Kroll, Inc. (a)................ 85,300 1,984,078
------------
8,526,016
------------
COMMUNICATIONS EQUIPMENT (3.9%)
Avocent Corp. (a).............. 86,173 3,257,339
Inter-Tel, Inc. ............... 91,100 2,294,809
NetScreen Technologies, Inc.
(a)........................... 95,800 2,550,196
Westell Technologies, Inc.
(a)........................... 235,900 1,965,047
------------
10,067,391
------------
COMPUTERS & PERIPHERALS (2.2%)
Applied Films Corp. (a)........ 106,300 3,332,505
SimpleTech, Inc. (a)........... 283,700 2,227,045
------------
5,559,550
------------
ELECTRICAL EQUIPMENT (1.0%)
Roper Industries, Inc. ........ 54,100 2,673,622
------------
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (6.0%)
Amphenol Corp. Class A (a)..... 61,666 $ 3,622,877
FLIR Systems, Inc. (a)......... 92,800 2,900,928
Global Imaging Systems, Inc.
(a)........................... 115,900 3,366,895
ScanSource, Inc. (a)........... 74,800 3,216,400
Trimble Navigation Ltd. (a).... 81,800 2,261,770
------------
15,368,870
------------
ENERGY EQUIPMENT & SERVICES (1.6%)
Key Energy Services, Inc.
(a)........................... 180,400 1,574,892
Superior Energy Services, Inc.
(a)........................... 178,300 1,594,002
W-H Energy Services, Inc.
(a)........................... 53,300 835,744
------------
4,004,638
------------
FOOD & STAPLES RETAILING (0.8%)
Performance Food Group Co.
(a)........................... 57,402 2,138,225
------------
HEALTH CARE EQUIPMENT & SUPPLIES (2.0%)
Cytyc Corp. (a)................ 125,900 1,627,887
Respironics, Inc. (a).......... 38,200 1,592,558
Wilson Greatbatch Technologies,
Inc. (a)...................... 53,300 2,009,410
------------
5,229,855
------------
HEALTH CARE PROVIDERS & SERVICES (5.4%)
AdvancePCS (a)................. 26,368 1,357,161
Coventry Health Care, Inc.
(a)........................... 52,500 2,874,375
Henry Schein, Inc. (a)......... 31,900 1,979,395
Mid Atlantic Medical Services,
Inc. (a)...................... 39,300 2,295,120
Odyssey Healthcare, Inc. (a)... 90,150 2,500,761
VCA Antech, Inc. (a)........... 100,300 2,832,472
------------
13,839,284
------------
HOTELS, RESTAURANTS & LEISURE (4.3%)
P.F. Chang's China Bistro, Inc.
(a)........................... 52,884 2,577,566
Panera Bread Co. Class A (a)... 68,300 2,747,709
Smith & Wollensky Restaurant
Group, Inc. (The) (a)......... 275,356 1,538,139
Station Casinos, Inc. ......... 93,300 2,775,675
WMS Industries, Inc. (a)....... 65,900 1,524,267
------------
11,163,356
------------
HOUSEHOLD DURABLES (6.5%)
Harman International
Industries, Inc. ............. 27,900 3,576,780
Hovnanian Enterprises, Inc.
Class A (a)................... 32,300 2,625,344
M.D.C. Holdings, Inc. ......... 59,439 4,001,433
Ryland Group, Inc. (The)....... 44,900 3,991,610
Yankee Candle Co., Inc. (The)
(a)........................... 94,200 2,635,716
------------
16,830,883
------------
INTERNET & CATALOG RETAIL (1.5%)
Netflix, Inc. (a)(b)........... 67,300 3,856,290
------------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003
11
-
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (CONTINUED)
INTERNET SOFTWARE & SERVICES (2.3%)
Digitas, Inc. (a).............. 333,100 $ 2,897,970
RADWARE Ltd. (a)............... 125,800 2,912,270
------------
5,810,240
------------
IT SERVICES (1.4%)
BISYS Group, Inc. (The) (a).... 117,354 1,678,162
CACI International, Inc. Class
A (a)......................... 40,400 2,001,012
------------
3,679,174
------------
MACHINERY (3.5%)
AGCO Corp. (a)................. 99,800 1,796,400
CLARCOR, Inc. ................. 50,200 2,040,630
Cummins, Inc. ................. 52,400 2,483,760
Wabash National Corp. (a)...... 117,100 2,701,497
------------
9,022,287
------------
MEDIA (0.9%)
Radio One, Inc. Class D (a).... 145,264 2,309,698
------------
MULTILINE RETAIL (1.0%)
Fred's, Inc. .................. 66,050 2,488,764
------------
OIL & GAS (0.8%)
Evergreen Resources, Inc.
(a)........................... 77,200 2,116,824
------------
PHARMACEUTICALS (4.6%)
Able Laboratories, Inc. (a).... 57,200 1,106,248
American Pharmaceutical
Partners, Inc. (a)(b)......... 76,800 1,870,080
K-V Pharmaceutical Co. Class A
(a)........................... 72,750 1,746,000
Medicis Pharmaceutical Corp.
Class A....................... 35,800 2,267,930
MGI Pharma, Inc. (a)........... 39,800 1,494,888
Taro Pharmaceutical Industries
Ltd. (a)...................... 54,300 3,488,775
------------
11,973,921
------------
ROAD & RAIL (1.1%)
Knight Transportation, Inc.
(a)........................... 47,500 1,195,575
Werner Enterprises, Inc. ...... 93,250 1,682,230
------------
2,877,805
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (11.9%)
Advanced Energy Industries,
Inc. (a)...................... 114,200 2,607,186
AMIS Holdings, Inc. (a)........ 109,500 2,206,425
Artisan Components, Inc. (a)... 82,500 1,692,075
ATMI, Inc. (a)................. 89,000 2,046,110
August Technology Corp. (a).... 135,400 2,626,760
Cymer, Inc. (a)................ 70,700 3,228,162
Fairchild Semiconductor
International, Inc. (a)....... 181,500 4,101,900
Integrated Circuit Systems,
Inc. (a)...................... 85,300 2,863,521
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (CONTINUED)
MKS Instruments, Inc. (a)...... 98,600 $ 2,563,600
Rudolph Technologies, Inc.
(a)(b)........................ 118,200 3,090,930
Sigmatel, Inc. (a)............. 96,500 2,451,100
Zoran Corp. (a)................ 71,300 1,187,858
------------
30,665,627
------------
SOFTWARE (6.0%)
Altiris, Inc. (a).............. 117,400 4,036,212
Business Objects S.A. ADR
(a)(b)(c)..................... 106,500 3,499,590
Documentum, Inc. (a)........... 30,300 901,425
Manhattan Associates, Inc.
(a)........................... 82,485 2,296,382
Progress Software Corp. (a).... 114,100 2,518,187
SERENA Software, Inc. (a)...... 131,300 2,264,925
------------
15,516,721
------------
SPECIALTY RETAIL (8.0%)
A.C. Moore Arts & Crafts, Inc.
(a)........................... 95,100 2,199,663
Advance Auto Parts, Inc. (a)... 27,100 2,119,762
Guitar Center, Inc. (a)........ 71,400 2,324,070
Hibbett Sporting Goods, Inc.
(a)........................... 98,400 2,687,304
Hot Topic, Inc. (a)............ 103,350 2,967,179
PETCO Animal Supplies, Inc.
(a)........................... 78,100 2,591,358
Select Comfort Corp. (a)(b).... 105,300 3,295,890
Sharper Image Corp. (a)(b)..... 86,500 2,491,200
------------
20,676,426
------------
TEXTILES, APPAREL & LUXURY GOODS (1.1%)
Carter's, Inc. (a)(b).......... 20,700 579,600
Fossil, Inc. (a)............... 86,900 2,346,300
------------
2,925,900
------------
THRIFTS & MORTGAGE FINANCE (0.8%)
Dime Community Bancshares...... 78,600 2,191,368
------------
TRADING COMPANIES & DISTRIBUTORS (0.9%)
MSC Industrial Direct Co., Inc.
Class A....................... 100,900 2,386,285
------------
WIRELESS TELECOMMUNICATION SERVICES (1.2%)
Wireless Facilities, Inc.
(a)........................... 175,100 3,008,218
------------
Total Common Stocks
(Cost $183,378,290)........... 250,759,539
------------
<Caption>
PRINCIPAL
AMOUNT
-----------
SHORT-TERM INVESTMENTS (9.6%)
COMMERCIAL PAPER (3.3%)
Rhineland Funding Capital Corp.
1.1365%, due 11/5/03 (d)...... $2,000,000 1,999,751
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Small Cap Growth Fund
12
- -
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
SHORT-TERM INVESTMENTS (CONTINUED)
COMMERCIAL PAPER (CONTINUED)
UBS Finance Delaware LLC
1.03%, due 11/3/03............ $6,445,000 $ 6,444,631
------------
Total Commercial Paper
(Cost $8,444,382)............. 8,444,382
------------
SHARES
-----------
INVESTMENT COMPANIES (0.9%)
AIM Institutional Funds Group
(d)........................... 805,536 805,536
Merrill Lynch Premier
Institutional Fund............ 1,528,994 1,528,994
------------
Total Investment Companies
(Cost $2,334,530)............. 2,334,530
------------
PRINCIPAL
AMOUNT
-----------
MASTER NOTE (3.9%)
Banc of America Securities LLC
1.1874%, due 11/3/03 (d)...... $10,000,000 10,000,000
------------
Total Master Note
(Cost $10,000,000)............ 10,000,000
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
REPURCHASE AGREEMENT (1.5%)
Countrywide Securities Corp.
1.1424%, dated 10/31/03 due
11/3/03
Proceeds at Maturity
$4,037,379 (d)
(Collateralized by Various
Bonds with a Principal Amount
of $4,765,534 and a Market
Value of $4,136,940).......... $4,037,000 $ 4,037,000
------------
Total Repurchase Agreement
(Cost $4,037,000)............. 4,037,000
------------
Total Short-Term Investments
(Cost $24,815,912)............ 24,815,912
------------
Total Investments
(Cost $208,194,202) (e)....... 106.8% 275,575,451(f)
Liabilities in Excess of
Cash and Other Assets......... (6.8) (17,660,662)
----------- ------------
Net Assets..................... 100.0% $257,914,789
=========== ============
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) Represents security, or a portion thereof, which is out
on loan.
(c) ADR--American Depositary Receipt.
(d) Represents security, or a portion thereof, purchased with
cash collateral received for securities on loan.
(e) The cost for federal income tax purposes is $210,041,582.
(f) At October 31, 2003 net unrealized appreciation was
$65,533,869, 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 $72,216,219 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $6,682,350.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
-
Statement of Assets and Liabilities October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$208,194,202)--including $15,957,670 market value of
securities loaned......................................... $ 275,575,451
Cash........................................................ 2,617
Receivables:
Fund shares sold.......................................... 270,964
Dividends and interest.................................... 43,119
Other assets................................................ 12,661
-------------
Total assets........................................ 275,904,812
-------------
LIABILITIES:
Payables:
Securities lending collateral............................. 16,842,287
Fund shares redeemed...................................... 396,265
Transfer agent............................................ 245,693
Manager................................................... 213,588
NYLIFE Distributors....................................... 165,794
Custodian................................................. 5,335
Trustees.................................................. 2,719
Accrued expenses............................................ 118,342
-------------
Total liabilities................................... 17,990,023
-------------
Net assets.................................................. $ 257,914,789
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 53,084
Class B................................................... 138,517
Class C................................................... 5,994
Additional paid-in capital.................................. 393,224,413
Accumulated net realized loss on investments................ (202,888,468)
Net unrealized appreciation on investments.................. 67,381,249
-------------
Net assets.................................................. $ 257,914,789
=============
CLASS A
Net assets applicable to outstanding shares................. $ 71,451,022
=============
Shares of beneficial interest outstanding................... 5,308,402
=============
Net asset value per share outstanding....................... $ 13.46
Maximum sales charge (5.50% of offering price).............. 0.78
-------------
Maximum offering price per share outstanding................ $ 14.24
=============
CLASS B
Net assets applicable to outstanding shares................. $ 178,729,682
=============
Shares of beneficial interest outstanding................... 13,851,733
=============
Net asset value and offering price per share outstanding.... $ 12.90
=============
CLASS C
Net assets applicable to outstanding shares................. $ 7,734,085
=============
Shares of beneficial interest outstanding................... 599,358
=============
Net asset value and offering price per share outstanding.... $ 12.90
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
------------ ------------
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 295,148 $ 372,312
Interest.................................................. 4,231 99,678
Income from securities loaned--net........................ 20,497 --
----------- ------------
Total income............................................ 319,876 471,990
----------- ------------
Expenses:
Manager................................................... 1,695,204 2,221,302
Transfer agent............................................ 1,220,814 1,514,917
Distribution--Class B..................................... 899,363 1,220,330
Distribution--Class C..................................... 37,216 44,697
Service--Class A.......................................... 111,608 133,650
Service--Class B.......................................... 299,788 406,777
Service--Class C.......................................... 12,405 14,899
Shareholder communication................................. 74,546 105,594
Professional.............................................. 52,774 54,474
Recordkeeping............................................. 39,163 48,871
Registration.............................................. 32,957 32,426
Custodian................................................. 24,530 31,583
Trustees.................................................. 10,516 13,960
Miscellaneous............................................. 20,721 25,415
----------- ------------
Total expenses.......................................... 4,531,605 5,868,895
----------- ------------
Net investment loss......................................... (4,211,729) (5,396,905)
----------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments..................... 8,511,432 (49,615,212)
Net change in unrealized appreciation on investments........ 60,943,960 (24,193,592)
----------- ------------
Net realized and unrealized gain (loss) on investments...... 69,455,392 (73,808,804)
----------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ $65,243,663 $(79,205,709)
=========== ============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
(a) Dividends recorded net of foreign withholding taxes of
$1,609 and $3,460 for 2003 and 2002, respectively.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ------------ -------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss....................................... $ (4,211,729) $ (5,396,905) $ (6,078,474)
Net realized gain (loss) on investments................... 8,511,432 (49,615,212) (88,516,981)
Net change in unrealized appreciation on investments...... 60,943,960 (24,193,592) 22,194,933
------------ ------------ -------------
Net increase (decrease) in net assets resulting from
operations.............................................. 65,243,663 (79,205,709) (72,400,522)
------------ ------------ -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 28,703,693 64,317,186 69,345,748
Class B................................................. 23,984,882 30,046,744 51,801,052
Class C................................................. 1,703,227 3,099,852 1,334,747
Cost of shares redeemed:
Class A................................................. (19,106,983) (62,368,859) (88,087,806)
Class B................................................. (22,189,821) (37,581,624) (64,886,457)
Class C................................................. (1,113,608) (2,302,617) (2,679,045)
------------ ------------ -------------
Increase (decrease) in net assets derived from capital
share transactions.................................. 11,981,390 (4,789,318) (33,171,761)
------------ ------------ -------------
Net increase (decrease) in net assets................. 77,225,053 (83,995,027) (105,572,283)
NET ASSETS:
Beginning of period......................................... 180,689,736 264,684,763 370,257,046
------------ ------------ -------------
End of period............................................... $257,914,789 $180,689,736 $ 264,684,763
============ ============ =============
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
------------------------------------------------------------------------------------
January 1, 2003 Year ended June 1**
through December 31, through
October 31, ---------------------------------------------- December 31,
2003* 2002 2001 2000 1999 1998
---------------- ------- ------- ------- ------- ------------
Net asset value at beginning of period..... $ 9.88 $ 13.90 $ 17.11 $ 21.82 $ 10.51 $ 10.00
------- ------- ------- ------- ------- -------
Net investment loss (a).................... (0.18) (0.22) (0.22) (0.26) (0.20) (0.10)
Net realized and unrealized gain (loss) on
investments............................... 3.76 (3.80) (2.99) (4.17) 11.51 0.61
------- ------- ------- ------- ------- -------
Total from investment operations........... 3.58 (4.02) (3.21) (4.43) 11.31 0.51
------- ------- ------- ------- ------- -------
Less distributions:
From net realized gain on investments...... -- -- -- (0.28) -- --
------- ------- ------- ------- ------- -------
Net asset value at end of period........... $ 13.46 $ 9.88 $ 13.90 $ 17.11 $ 21.82 $ 10.51
======= ======= ======= ======= ======= =======
Total investment return (b)................ 36.23% (28.92%) (18.76%) (20.24%) 107.61% 5.10%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss...................... (1.93%)+ (1.86%) (1.56%) (1.20%) (1.48%) (2.12%)+
Expenses................................. 2.12%+ 2.07% 1.90% 1.70% 1.91% 2.63% +
Portfolio turnover rate.................... 69% 132% 111% 122% 86% 32%
Net assets at end of period (in 000's)..... $71,451 $44,037 $61,197 $99,415 $64,470 $15,319
</Table>
- -------
<Table>
* The Fund charged its fiscal year end from December 31 to October 31.
** Commencement of Operations.
*** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and is not annualized.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
-
<Table>
<Caption>
Class B Class C
-------------------------------------------------------------------------- ---------------------------------
January 1, 2003 Year ended June 1** January 1, 2003 Year ended
through December 31, through through December 31,
October 31, ----------------------------------------- December 31, October 31, ---------------
2003* 2002 2001 2000 1999 1998 2003* 2002 2001
--------------- -------- -------- -------- -------- ------------ --------------- ------ ------
$ 9.54 $ 13.51 $ 16.75 $ 21.55 $ 10.46 $ 10.00 $ 9.54 $13.51 $16.75
-------- -------- -------- -------- -------- ------- ------ ------ ------
(0.24) (0.30) (0.32) (0.42) (0.29) (0.12) (0.24) (0.30) (0.32)
3.60 (3.67) (2.92) (4.10) 11.38 0.58 3.60 (3.67) (2.92)
-------- -------- -------- -------- -------- ------- ------ ------ ------
3.36 (3.97) (3.24) (4.52) 11.09 0.46 3.36 (3.97) (3.24)
-------- -------- -------- -------- -------- ------- ------ ------ ------
-- -- -- (0.28) -- -- -- -- --
-------- -------- -------- -------- -------- ------- ------ ------ ------
$ 12.90 $ 9.54 $ 13.51 $ 16.75 $ 21.55 $ 10.46 $12.90 $9.54 $13.51
======== ======== ======== ======== ======== ======= ====== ====== ======
35.22% (29.39%) (19.34%) (20.91%) 106.02% 4.60% 35.22% (29.39%) (19.34%)
(2.68%)+ (2.61%) (2.31%) (1.95%) (2.23%) (2.87%)+ (2.68%)+ (2.61%) (2.31%)
2.87%+ 2.82% 2.65% 2.45% 2.66% 3.38%+ 2.87%+ 2.82% 2.65%
69% 132% 111% 122% 86% 32% 69% 132% 111%
$178,730 $131,404 $196,859 $260,999 $130,487 $20,748 $7,734 $5,248 $6,628
<Caption>
Class C
---------------------------------
Year ended September 1***
December 31, through
--------------- December 31,
2000 1999 1998
------ ------ ---------------
$21.55 $10.46 $ 8.43
------ ------ ------
(0.42) (0.29) (0.09)
(4.10) 11.38 2.12
------ ------ ------
(4.52) 11.09 2.03
------ ------ ------
(0.28) -- --
------ ------ ------
$16.75 $21.55 $10.46
====== ====== ======
(20.91%) 106.02% 24.08%
(1.95%) (2.23%) (2.87%)+
2.45% 2.66% 3.38% +
122% 86% 32%
$9,843 $2,032 $ 1
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
- -
MainStay Small Cap Growth Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay Small
Cap Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and within one year of purchase
of Class C shares. Class A shares, Class B shares and Class C shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions except that the Class B shares and
Class C shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek long-term capital appreciation by
investing primarily in securities of small-cap companies.
Small-capitalization companies may be more volatile in price and have
significantly lower trading volumes than companies with larger capitalizations.
They may be more vulnerable to adverse business or market developments than
large-capitalization companies.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are
Notes to Financial Statements
19
-
valued at amortized cost, which approximates market value. Securities for which
market quotations are not readily available are valued by methods deemed by the
Board of Trustees to represent fair value.
(B) SECURITIES LENDING. The Fund may lend its securities to broker-dealer and
financial institutions. The loans are collateralized by cash or securities at
least equal at all times to the market value of the securities loaned. The Fund
may bear the risk of delay in recovery of, or loss of rights in, the securities
loaned should the borrower of the securities experience financial difficulty.
The Fund receives compensation for lending its securities in the form of fees or
it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(C) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay any
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current period reclassification between
accumulated net investment loss and additional paid-in-capital arising from
permanent differences; net assets at October 31, 2003, are not affected.
<Table>
<Caption>
ACCUMULATED
NET INVESTMENT ADDITIONAL
LOSS PAID-IN CAPITAL
-------------- ---------------
$4,211,729 $(4,211,729)
</Table>
The reclassification for the Fund is due to net operating losses.
MainStay Small Cap Growth Fund
20
- -
(E) 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 as earned.
Discounts and premiums on short-term securities are accreted and amortized,
respectively, on the straight line method.
Investment income, and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(F) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(G) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 1.00% of the Fund's
average daily net assets. For the ten months ended October 31, 2003, the Manager
earned from the Fund $1,695,204. For the year ended December 31, 2002, the
Manager earned from the Fund $2,221,302.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor a monthly fee at an annual rate of
0.50% of the average daily net assets of the Fund.
Notes to Financial Statements (continued)
21
-
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Distribution Plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $1,905 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $3,114, $157,141 and $1,154, respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and year ended December 31, 2002, amounted to $1,220,814
and $1,514,917, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective funds. Thus the Small Cap
Growth Fund only pays a portion of the fees identified above.
MainStay Small Cap Growth Fund
22
- -
(F) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $4,395 for the ten months ended October
31, 2003 and $4,302 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $39,163 for the ten months ended October
31, 2003 and $48,871 for the year ended December 31,2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
- ------------------- ------------ -----------------
$(201,041,088) $65,533,869 $(135,507,219)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is due
to wash sales deferrals.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $201,041,088 were available, as shown in the table below, to the extent
provided by regulations to offset future realized gains of the Fund through the
years indicated. To the extent that these carryforwards are used to offset
future capital gains, it is probable that the capital gains so offset will not
be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
----------------- --------
2008.................................................. $ 44,310
2009.................................................. 113,554
2010.................................................. 40,252
2011.................................................. 2,925
--------
$201,041
========
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $143,942 and $137,963, respectively.
As of October 31, 2003, the Fund had securities on loan with an aggregate market
value of $15,957,670. The Fund received $16,842,287 in cash as collateral for
securities on loan which was used to purchase highly liquid short-term
investments in accordance with Fund's securities lending procedures.
Notes to Financial Statements (continued)
23
-
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
JANUARY 1 THROUGH ---------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold.......... 2,592 2,236 156 5,195 2,610 266 4,957 3,775 96
Shares redeemed...... (1,740) (2,165) (107) (5,140) (3,396) (206) (6,367) (4,793) (194)
------ ------ ---- ------ ------ ---- ------- ------- -----
Net increase
(decrease)......... 852 71 49 55 (786) 60 (1,410) (1,018) (98)
====== ====== ==== ====== ====== ==== ======= ======= =====
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
24
- -
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Small Cap Growth Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Small Cap Growth Fund (one
of the funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
25
-
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
26
- -
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
27
-
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
28
- -
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
29
-
This page intentionally left blank
30
- -
This page intentionally left blank
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY.LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSSG11-12/03
NYLIM-A04373 24
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
Small Cap Growth Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY.LOGO]
Table of Contents
<Table>
President's Letter 2
$10,000 Invested in MainStay Small Cap Value
Fund versus Russell 2000(R) Value Index and
Inflation--Class A, Class B, and Class C
Shares 3
Portfolio Management Discussion and Analysis 5
Year-by-Year and 10-Month Performance 6
Portfolio of Investments 11
Financial Statements 13
Notes to Financial Statements 18
Report of Independent Auditors 23
Trustees and Officers 24
The MainStay(R) Funds 27
</Table>
2
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
3
- ------- -
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
$10,000 Invested in MainStay Small
Cap Value Fund versus Russell 2000(R)
Value Index and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 23.22%, 5 Years 13.04%, Since Inception
(6/1/98) 7.97%
[LINE GRAPH]
<Table>
<Caption>
MAINSTAY SMALL CAP RUSSELL 2000 VALUE
VALUE FUND INDEX(1) INFLATION (CPI)(2)
------------------ ------------------ ------------------
6/01/98 9450 10000 10000
10/31/98 7758 8408 10080
10/31/99 8193 8469 10338
10/31/00 11214 9934 10695
10/31/01 12264 10803 10923
10/31/02 11622 10530 11150
10/31/03 15154 14772 11378
</Table>
CLASS B SHARES
Total Returns with Sales Charges: 1 Year 24.36%, 5 Years 13.23%, Since Inception
(6/1/98) 8.17%
[LINE GRAPH]
<Table>
<Caption>
MAINSTAY SMALL CAP RUSSELL 2000 VALUE
VALUE FUND INDEX(1) INFLATION (CPI)(2)
------------------ ------------------ ------------------
6/01/98 10000 10000 10000
10/31/98 8190 8408 10080
10/31/99 8590 8469 10338
10/31/00 11656 9934 10695
10/31/01 12648 10803 10923
10/31/02 11911 10530 11150
10/31/03 15309 14772 11378
</Table>
CLASS C SHARES
Total Returns with Sales Charges: 1 Year 28.27%, 5 Years 13.46%, Since Inception
(6/1/98) 8.29%
[LINE GRAPH]
<Table>
<Caption>
MAINSTAY SMALL CAP RUSSELL 2000 VALUE
VALUE FUND INDEX(1) INFLATION (CPI)(2)
------------------ ------------------ ------------------
6/01/98 10000 10000 10000
10/31/98 8190 8408 10080
10/31/99 8590 8469 10338
10/31/00 11656 9934 10695
10/31/01 12648 10803 10923
10/31/02 11911 10530 11150
10/31/03 15398 14772 11378
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION PLEASE VISIT WWW.MAINSTAYFUNDS.COM.
4
- ----------
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect change in share price, reinvestment of dividend and capital
gain distributions, and maximum applicable sales charges explained in this
paragraph. The graphs assume an initial investment of $10,000 and reflect
deduction of all sales charges that would have applied for the period of
investment. Class A share performance reflects the effect of the maximum 5.5%
initial sales charge. Class B shares are subject to a contingent deferred
sales charge (CDSC) of up to 5% if shares are redeemed within the first six
years of purchase. Class B share performance reflects a CDSC of 1%, which
would apply for the period shown. Class C share performance includes the
historical performance of the Class B shares for periods from 6/1/98 through
8/31/98. Class C shares would be subject to a CDSC of 1% if redeemed within
one year of purchase.
1. The Russell 2000(R) Value Index is an unmanaged index that measures the
performance of those Russell 2000(R) companies with lower price-to-book
ratios and lower forecasted growth values. The Russell 2000(R) Index is an
unmanaged index that measures the performance of the 2,000 smallest
companies in the Russell 3000(R) Index which, in turn, is an unmanaged
index that measures the performance of the 3,000 largest U.S. companies
based on total market capitalization. Results assume the reinvestment of
all income and capital gains. An investment cannot be made directly into
an index.
2. Inflation is measured 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. The rate of inflation does not represent an
investment return.
5
- ------- -
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 4 for information on the Russell 2000(R) Value Index.
3. For each fund with at least a three-year history, Morningstar calculates a
Morningstar Rating(TM) based on a Morningstar Risk-Adjusted Return measure
that accounts for variation in a fund's monthly performance (including the
effects of sales charges, loads, and redemption fees), placing more emphasis
on downward variations and rewarding consistent performance. The top 10% of
funds in each category receive five stars, the next 22.5% receive four stars,
the middle 35% receive three stars, the next 22.5% receive two stars, and the
bottom 10% receive one star. The Overall Morningstar Rating(TM) for a fund is
derived from a weighted average of the performance figures associated with
its three-, five- and 10-year (if applicable) Morningstar Rating(TM) metrics.
Portfolio Management Discussion and Analysis
The equity markets stumbled out of the gate in 2003, due in large part to the
anemic economy and uncertainty regarding the possibility of a war in Iraq. Since
mid-March 2003, however, stocks have produced outstanding results.
The stock market is often a "leading indicator," meaning that people attempt to
anticipate the future direction of the economy and corporate profits and then
invest accordingly. In hindsight, the strong rally showed that investors
correctly anticipated the economic recovery. As a case in point, third-quarter
2003 growth in gross domestic product exceeded expectations, according to
preliminary estimates from the Bureau of Economic analysis. Robust consumer
spending and a turnaround in corporate spending helped drive the economy
forward.
The market rally was accompanied by a return to speculative activity at a level
we have not seen since the run-up in information technology stocks in the late
1990s. Since March 2003, the best performance has been generated by unprofitable
businesses and companies with suspect balance sheets. Since our research focus
is on high-quality companies that are selling at attractive valuations, we are
seldom able to fully participate in this type of speculative rally.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Small Cap Value Fund returned
26.94% for Class A shares and 26.17% for Class B shares, and 26.07% for Class C
shares, respectively, excluding all sales charges. All share classes
underperformed the 35.64% return of the average Lipper(1) small-cap core fund
over the same period. All share classes also underperformed the 35.72% return of
the Russell 2000(R) Value Index(2) for the first 10 months of 2003.
Much of the Fund's underperformance during the reporting period resulted from
the market's preference for speculative stocks, which typically do not fit our
investment approach. We believe that the market's preference will reverse in the
near future and that quality companies will again begin to outperform.
Class A, Class B, and Class C shares of MainStay Small Cap Value Fund were all
rated four stars overall out of 227 small blend funds by Morningstar(3) as of
October 31, 2003. The Fund's Class A and Class B shares were rated three stars
and Class C shares were rated four stars out of 227 small blend funds for the
three-year period then ended. Class A, Class B, and Class C shares of the Fund
were all rated four stars out of 213 small blend funds for the five-year period
then ended.
6
- -------
4. Performance percentages reflect the total return performance of the indicated
securities for the 10-month period ended October 31, 2003, or for the portion
of the reporting period such securities were held in the Fund, if shorter.
Due to purchases and sales, the performance of Fund holdings may differ from
the performance of the securities themselves.
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[PERFORMANCE CHART; LINE GRAPH]
<Table>
<Caption>
CLASS A SHARES
--------------
12/98 -9.7
12/99 6.11
12/00 30.04
12/01 15.43
12/02 -12.16
10/03 26.94
</Table>
CLASS B AND CLASS C SHARES
[PERFORMANCE CHART; LINE GRAPH]
<Table>
<Caption>
CLASS B AND CLASS C SHARES
--------------------------
12/98 -10
12/99 5.35
12/00 28.97
12/01 14.57
12/02 -12.83
10/03 26.17
10/03 26.07
</Table>
STRONG AND WEAK PERFORMERS
The Fund's portfolio is widely diversified and its best-performing stocks were
spread across a wide variety of industries.(4)
TTM Technologies (+386.7%) is a leading provider of high-end printed circuit
boards. During the reporting period, the company's stock exceeded the strong
performance generated by the technology sector as a whole. TTM continued to
enjoy high profit margins, and it benefited from minimal Asian competition.
7
-
ITT Educational Services (+111.5%) is a leading provider of technology-oriented
postsecondary degree programs in the United States. The firm is successfully
implementing several initiatives that are driving student enrollment growth at
rates well above those of its competitors.
eFunds (+102.3%) provides electronic transaction processing, ATM management,
risk management, and professional services to financial institutions, retailers,
government agencies, and others. eFunds' new management team is implementing the
company's business strategy more effectively than the preceding team, unlocking
the earnings power in the firm's businesses and positioning the company for
revenue growth.
K-Swiss (+97.2%) is a leading designer and marketer of athletic footwear. The
company's stock performance reflected a continuation of better-than-expected
financial results, which resulted from robust order rates for the company's key
footwear lines.
Plantronics (+83.8%) is the leading worldwide manufacturer of communication
headsets. The firm's revenues and earnings have rebounded in 2003 as demand for
both mobile and call-center units has accelerated.
While several holdings had positive returns, a number of other stocks in the
Fund's portfolio provided disappointing results.
Oneida (-62.3%) is a major supplier of tableware to both the consumer and
institutional market. The company has also expanded via acquisitions into the
china and glassware markets. Recent slowdowns in consumer spending at department
stores hurt the company's sales. The Fund's position was sold when demand
remained weak and the company's market share declined.
Merix (-52.3%) is a leader in the fabrication of complex, high-performance
printed circuits boards--a niche that is growing rapidly. The Fund's position
was sold when the company's timetable for resuming profitable operations was
pushed too far into the future.
Central Parking (-49.2%) operates or manages multilevel parking facilities and
surface lots and provides ancillary products and services, including shuttle,
valet, and billing and collection services. The company saw an abrupt
deterioration in its results in the first quarter of 2003, primarily because of
poor managerial decisions and a breakdown in internal controls. The Fund's
position in the stock was sold.
RehabCare Group (-28.3%) is a provider of temporary healthcare staffing
services. It also offers program management of inpatient rehabilitation and
skilled nursing
8
units, outpatient therapy programs, and contract therapy services. The company's
stock came under pressure because of a weak staffing environment and the fear of
a significant government price cut in Medicare refunding. The Fund's position in
the stock was sold, since the Medicare rate cut would materially impact the
company's earnings power.
Payless ShoeSource (-20.7%) is the largest U.S. shoe retailer, with 4,300 stores
nationwide. The Fund's position in the stock was sold because of deteriorating
fundamentals.
PURCHASES AND SALES
During the 10-month reporting period, we added Charles River Labs to the Fund's
portfolio. Charles River is a leading provider of drug discovery and development
services. Recent indications suggest that pharmaceutical research and
development have begun to accelerate, and we believe that the firm should be
able to increase its sales going forward.
We also initiated a position in Ryan's Family Steak House, a chain of over 340
family-style restaurants located mostly in the Midwest and the South. The
company plans to open 15 to 17 new locations per year, which may generate unit
growth of around 5% annually. The company also enjoys strong free cash flow.
THQ is a leading publisher of entertainment software for all major hardware
platforms and for personal computers. The company is also the largest
third-party publisher of games for Nintendo's Game Boy platform. We added THQ
stock to the Fund because we believe its improving portfolio diversity and
growing number of internally developed titles mitigates revenue volatility and
should enhance the company's margins over time.
Overall, a number of stocks were eliminated from the portfolio during the
reporting period when they failed to meet our expectations. Examples of
significant holdings that were sold included Merix, Oneida, and Payless
ShoeSource.
SECTOR WEIGHTINGS
During the 10-month reporting period, the Fund's relative sector weightings,
over or under the benchmark, were a byproduct of our extensive bottom-up
analysis of individual companies. The stocks we are focusing on represent what
we believe to be the best values and the most likely candidates to benefit from
an economic recovery.
9
-
After the overspending of the late 1990's, capital spending has plummeted in the
past three years. In the information technology sector, equipment spending is at
an all time low, a trend we have seen in most industrial cyclical industries. At
the same time, corporate free cash-flow generation, the best indicator of future
capital spending, is at record levels. To complete the picture, what is needed
is an improvement in business confidence, which we believe is now occurring in
response to accelerating earnings growth. In order for the portfolio to benefit
from these trends, we overweighted industrial cyclical stocks, with a particular
emphasis on basic materials and capital goods. Industrial cyclical stocks in
total represent approximately 35% of the Fund's portfolio versus 28% for the
Russell 2000 Value Index.
Consumers, on the other hand, have been spending aggressively over the past few
years, despite the weakening employment picture and rising debt levels. While a
multiyear decline in interest rates has bolstered consumer spending
significantly, during the reporting period, long-term rates have increased. We
believe that other rates may also have bottomed and that consumer spending
growth will slow as a result. Based on these expectations, the Fund maintained a
modest underweighted position in consumer cyclical stocks of 15% of the
portfolio versus 16% for the benchmark.
We feel that the financials sector is vulnerable due to the expected rise in
interest rates as the economy recovers. Financial stocks are selling at the high
end of their valuation ranges and represent record-high weightings in the
various indices. Hence, we remain comfortable with the Fund's underweighted
position in this sector. Our concerns have led us to allocate approximately 21%
of the portfolio to financial stocks as compared to nearly 33% for the Russell
2000 Value Index.
LOOKING AHEAD
While we are frustrated by the Fund's underperformance during the reporting
period, we continue to be encouraged by the quality of the Fund's stock holdings
and are comfortable with its industry weightings. We have no plans to alter our
time-tested, disciplined approach to small-cap investing, and we look forward to
the market once again recognizing the value of quality. We believe that the Fund
is well positioned to benefit from improving corporate spending.
10
- -
Whatever the markets or the economy may bring, the Fund will continue to seek
long-term capital appreciation by investing primarily in securities of small-cap
companies.
Stephen J. Bruno
Timothy G. Dalton, Jr.
Kenneth J. Greiner
Portfolio Managers
Dalton, Greiner, Hartman, Maher & Co.
Stocks of small companies may be subject to higher price volatility,
significantly lower trading volumes, and greater spreads between bid and ask
prices than stocks of larger companies. Small companies may be more vulnerable
to adverse business or market developments than mid- or large-capitalization
companies.
MainStay Small Cap Value Fund was closed to new investors as of December 1,
2001.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
11
-
Portfolio of Investments October 31, 2003
<Table>
<Caption>
SHARES VALUE
---------------------------
COMMON STOCKS (99.5%)+
AUTOMOBILES (0.8%)
Coachmen Industries, Inc. ..... 58,300 $ 908,897
------------
BIOTECHNOLOGY (1.5%)
Charles River Laboratories
International, Inc. (a)....... 53,400 1,721,616
------------
BUILDING PRODUCTS (2.9%)
NCI Building Systems, Inc.
(a)........................... 72,700 1,581,225
Simpson Manufacturing Co. ,
Inc. (a)...................... 37,700 1,687,075
------------
3,268,300
------------
CAPITAL MARKETS (1.4%)
Waddell & Reed Financial, Inc.
Class A....................... 70,400 1,561,472
------------
CHEMICALS (4.5%)
Arch Chemicals, Inc. .......... 81,000 1,796,580
Georgia Gulf Corp. ............ 67,100 1,804,990
H.B. Fuller Co. ............... 62,800 1,556,184
------------
5,157,754
------------
COMMERCIAL BANKS (8.2%)
Chemical Financial Corp. ...... 13,034 452,932
Chittenden Corp. .............. 69,700 2,242,946
Cullen/Frost Bankers, Inc. .... 37,600 1,457,376
Local Financial Corp. (a)...... 133,800 2,597,058
S&T Bancorp, Inc. ............. 29,842 902,422
Westamerica Bancorp............ 35,200 1,762,112
------------
9,414,846
------------
COMMERCIAL SERVICES & SUPPLIES (6.9%)
Arbitron, Inc. (a)............. 41,800 1,651,100
Banta Corp. ................... 39,300 1,503,618
Herman Miller, Inc. ........... 74,500 1,711,265
ITT Educational Services, Inc.
(a)........................... 34,600 1,723,080
Learning Tree International,
Inc. (a)...................... 75,255 1,354,590
------------
7,943,653
------------
COMMUNICATIONS EQUIPMENT (1.5%)
Plantronics, Inc. (a).......... 61,100 1,699,191
------------
ELECTRIC UTILITIES (1.5%)
El Paso Electric Co. (a)....... 142,400 1,728,736
------------
ELECTRICAL EQUIPMENT (3.4%)
Acuity Brands, Inc. ........... 80,000 1,720,000
AMETEK, Inc. .................. 45,000 2,117,250
------------
3,837,250
------------
</Table>
<Table>
<Caption>
SHARES VALUE
---------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (5.0%)
Electro Scientific Industries,
Inc. (a)...................... 62,500 $ 1,535,000
Littelfuse, Inc. (a)........... 34,300 912,380
Technitrol, Inc. (a)........... 89,300 1,946,740
TTM Technologies, Inc. (a)..... 78,800 1,268,680
------------
5,662,800
------------
ENERGY EQUIPMENT & SERVICES (2.7%)
Pride International, Inc.
(a)........................... 118,600 1,942,668
Universal Compression Holdings,
Inc. (a)...................... 49,900 1,097,301
------------
3,039,969
------------
HEALTH CARE EQUIPMENT & SUPPLIES (4.9%)
Arrow International, Inc. ..... 53,600 1,413,968
Matthews International Corp.
Class A....................... 30,900 833,991
Orthofix International N.V.
(a)........................... 48,000 1,752,000
Sybron Dental Specialties,
Inc. (a)...................... 70,400 1,619,200
------------
5,619,159
------------
HEALTH CARE PROVIDERS & SERVICES (3.5%)
Option Care, Inc. (a).......... 117,557 1,150,883
Pharmaceutical Product
Development, Inc. (a)......... 40,100 1,205,807
Renal Care Group, Inc. (a)..... 43,400 1,627,934
------------
3,984,624
------------
HOTELS, RESTAURANTS & LEISURE (2.1%)
La Quinta Corp. Paired-share
(a)(b)........................ 173,700 1,071,729
Ryan's Family Steak Houses,
Inc. (a)...................... 94,100 1,311,754
------------
2,383,483
------------
INSURANCE (4.5%)
AmerUs Group Co. .............. 52,000 1,963,000
Reinsurance Group of America,
Inc. ......................... 39,900 1,594,005
Scottish Re Group Ltd. ........ 75,300 1,642,293
------------
5,199,298
------------
IT SERVICES (3.4%)
eFunds Corp. (a)............... 125,963 2,016,668
Forrester Research, Inc. (a)... 111,098 1,894,221
------------
3,910,889
------------
LEISURE EQUIPMENT & PRODUCTS (1.5%)
Arctic Cat, Inc. .............. 77,900 1,754,308
------------
MACHINERY (8.3%)
Briggs & Stratton Corp. ....... 38,300 2,489,883
CLARCOR, Inc. ................. 32,200 1,308,930
IDEX Corp. .................... 42,500 1,580,150
Lincoln Electric Holdings,
Inc. ......................... 61,400 1,497,546
Thomas Industries, Inc. ....... 25,900 782,180
Trinity Industries, Inc. ...... 20,900 531,905
Wabtec Corp. .................. 88,400 1,352,520
------------
9,543,114
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Small Cap Value Fund
12
- -
<Table>
<Caption>
SHARES VALUE
---------------------------
COMMON STOCKS (CONTINUED)
MEDIA (1.5%)
Journal Communications, Inc.
Class A (a)................... 7,800 $ 138,762
Mediacom Communications Corp.
(a)........................... 232,400 1,626,800
------------
1,765,562
------------
METALS & MINING (2.1%)
United States Steel Corp. ..... 103,900 2,457,235
------------
OIL & GAS (2.9%)
Cimarex Energy Co. (a)......... 49,900 1,020,455
Houston Exploration Co. (The)
(a)........................... 65,500 2,292,500
------------
3,312,955
------------
PAPER & FOREST PRODUCTS (1.4%)
Wausau-Mosinee Paper Corp. .... 125,700 1,553,652
------------
REAL ESTATE (5.4%)
Kilroy Realty Corp. ........... 49,100 1,418,990
LNR Property Corp. ............ 34,400 1,406,960
Macerich Co. (The)............. 29,300 1,177,860
Sun Communities, Inc. ......... 34,200 1,246,590
Trammell Crow Co. (a).......... 65,200 887,372
------------
6,137,772
------------
ROAD & RAIL (2.7%)
Florida East Coast Industries,
Inc. ......................... 48,700 1,447,364
Heartland Express, Inc. ....... 9,842 244,475
Overnite Corp. (a)............. 3,700 81,992
USF Corp. ..................... 40,100 1,279,992
------------
3,053,823
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (4.1%)
Actel Corp. (a)................ 42,654 1,150,805
Pericom Semiconductor Corp.
(a)........................... 149,283 1,700,333
Phototronics, Inc. (a)......... 87,600 1,886,904
------------
4,738,042
------------
</Table>
<Table>
<Caption>
SHARES VALUE
---------------------------
SOFTWARE (2.7%)
Autodesk, Inc. ................ 94,100 $ 1,811,425
THQ, Inc. (a).................. 69,100 1,225,834
------------
3,037,259
------------
SPECIALTY RETAIL (2.7%)
Dress Barn, Inc. The) (a)...... 82,400 1,153,600
Steiner Leisure Ltd. (a)....... 76,100 1,047,136
Too, Inc. (a).................. 57,300 945,450
------------
3,146,186
------------
TEXTILES, APPAREL & LUXURY GOODS (4.4%)
K-Swiss, Inc. Class A.......... 36,831 1,618,354
Tommy Hilfiger Corp. (a)....... 94,400 1,386,736
Warnaco Group, Inc. The) (a)... 116,445 2,031,965
------------
5,037,055
------------
THRIFTS & MORTGAGE FINANCE (1.1%)
Brookline Bancorp, Inc. ....... 85,100 1,261,182
------------
Total Investments
(Cost $94,326,878) (c)........ 99.5% 113,840,082(d)
Cash and Other Assets,
Less Liabilities.............. 0.5 540,667
-------- ------------
Net Assets..................... 100.0% $114,380,749
======== ============
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) Paired-share security represents equal ownership of La
Quinta Properties, Inc. Class B and La Quinta Corp.
(c) The cost for federal income tax purposes is $94,636,868.
(d) At October 31, 2003, net unrealized appreciation was
$19,203,214, 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 $22,150,937 and
aggregate unrealized depreciation for all investments on
which there was an excess of cost over market value of
$2,947,723.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
-
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$94,326,878).............................................. $113,840,082
Cash........................................................ 857,259
Receivables:
Investment securities sold................................ 837,247
Fund shares sold.......................................... 134,550
Dividends and interest.................................... 71,917
Other assets................................................ 10,499
------------
Total assets........................................ 115,751,554
------------
LIABILITIES:
Payables:
Investment securities purchased........................... 946,325
Fund shares redeemed...................................... 113,074
Manager................................................... 96,930
Transfer agent............................................ 74,756
NYLIFE Distributors....................................... 67,799
Shareholder communication................................. 31,176
Custodian................................................. 3,327
Accrued expenses............................................ 37,418
------------
Total liabilities................................... 1,370,805
------------
Net assets.................................................. $114,380,749
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 31,583
Class B................................................... 44,742
Class C................................................... 7,040
Additional paid-in capital.................................. 90,938,018
Accumulated undistributed net realized gain on
investments............................................... 3,846,162
Net unrealized appreciation on investments.................. 19,513,204
------------
Net assets.................................................. $114,380,749
============
CLASS A
Net assets applicable to outstanding shares................. $ 44,495,913
============
Shares of beneficial interest outstanding................... 3,158,279
============
Net asset value per share outstanding....................... $ 14.09
Maximum sales charge (5.50% of offering price).............. 0.82
------------
Maximum offering price per share outstanding................ $ 14.91
============
CLASS B
Net assets applicable to outstanding shares................. $ 60,384,112
============
Shares of beneficial interest outstanding................... 4,474,175
============
Net asset value and offering price per share outstanding.... $ 13.50
============
CLASS C
Net assets applicable to outstanding shares................. $ 9,500,724
============
Shares of beneficial interest outstanding................... 704,025
============
Net asset value and offering price per share outstanding.... $ 13.49
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
----------- ------------
INVESTMENT INCOME:
Income:
Dividends................................................. $ 907,415 $ 1,269,367
Interest.................................................. 13,094 54,070
----------- ------------
Total income............................................ 920,509 1,323,437
----------- ------------
Expenses:
Manager................................................... 818,724 1,173,251
Transfer agent............................................ 377,667 489,771
Distribution--Class B..................................... 330,558 477,712
Distribution--Class C..................................... 54,570 86,923
Service--Class A.......................................... 76,305 105,101
Service--Class B.......................................... 110,186 159,237
Service--Class C.......................................... 18,190 28,974
Shareholder communication................................. 43,854 61,087
Professional.............................................. 41,117 43,031
Registration.............................................. 30,459 34,761
Recordkeeping............................................. 29,548 38,299
Custodian................................................. 19,176 23,741
Trustees.................................................. 6,403 9,200
Miscellaneous............................................. 18,672 22,792
----------- ------------
Total expenses before reimbursement..................... 1,975,429 2,753,880
Expense reimbursement from Manager.......................... (34,725) --
----------- ------------
Net expenses............................................ 1,940,704 2,753,880
----------- ------------
Net investment loss......................................... (1,020,195) (1,430,443)
----------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments............................ 3,713,374 335,025
Net change in unrealized appreciation (depreciation) on
investments............................................... 20,809,133 (15,273,957)
----------- ------------
Net realized and unrealized gain (loss) on investments...... 24,522,507 (14,938,932)
----------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ $23,502,312 $(16,369,375)
=========== ============
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------- ------------ ------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss....................................... $ (1,020,195) $ (1,430,443) $ (792,179)
Net realized gain on investments.......................... 3,713,374 335,025 5,478,043
Net change in unrealized appreciation (depreciation) on
investments............................................. 20,809,133 (15,273,957) 7,569,557
------------- ------------ ------------
Net increase (decrease) in net assets resulting from
operations.............................................. 23,502,312 (16,369,375) 12,255,421
------------- ------------ ------------
Distributions to shareholders:
From net realized gain on investments:
Class A................................................. -- (556,902) (674,099)
Class B................................................. -- (883,671) (1,055,849)
Class C................................................. -- (157,204) (193,660)
------------- ------------ ------------
Total distributions to shareholders................... -- (1,597,777) (1,923,608)
------------- ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 10,118,600 19,265,086 42,815,417
Class B................................................. 4,191,414 10,805,256 40,214,126
Class C................................................. 224,629 1,377,359 10,635,016
Net asset value of shares issued to shareholders in
reinvestment of distributions:
Class A................................................. -- 416,771 547,275
Class B................................................. -- 817,759 983,214
Class C................................................. -- 101,963 167,041
------------- ------------ ------------
14,534,643 32,784,194 95,362,089
Cost of shares redeemed:
Class A................................................. (9,899,408) (22,188,432) (30,900,193)
Class B................................................. (10,045,343) (15,066,025) (12,281,979)
Class C................................................. (2,130,757) (2,531,120) (1,601,976)
------------- ------------ ------------
Increase (decrease) in net assets derived from capital
share transactions.................................. (7,540,865) (7,001,383) 50,577,941
------------- ------------ ------------
Net increase (decrease) in net assets................. 15,961,447 (24,968,535) 60,909,754
NET ASSETS:
Beginning of period......................................... 98,419,302 123,387,837 62,478,083
------------- ------------ ------------
End of period............................................... 114,380,749 $ 98,419,302 $123,387,837
============= ============ ============
</Table>
<Table>
- -------
* The fund changed its fiscal year end from December 31 to
October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
---------------------------------------------------------------------------
January 1, 2003 June 1**
through Year ended December 31, through
October 31, ---------------------------------------- December 31,
2003* 2002 2001 2000 1999 1998
--------------- ------- ------- ------- ------- ------------
Net asset value at beginning of period............ $ 11.10 $ 12.84 $ 11.30 $ 9.56 $ 9.03 $ 10.00
------- ------- ------- ------- ------- -------
Net investment income (loss) (a).................. (0.08) (0.09) (0.05) 0.00(b) (0.03) (0.06)
Net realized and unrealized gain (loss) on
investments...................................... 3.07 (1.47) 1.79 2.80 0.58 (0.91)
------- ------- ------- ------- ------- -------
Total from investment operations.................. 2.99 (1.56) 1.74 2.80 0.55 (0.97)
------- ------- ------- ------- ------- -------
Less distributions:
From net realized gain on investments............ -- (0.18) (0.20) (1.06) (0.02) --
------- ------- ------- ------- ------- -------
Net asset value at end of period.................. $ 14.09 $ 11.10 $ 12.84 $ 11.30 $ 9.56 $ 9.03
======= ======= ======= ======= ======= =======
Total investment return (c)....................... 26.94% (12.16%) 15.43% 30.04% 6.11% (9.70%)
Ratios (to average net assets)/
Supplemental Data:
Net investment income (loss)................... (0.78%)+ (0.74%) (0.41%) 0.08% (0.34%) (1.53%)+
Net expenses................................... 1.90%+ 1.87% 1.88% 1.90% 1.90% 3.14%+
Expenses (before reimbursement)................ 1.94%+ 1.87% 1.88% 2.07% 2.21% 3.14%+
Portfolio turnover rate........................... 41% 46% 46% 69% 42% 24%
Net assets at end of period (in 000's)............ $44,496 $35,197 $43,761 $27,610 $15,205 $12,339
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Commencement of Operations.
*** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges and is
not annualized.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
-
<Table>
<Caption>
Class B Class C
---------------------------------------------------------------------- ---------------
January 1, 2003 June 1** January 1, 2003
through Year ended December 31, through through
October 31, ------------------------------------- December 31, October 31,
2003* 2002 2001 2000 1999 1998 2003*
--------------- ------- ------- ------- ------- ------------ ---------------
$ 10.70 $ 12.48 $ 11.07 $ 9.46 $ 9.00 $ 10.00 $ 10.70
------- ------- ------- ------- ------- ------- -------
(0.15) (0.18) (0.13) (0.07) (0.10) (0.09) (0.15)
2.95 (1.42) 1.74 2.74 0.58 (0.91) 2.94
------- ------- ------- ------- ------- ------- -------
2.80 (1.60) 1.61 2.67 0.48 (1.00) 2.79
------- ------- ------- ------- ------- ------- -------
-- (0.18) (0.20) (1.06) (0.02) -- --
------- ------- ------- ------- ------- ------- -------
$ 13.50 $ 10.70 $ 12.48 $ 11.07 $ 9.46 $ 9.00 $ 13.49
======= ======= ======= ======= ======= ======= =======
26.17% (12.83%) 14.57% 28.97% 5.35% (10.00%) 26.07%
(1.53%)+ (1.49%) (1.16%) (0.67%) (1.09%) (2.28%)+ (1.53%)+
2.65%+ 2.62% 2.63% 2.65% 2.65% 3.89%+ 2.65%+
2.69%+ 2.62% 2.63% 2.82% 2.96% 3.89%+ 2.69%+
41% 46% 46% 69% 42% 24% 41%
$60,384 $53,819 $67,377 $32,777 $15,722 $10,145 $ 9,501
<Caption>
Class C
-------------------------------------------------------
September 1***
Year ended December 31, through
------------------------------------- December 31,
2002 2001 2000 1999 1998
------- ------- ------- ------- ---------------
$ 12.48 $ 11.07 $ 9.46 $ 9.00 $ 7.49
------- ------- ------- ------- ------
(0.18) (0.13) (0.07) (0.10) (0.06)
(1.42) 1.74 2.74 0.58 1.57
------- ------- ------- ------- ------
(1.60) 1.61 2.67 0.48 1.51
------- ------- ------- ------- ------
(0.18) (0.20) (1.06) (0.02) --
------- ------- ------- ------- ------
$ 10.70 $ 12.48 $ 11.07 $ 9.46 $ 9.00
======= ======= ======= ======= ======
(12.83%) 14.57% 28.97% 5.35% 20.16%
(1.49%) (1.16%) (0.67%) (1.09%) (2.28%)+
2.62% 2.63% 2.65% 2.65% 3.89%+
2.62% 2.63% 2.82% 2.96% 3.89%+
46% 46% 69% 42% 24%
$ 9,403 $12,250 $ 2,090 $ 634 $ 196
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Small Cap Value Fund
18
- -
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay Small
Cap Value Fund (the "Fund"), a diversified fund. The Board of Trustees of the
Trust approved the closure of the Fund to new investors, effective December 1,
2001. Existing shareholders may continue to invest in the Fund directly, through
exchanges, or by reinvesting distributions.
The Fund currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and within one year of purchase
of Class C shares. Class A shares, Class B shares and Class C shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions except that the Class B shares and
Class C shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek long-term capital appreciation by
investing primarily in securities of small-cap companies.
Small-capitalization companies may be more volatile in price and have
significantly lower trading volumes than companies with larger capitalizations.
They may be more vulnerable to adverse business or market developments than
large-capitalization companies.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized
Notes to Financial Statements
19
-
cost, which approximates market value. Securities for which market quotations
are not readily available are valued by methods deemed by the Board of Trustees
to represent fair value.
(B) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay any
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current period reclassification between
accumulated net investment loss and additional paid-in-capital arising from
permanent differences; net assets at October 31, 2003, are not affected.
<Table>
<Caption>
ACCUMULATED NET ADDITIONAL
INVESTMENT LOSS PAID-IN-CAPITAL
--------------- ---------------
$1,020,195 $(1,020,195)
</Table>
The reclassification for the Fund is primarily due to net operating losses.
(D) 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 as earned.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
MainStay Small Cap Value Fund
20
- -
(F) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. Dalton,
Greiner, Hartman, Maher & Co. (the "Subadvisor") is responsible for the
day-to-day portfolio management of the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 1.00% of the Fund's
average daily net assets. The Manager has voluntarily agreed to reimburse the
expenses of the Fund to the extent that operating expenses would exceed on an
annualized basis 1.90%, 2.65% and 2.65% of the average daily net assets of the
Class A, Class B and Class C shares, respectively. For the ten months ended
October 31, 2003, the Manager earned from the Fund $818,724 and reimbursed the
Fund for $34,725. For the year ended December 31, 2002, the Manager earned from
the Fund $1,173,251 and did not reimburse the Fund for expenses.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and the
Subadvisor, the Manager paid the Subadvisor a monthly fee at an annual rate of
0.50% of the average daily net assets on assets up to $250 million, 0.45% on
assets from $250 million to $500 million and 0.40% on assets in excess of $500
million.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC ("the Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Distribution Plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
Notes to Financial Statements (continued)
21
-
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $750 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $195, $75,783 and $423, respectively, for the ten months ended October
31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued for the ten months ended October
31, 2003 and year ended December 31, 2002, amounted to $377,667 and $489,771,
respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the Small Cap
Value Fund only pays a portion of the fees identified above.
(F) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $2,068 for the ten months ended October
31, 2003 and $2,307 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $29,548 for the ten months ended October
31, 2003 and $38,299 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER GAINS APPRECIATION GAIN
------------------- ------------ -----------------
$4,156,152 $19,203,214 $23,359,366
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals and real estate investment trusts
distributions.
MainStay Small Cap Value Fund
22
- -
The tax character of distributions paid during the years ended December 31, 2002
and December 31, 2001, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2002 2001
---------- ----------
Distributions paid from:
Ordinary Income................................. $ 854,844 $ 789,350
Long-term Capital Gains......................... 742,933 1,134,258
---------- ----------
$1,597,777 $1,923,608
========== ==========
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $39,649 and $47,290, respectively.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
JANUARY 1 DECEMBER 31,
THROUGH ---------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold............ 835 366 19 1,552 879 110 3,574 3,435 912
Shares issued in
reinvestment of
distributions........ -- -- -- 38 77 10 43 80 14
---- ---- ---- ------ ------ ---- ------ ------ ----
835 366 19 1,590 956 120 3,617 3,515 926
Shares redeemed........ (847) (922) (194) (1,827) (1,326) (223) (2,653) (1,077) (133)
---- ---- ---- ------ ------ ---- ------ ------ ----
Net increase
(decrease)........... (12) (556) (175) (237) (370) (103) 964 2,438 793
==== ==== ==== ====== ====== ==== ====== ====== ====
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
23
-
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Small Cap Value Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Small Cap Value Fund (one
of the funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
24
- -
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
25
-
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
26
- -
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
27
-
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY LOGO]
MainStay is a division of New York Life Investment
Management LLC, the investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSSV11- 12/03
NYLIM-A04342 25
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MAINSTAY(R)
SMALL CAP VALUE FUND
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY LOGO]
Table of Contents
<Table>
President's Letter 2
$10,000 Invested in MainStay Strategic Income
Fund versus Lehman Brothers(R) Aggregate Bond
Index, a Three-Index Composite, and Inflation
--Class A, Class B, and Class C Shares 3
Portfolio Management Discussion and Analysis 5
Year-by-Year and 10-Month Performance 6
Portfolio of Investments 11
Financial Statements 25
Notes to Financial Statements 30
Report of Independent Auditors 42
Trustees and Officers 43
The MainStay(R) Funds 46
</Table>
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
2
$10,000 Invested in MainStay Strategic
Income Fund versus Lehman Brothers(R)
Aggregate Bond Index, a Three-Index
Composite, and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 18.00%, 5 Years 5.05%, Since Inception
(2/28/97) 5.17%
[CLASS A SHARES PERFORMANCE LINE GRAPH]
<Table>
Period-end MainStay Strategic Income Fund Lehman Brothers Aggregate Bond Index(1)
- ----------
02/28/97 $ 9,550.00 $ 10,000.00
10/31/97 10,209.00 10,747.00
10/31/98 10,451.00 11,750.00
10/31/99 10,845.00 11,813.00
10/31/00 10,834.00 12,675.00
10/31/01 11,400.00 14,520.00
10/31/02 11,332.00 15,375.00
10/31/03 14,002.00 16,129.00
Period-end Three-Index Composite(2) Inflation (CPI)(3)
- ----------
02/28/97 $ 10,000.00 $ 10,000.00
10/31/97 10,676.00 10,113.00
10/31/98 11,375.00 10,263.00
10/31/99 11,498.00 10,526.00
10/31/00 11,361.00 10,889.00
10/31/01 12,192.00 11,121.00
10/31/02 12,850.00 11,353.00
10/31/03 15,123.00 11,584.00
</Table>
CLASS B AND CLASS C SHARES
Class B Total Returns with Sales Charges: 1 Year 17.73%, 5 Years 4.95%, Since
Inception (2/28/97) 5.12%
Class C Total Returns with Sales Charges: 1 Year 21.73%, 5 Years 5.25%, Since
Inception (2/28/97) 5.12%
[CLASS B SHARES PERFORMANCE LINE GRAPH]
<Table>
Period-end MainStay Strategic Income Fund Lehman Brothers Aggregate Bond Index(1)
- ----------
02/28/97 $ 10,000.00 $ 10,000.00
10/31/97 10,635.00 10,747.00
10/31/98 10,802.00 11,750.00
10/31/99 11,143.00 11,813.00
10/31/00 11,031.00 12,675.00
10/31/01 11,535.00 14,520.00
10/31/02 11,370.00 15,375.00
10/31/03 13,953.00 16,129.00
Period-end Three-Index Composite(2) Inflation (CPI)(3)
- ----------
02/28/97 $ 10,000.00 $ 10,000.00
10/31/97 10,676.00 10,113.00
10/31/98 11,375.00 10,263.00
10/31/99 11,498.00 10,526.00
10/31/00 11,361.00 10,889.00
10/31/01 12,192.00 11,121.00
10/31/02 12,850.00 11,353.00
10/31/03 15,123.00 11,584.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION PLEASE VISIT WWW.MAINSTAYFUNDS.COM. Performance tables and graphs
do not reflect the deduction of taxes that a shareholder would pay on
distributions or Fund-share redemptions. Total returns reflect change in
share price, reinvestment of dividend and capital gain distributions, and
maximum applicable sales charges explained in this paragraph. The graphs
assume an initial investment of $10,000 and reflect deduction of all sales
charges that would have applied for the period of investment. Class A share
performance reflects the effect of the maximum 4.5% initial sales charge.
Class B shares are subject to a contingent deferred sales charge (CDSC) of up
to 5% if shares are redeemed within the first six years of purchase. Class C
share performance includes the historical performance of the Class B shares
for periods from 2/28/97 through 8/31/98. Class C shares would be subject to
a CDSC of 1% if redeemed within one year of purchase.
1. The Lehman Brothers(R) Aggregate Bond Index is an unmanaged index that
includes the following other unmanaged Lehman Brothers Indices: the
Government Index, the Corporate Index, the Mortgage-Backed Securities Index
and the
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
3
- ----------
Asset-Backed Securities Index. To qualify for inclusion in the Lehman
Brothers Aggregate Bond Index, securities must be U.S. dollar denominated
and investment grade and have a fixed-rate coupon, a remaining maturity of
at least one year, and a par amount outstanding of at least $150 million.
Results assume reinvestment of all income and capital-gains. An investment
cannot be made directly into an index.
2. The Fund compares itself to a Three-Index Composite that assumes equal
investments in the Lehman Brothers(R) Aggregate Bond Index, the Credit
Suisse First Boston(TM) High Yield Index, and the Citigroup Non-U.S. Dollar
World Government Bond Index. All indices are unmanaged. The indices measure
the performance of securities in the U.S. government and domestic
investment-grade bond sector, the U.S. high-yield bond sector, and the
international bond sector, respectively. Results assume that all income and
capital gains are reinvested in the index or indices that produce them. An
investment cannot be made directly into an index or this composite.
3. Inflation is measured 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. The rate of inflation does not represent an
investment return.
4
Portfolio Management Discussion and Analysis
As the year 2003 got underway, economic growth was tepid, with consumer and
government spending buoying the economy, while business spending was anemic at
best. During the first half of 2003, the virtual absence of three key economic
drivers--business confidence, capital spending, and hiring--again left consumers
to pick up the slack. With interest rates falling, many homeowners moved to
refinance their mortgages and the "found money" helped to prop up the economy.
On June 25, 2003, the Federal Reserve lowered the targeted federal funds rate by
25 basis points to 1.0%, the lowest level in four decades.
In May, deflationary concerns triggered a massive Treasury bill rally, but the
market reversed course after the Fed's June easing move and Treasury yields
rose. Aside from Treasuries, the dominant theme in the bond market was a renewed
investor appetite for risk. In October, the Bureau of Economic Analysis released
advance estimates that showed real gross domestic product rising at an unusually
rapid pace in the third quarter. As the economic picture brightened,
corporate-bond prices rallied sharply, especially among lower-rated securities.
The high-yield bond market generated outstanding returns during the first 10
months of 2003. Low interest rates, declining default rates, and sustained
demand propelled high-yield prices higher, with strong technicals through most
of the period. In the beginning of August, we saw some technical selling
pressure that resulted from rising interest rates, retail money flows out of
high-yield bonds, and a flood of new issuance. Even so, some $23 billion flowed
into the high-yield market from January through October of 2003.
International bond markets were also generally strong. Japan appears to be
heading toward self-sustaining growth, and the Chinese economic engine has
fueled increases in raw materials prices, which has helped exporters such as
Australia and Chile. Interest rates generally declined in Europe and Canada,
while Australia, Japan, and the U.K. saw interest rates rise. Yield curves in
the U.S. and Europe steepened, while yield curves elsewhere tended to flatten.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Strategic Income Fund
returned 16.22% for Class A shares and 15.55% for Class B and Class C shares,
excluding all sales charges. All share classes outperformed the 12.39% return
for the average Lipper(1) multi-sector income fund over the same period. All
share classes outperformed the 2.81% return of the Lehman Brothers(R) Aggregate
Bond Index(2) and the 12.11% return of the Fund's Three-Index Composite(3) for
the 10-month period ended October 31, 2003.
- -------
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 3 for more information about the Lehman Brothers
Aggregate Bond Index.
3. See footnote on page 4 for more information about the Fund's Three-Index
Composite.
5
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[CLASS A SHARES PERFORMANCE BAR GRAPH]
<Table>
<Caption>
Period-end Total Returns %
- ---------- ---------------
12/97 6.62
12/98 5.17
12/99 2.3
12/00 -1.57
12/01 6.62
12/02 4.78
10/03 16.22
</Table>
See footnote on page 3 for more information on performance.
CLASS B AND CLASS C SHARES
[CLASS B SHARES PERFORMANCE BAR GRAPH]
<Table>
<Caption>
Period-end Total Returns %
- ---------- ---------------
12/97 6.02
12/98 4.35
12/99 1.54
12/00 -2.28
12/01 5.78
12/02 3.99
10/03 15.55
</Table>
See footnote on page 3 for more information on performance. Class C share
returns reflect the historical performance of the Class B shares through
8/31/98.
SECTOR WEIGHTS
For the entire reporting period, the Fund has been overweighted in high-yield
corporate and emerging-market debt. At its maximum, the Fund had an exposure of
approximately 56% to these sectors. At the start of the period, yield spreads to
Treasuries were at or near historically wide levels, and we felt that these
sectors represented the best value in the market. Spreads have steadily declined
and U.S. high-yield and emerging-market dollar debt have had
6
high double-digit returns for the period. During the reporting period, we also
increased currency exposure to approximately 10% of the Fund. This was
accomplished by taking off currency hedges on non-dollar bond positions and by
taking long currency-option positions. At the end of the reporting period, the
Fund continued to maintain a similar weighting. We reduced the Fund's exposure
to high-yield bonds by 5% at the end of the reporting period and added to
investment-grade and international debt, including emerging-market bonds. We
remain comfortable with the Fund's current sector exposure of 40% high-yield
securities, 33% investment-grade U.S. dollar debt, and 27% international bonds.
We expect the high-yield market to outperform over the next six months but not
to the same degree we have seen during the reporting period.
HIGH-GRADE DOMESTIC BONDS
The high-grade domestic bond portion of the Fund's portfolio emphasizes sector
and issue selection as the main sources of total return, seeking mispriced
securities that may provide gains as prices realign. We also focus on sectors
where the yield advantage to Treasuries is expected to realign. In keeping with
these strategies, this portion of the Fund's portfolio maintained an over-
weighted position in corporate debt relative to Treasuries, agencies, and
mortgage-backed securities. Among Treasury holdings, we sought to reverse an
earlier bias toward yield-curve flattening by emphasizing intermediate-term
maturities, when we determined that a growing fiscal deficit and gradual
economic recovery would likely cause the yield curve to steepen.
Various concerns led us to trim agency debentures to a neutral position. We
underweighted residential mortgage-backed securities in the high-grade portion
of the Fund's portfolio for a two-month period in the summer. As interest rates
began to rise, however, we emphasized mortgage-backed issues with 5.5% to 6.0%
coupons. These mortgage-backed bonds are on the prepayment cusp, and we expect
them to perform well as interest-rates rise and prepayments taper off.
During the reporting period, we took profits in Treasury inflation-protected
securities (TIPS) and also lightened the Fund's exposure to commercial mortgage-
backed securities. In our opinion, investors were not being properly compensated
to bear the risk of a downturn in commercial real estate. Although the
high-grade portion of the Fund's portfolio typically maintains a duration near
that of its peers, we used tactical repositioning to take advantage of interest-
rate trends, which proved beneficial in most instances. Our decision to lengthen
duration in June, however, detracted from performance when Treasury yields
turned sharply upward.
7
HIGH-YIELD BONDS
The high-yield portion of the Fund's portfolio benefited from telecommunications
holdings Nextel International, Qwest, Call Net Enterprises, and Colt Telecom. In
the wireless area, Sprint PCS generated strong results for the period it was
held in the Fund. The Fund was also rewarded for holding Alamosa, AirGate, and
U.S. Unwired.
An overweighted position in the utilities sector throughout the reporting period
contributed positively to high-yield bond results, as the industry was among the
top performers year-to-date. In the utilities industry group, the Fund
emphasized gas-pipeline companies such as El Paso, Tennessee Gas Pipeline, and
PG&E.
High-yield information technology bonds outperformed the Credit Suisse First
Boston High Yield Index during the reporting period, as many companies benefited
from cost cutting and balance-sheet improvements. Avaya, Juniper Networks,
Lucent Technologies, and Nortel Networks were all strong performers in the
high-yield portion of the Fund's portfolio. While revenues for telecommunication
equipment makers are not growing, the market reacted positively to balance-sheet
repair and cash-flow restructurings, which bolstered the returns of these bonds.
Xerox performed well, as the firm showed revenue gains and an increase in its
margins. Other high-yield technology holdings that helped results were Ciena and
LSI Logic.
After setbacks in 2002, the cable industry saw free cash-flow and credit
improvements in 2003 that resulted in strong performance. High-yield holdings in
FrontierVision, Comcast, and Quebecor Media all enhanced results. We have
recently lowered the Fund's exposure to this industry by taking profits in
issues that were purchased at a discount and that had reached what we believed
to be their full potential.
Airline-industry bonds were extremely volatile over the 10-month reporting
period, suffering from financial, war-related, and union difficulties in the
first quarter of 2003 but bouncing back strongly as the year progressed. The
Fund's high-yield holdings in Delta Air Lines and Northwest Airlines were both
strong performers.
High-yield health care bonds have been lackluster year-to-date, and the high-
yield portion of the Fund's portfolio benefited from an underweighted position
in the sector. Health care holdings included Caremark, dj Orthopedics, Per-Se
Technologies, and Vertex Pharmaceuticals. HealthSouth was particularly
disappointing. An SEC investigation hurt HealthSouth's performance and we
decided to sell the Fund's position in the company.
8
INTERNATIONAL BONDS
The international bond portion of the Fund's portfolio started 2003 with a
relatively long duration, which provided positive results when several central
banks eased interest rates, the yield curve steepened, and European government
debt returned 3.0% on average in local currency terms.(3)
The decision to keep the international bond portion of the Fund's portfolio
underweighted in the Japanese market contributed positively to performance,
since Japan was the worst performer for the period, returning -1.45% in local
currency terms. Our decision to remain at least market weighted in the U.K.
proved less advantageous, since the U.K. was the Fund's second-worst performing
international-bond market, returning -0.45 in local currency terms.
Toward the end of the reporting period, we aggressively reduced the duration of
the European holdings in the international-bond portion of the Fund's port
folio. We also sold Canadian debt to increase Japanese holdings. With a 3.75%
return in local currency terms for the 10-month period, Canadians bonds per
formed well. Once spreads to U.S. bonds had narrowed significantly, however, we
saw no compelling reason to remain overweighted in Canadian bonds.
The Fund benefited from holdings in non-G7 investment-grade corporate bonds(4)
and emerging-market debt. Of the two, emerging-market debt made the most
significant positive contribution to the Fund's performance, since the yield
spreads of emerging-market bonds over U.S. Treasuries narrowed considerably. We
continue to hold about 10% of the international bond portion of the Fund's
portfolio in emerging-market debt.
We have increasingly added currency exposure to the international-bond portion
of the Fund's portfolio. By the end of the reporting period, over half of the
Fund's international holdings were affected by currency movements, most of which
have contributed positively to performance.
LOOKING AHEAD
In the United States, the budget deficit, deflationary concerns, and the pace of
employment and corporate spending are likely to determine the direction of the
bond markets. As the economy continues to strengthen, we believe that high-yield
bonds may continue to benefit from falling default rates. International bond
markets will continue to depend on global economic growth and we anticipate that
the dollar may recover some of the ground it has lost.
- -------
3. Performance percentages represent total returns of the specified markets for
the 10-month period. Due to security selection, purchases, and sales, Fund
results may differ from those of the markets themselves.
4. The Group of Seven (G7) is a forum of seven leading economic powers--Canada,
France, Germany, Italy, Japan, the United Kingdom, and the United States--
that meets to ensure the stability of the international financial system.
Russia joined the group in 1998, creating the G8, but financial issues
continue to be addressed by the G7.
9
Whatever the markets or the world economy may bring, the Fund will continue to
seek to provide current income and competitive overall return by investing
primarily in domestic and foreign debt securities.
Joseph Portera
Portfolio Manager
MacKay Shields LLC
Foreign securities may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information, and changes in tax or currency laws or monetary policy. These risks
are likely to be greater in emerging markets than in developed markets.
High-yield securities ("junk bonds") are generally considered speculative
because they present a greater risk of loss than higher-quality debt securities
and may be subject to greater price volatility. The Fund may invest in
derivatives, which may increase the volatility of the Fund's net asset value and
may result in a loss to the Fund.
TARGETED DIVIDEND POLICY
MainStay Strategic Income Fund seeks to maintain a fixed dividend, with changes
made only on an infrequent basis. In June 2003, the Fund reduced its dividend to
reflect the lower yields available in the bond market. Since the Fund's
portfolio managers did not engage in additional trading to accommodate dividend
payments, the Fund's portfolio turnover rate and transaction costs were not
affected.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
10
Portfolio of Investments October 31, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
LONG-TERM BONDS (89.5%)+
ASSET-BACKED SECURITIES (2.2%)
AIRLINES (0.2%)
American Airlines, Inc.
Series 2001-2 Class B
8.608%, due 4/1/11.......... $ 170,000 $ 148,850
Northwest Airlines, Inc.
Pass-Through Certificates
Series 2001-1 Class C
7.626%, due 4/1/10.......... 125,156 103,431
Series 1996-1
8.97%, due 1/2/15........... 23,191 15,112
------------
267,393
------------
CONSUMER FINANCE (0.4%)
BMW Vehicle Owner Trust
Series 2003-A Class A3
1.94%, due 2/25/07.......... 135,000 135,184
Volkswagen Auto Loan Enhanced
Trust
Series 2003-2 Class A3
2.27%, due 10/22/07......... 295,000 295,130
------------
430,314
------------
CONSUMER LOANS (0.1%)
Atlantic City Electric
Transition Funding LLC
Series 2002-1 Class A4
5.55%, due 10/20/23......... 75,000 75,248
------------
DIVERSIFIED FINANCIAL SERVICES (0.5%)
Capital One Master Trust
Series 2001-5 Class A
5.30%, due 6/15/09.......... 70,000 74,533
DaimlerChrysler Auto Trust
Series 2001-D Class A3
3.15%, due 11/6/05.......... 437,831 440,862
------------
515,395
------------
MEDIA (0.2%)
United Artists Theatre
Circuit, Inc.
Pass-Through Certificates
Series 1995-A
9.30%, due 7/1/15 (d)....... 204,797 199,677
------------
MULTILINE RETAIL (0.0%) (b)
Kmart Corp.
Pass-Through Certificates
Series 1995 Class K3
8.54%, due 1/2/15 (e)(f).... 85,340 34,136
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
MULTI-UTILITIES & UNREGULATED POWER (0.8%)
AES Eastern Energy L.P.
Pass-Through Certificates
Series 1999-A
9.00%, due 1/2/17 (g)....... $ 467,456 $ 507,190
Public Service of New
Hampshire Funding LLC
Pass-Through Certificates
Series 2002-1 Class A
4.58%, due 2/1/08........... 219,287 229,815
Tiverton/Rumford Power
Associates Ltd., L.P.
Pass-Through Certificates
9.00%, due 7/15/18 (c)...... 260,000 213,200
------------
950,205
------------
THRIFTS & MORTGAGE FINANCE (0.0%) (b)
Vanderbilt Mortgage Finance
Series 1999-B Class 1A4
6.545%, due 4/7/18.......... 50,000 52,044
------------
Total Asset-Backed Securities
(Cost $2,529,637)........... 2,524,412
------------
CONVERTIBLE BONDS (1.1%)
AIRLINES (0.1%)
Delta Air Lines, Inc.
8.00%, due 6/3/23 (c)....... 95,000 91,437
------------
BIOTECHNOLOGY (0.2%)
Vertex Pharmaceuticals, Inc.
5.00%, due 9/19/07.......... 250,000 222,500
------------
COMMUNICATIONS EQUIPMENT (0.3%)
CIENA Corp.
3.75%, due 2/1/08........... 203,000 178,132
Riverstone Networks, Inc.
3.75%, due 12/1/06 (c)...... 190,000 185,250
------------
363,382
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%)
At Home Corp.
4.75%, due 12/15/06
(e)(f)...................... 504,238 70,593
------------
HEALTH CARE PROVIDERS & SERVICES (0.1%)
Province Healthcare Co.
4.25%, due 10/10/08......... 135,000 127,069
------------
MEDIA (0.1%)
Adelphia Communications Corp.
6.00%, due 2/15/06 (e)...... 220,000 95,700
------------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
MainStay Strategic Income Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CONVERTIBLE BONDS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.2%)
Atmel Corp.
(zero coupon), due
5/23/21..................... $ 400,000 $ 167,000
Vitesse Semiconductor Corp.
4.00%, due 3/15/05.......... 136,000 132,770
------------
299,770
------------
Total Convertible Bonds
(Cost $1,390,282)........... 1,270,451
------------
CONVERTIBLE BONDS--FOREIGN (0.9%)
CANADA (0.3%)
Algoma Steel, Inc.
1.00%, due 12/31/30
(d)(e)(h)................... 57,000 25,935
Nortel Networks Corp.
4.25%, due 9/1/08........... 400,000 379,000
------------
404,935
------------
LUXEMBURG (0.3%)
Millicom International
Cellular S.A.
2.00%, due 6/1/06
(c)(d)(i)(j)................ 54,000 310,095
------------
NETHERLANDS (0.0%) (B)
KPNQwest N.V.
10.00%, due 3/15/12 (e)..... E 40,000 116
------------
UNITED KINGDOM (0.3%)
COLT Telecom Group PLC
2.00%, due 3/29/06 (c)...... 81,000 96,046
2.00%, due 4/3/07 (c)....... 205,000 243,079
------------
339,125
------------
Total Convertible
Bonds--Foreign
(Cost $567,143)............. 1,054,271
------------
CORPORATE BONDS (32.8%)
AEROSPACE & DEFENSE (0.5%)
BE Aerospace, Inc.
Series B
8.875%, due 5/1/11.......... $ 235,000 211,500
General Dynamics Corp.
4.50%, due 8/15/10.......... 115,000 116,581
Sequa Corp.
Series B
8.875%, due 4/1/08.......... 207,000 225,889
------------
553,970
------------
AIRLINES (0.5%)
Delta Air Lines, Inc.
8.30%, due 12/15/29......... 366,000 242,475
10.375%, due 12/15/22....... 80,000 55,400
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
AIRLINES (CONTINUED)
Northwest Airlines, Inc.
8.375%, due 3/15/04......... $ 15,000 $ 15,000
8.52%, due 4/7/04........... 105,000 104,737
8.875%, due 6/1/06.......... 100,000 88,750
9.875%, due 3/15/07......... 135,000 120,487
------------
626,849
------------
AUTO COMPONENTS (0.4%)
Dana Corp.
7.00%, due 3/1/29........... 120,000 106,500
Goodyear Tire & Rubber Co.
(The)
7.857%, due 8/15/11......... 130,000 111,150
8.50%, due 3/15/07.......... 140,000 134,400
Tenneco Automotive, Inc.
Series B
10.25%, due 7/15/13......... 95,000 104,975
------------
457,025
------------
AUTO LEASES (0.2%)
Williams Scotsman, Inc.
10.00%, due 8/15/08 (c)..... 195,000 214,500
------------
AUTOMOBILES (0.4%)
DaimlerChrysler North America
Holdings, Inc.
6.50%, due 11/15/13......... 320,000 323,037
General Motors Corp.
8.375%, due 7/15/33......... 150,000 158,259
------------
481,296
------------
BEVERAGES (0.2%)
Anheuser-Busch Cos., Inc.
4.95%, due 1/15/14.......... 60,000 60,239
Miller Brewing Co.
4.25%, due 8/15/08 (c)...... 155,000 156,527
------------
216,766
------------
BUILDING PRODUCTS (0.4%)
Dayton Superior Corp.
10.75%, due 9/15/08 (c)..... 145,000 151,162
Interline Brands, Inc.
11.50%, due 5/15/11 (c)..... 180,000 194,400
Masco Corp.
6.50%, due 8/15/32.......... 100,000 103,580
------------
449,142
------------
CAPITAL MARKETS (1.1%)
Bear Stearns Cos., Inc. (The)
4.00%, due 1/31/08.......... 60,000 60,960
Goldman Sachs Group, Inc.
(The)
4.75%, due 7/15/13.......... 90,000 86,909
5.125%, due 4/24/13......... E 170,000 202,013
5.25%, due 10/15/13......... $ 520,000 520,983
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CORPORATE BONDS (CONTINUED)
CAPITAL MARKETS (CONTINUED)
Morgan Stanley & Co.
3.625%, due 4/1/08.......... $ 265,000 $ 264,127
Series E
5.375%, due 11/14/13........ L 70,000 114,729
------------
1,249,721
------------
CHEMICALS (1.1%)
Equistar Chemicals L.P.
10.625%, due 5/1/11 (c)..... $ 195,000 203,775
General Chemical Industrial
Products, Inc.
10.625%, due 5/1/09 (e)..... 145,000 43,500
Lyondell Chemical Co.
Series A
9.625%, due 5/1/07.......... 25,000 25,375
10.50%, due 6/1/13.......... 255,000 262,650
Millennium America, Inc.
7.625%, due 11/15/26........ 149,000 127,395
Sovereign Specialty
Chemicals, Inc.
11.875%, due 3/15/10........ 188,000 187,060
Terra Capital, Inc.
12.875%, due 10/15/08....... 372,000 431,520
------------
1,281,275
------------
COMMERCIAL BANKS (0.4%)
Bank of America Corp.
5.125%, due 11/15/14........ 150,000 149,742
FleetBoston Financial Corp.
3.85%, due 2/15/08.......... 60,000 60,733
PNC Funding Corp.
5.25%, due 11/15/15......... 190,000 188,783
Wachovia Corp.
6.80%, due 6/1/05........... 85,000 91,371
------------
490,629
------------
COMMERCIAL SERVICES & SUPPLIES (0.4%)
American Color Graphics, Inc.
10.00%, due 6/15/10 (c)..... 125,000 134,062
Phoenix Color Corp.
10.375%, due 2/1/09......... 113,000 102,830
Protection One Alarm
Monitoring, Inc.
7.375%, due 8/15/05......... 249,000 205,425
------------
442,317
------------
COMMUNICATIONS EQUIPMENT (0.7%)
Avaya, Inc.
11.125%, due 4/1/09......... 245,000 289,100
Lucent Technologies, Inc.
6.45%, due 3/15/29.......... 400,000 309,000
7.25%, due 7/15/06.......... 172,000 175,440
------------
773,540
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
COMPUTERS & PERIPHERALS (0.1%)
IBM Corp.
8.375%, due 11/1/19......... $ 110,000 $ 143,210
------------
CONSTRUCTION & ENGINEERING (0.7%)
Amsted Industries, Inc.
10.25%, due 10/15/11 (c).... 235,000 259,087
Shaw Group, Inc. (The)
10.75%, due 3/15/10 (c)..... 200,000 211,000
URS Corp.
11.50%, due 9/15/09......... 280,000 317,800
Series B
12.25%, due 5/1/09.......... 65,000 68,900
------------
856,787
------------
CONSTRUCTION MATERIALS (0.1%)
CRH America, Inc.
5.30%, due 10/15/13......... 140,000 141,064
------------
CONSUMER FINANCE (0.6%)
Capital One Bank
4.875%, due 5/15/08......... 100,000 102,545
5.75%, due 9/15/10.......... 70,000 73,420
Deere (John) Capital Corp.
3.90%, due 1/15/08.......... 50,000 50,623
Ford Motor Credit Co.
7.00%, due 10/1/13.......... 235,000 231,015
General Motors Acceptance
Corp.
6.875%, due 8/28/12......... 105,000 107,632
Household Finance Corp.
6.75%, due 5/15/11.......... 45,000 50,359
MBNA Corp.
6.25%, due 1/17/07.......... 100,000 108,377
------------
723,971
------------
CONTAINERS & PACKAGING (0.7%)
Applied Extrusion
Technologies, Inc.
Series B
10.75%, due 7/1/11.......... 155,000 119,350
Owens-Brockway Glass
Container, Inc.
8.25%, due 5/15/13.......... 65,000 68,575
8.875%, due 2/15/09......... 145,000 157,325
Owens-Illinois, Inc.
7.80%, due 5/15/18.......... 408,000 391,680
Rock-Tenn Co.
8.20%, due 8/15/11.......... 43,000 50,541
Sealed Air Corp.
8.75%, due 7/1/08 (c)....... 30,000 35,326
------------
822,797
------------
DIVERSIFIED FINANCIAL SERVICES (1.4%)
Caithness Coso Funding Corp.
Series B
9.05%, due 12/15/09......... 230,029 246,131
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
MainStay Strategic Income Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CORPORATE BONDS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
Calpine Construction Finance
Corp.
9.75%, due 8/26/11 (c)(k)... $ 165,000 $ 163,762
Citigroup, Inc.
0.80%, due 10/30/08......... Y 30,000,000 271,824
4.875%, due 5/7/15.......... $ 50,000 48,450
FINOVA Group, Inc. (The)
7.50%, due 11/15/09......... 328,000 164,000
IPC Acquisition Corp.
11.50%, due 12/15/09........ 265,000 277,256
J Paul Getty Trust
Series 2003
5.875%, due 10/1/33......... 90,000 88,402
NiSource Finance Corp.
5.40%, due 7/15/14.......... 85,000 84,990
UCAR Finance, Inc.
10.25%, due 2/15/12......... 210,000 232,575
------------
1,577,390
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.8%)
AT&T Corp.
6.00%, due 11/21/06 (c)..... E 70,000 86,868
Citizens Communications Co.
7.60%, due 6/1/06........... $ 100,000 111,107
9.00%, due 8/15/31.......... 135,000 174,617
9.25%, due 5/15/11.......... 85,000 106,091
COLO.COM
13.875%, due 3/15/10
(c)(e)(l)(m1)............... 362 3,620
Mountain States Telephone &
Telegraph Co.
7.375%, due 5/1/30.......... 125,000 120,000
Qwest Capital Funding, Inc.
5.875%, due 8/3/04.......... 634,000 631,622
Qwest Corp.
8.875%, due 3/15/12 (c)..... 220,000 248,600
Qwest Services Corp.
13.50%, due 12/15/10 (c).... 454,000 530,045
14.00%, due 12/15/14 (c).... 205,000 250,100
TSI Telecommunication
Services, Inc.
Series B
12.75%, due 2/1/09.......... 255,000 262,650
U.S. West Communications,
Inc.
5.625%, due 11/15/08........ 15,000 14,700
7.20%, due 11/1/04.......... 15,000 15,375
7.50%, due 6/15/23.......... 205,000 196,800
8.875%, due 6/1/31.......... 195,000 204,750
WorldCom, Inc.
8.25%, due 5/15/31 (e)...... 808,000 296,940
------------
3,253,885
------------
ELECTRIC UTILITIES (0.8%)
Cedar Brakes II LLC
9.875%, due 9/1/13.......... 500,172 505,173
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
ELECTRIC UTILITIES (CONTINUED)
CenterPoint Energy, Inc.
7.25%, due 9/1/10 (c)....... $ 95,000 $ 101,802
Mirant Americas Generation
LLC
8.30%, due 5/1/11 (e)....... 45,000 37,237
8.50%, due 10/1/21 (e)...... 165,000 136,537
9.125%, due 5/1/31 (e)...... 45,000 37,237
TECO Energy, Inc.
7.20%, due 5/1/11........... 145,000 146,088
------------
964,074
------------
ELECTRICAL EQUIPMENT (0.0%) (b)
Emerson Electric Co.
6.00%, due 8/15/32.......... 50,000 50,475
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.1%)
ON Semiconductor Corp.
13.00%, due 5/15/08......... 90,000 104,400
------------
ENERGY EQUIPMENT & SERVICES (0.6%)
El Paso Natural Gas Co.
7.50%, due 11/15/26......... 45,000 40,050
Series A
7.625%, due 8/1/10.......... 185,000 183,150
Entergy-Koch L.P.
3.65%, due 8/20/06 (c)...... 140,000 140,949
Grant Prideco, Inc.
Series B
9.625%, due 12/1/07......... 160,000 176,000
Kaneb Pipe Line Operating
Partnership L.P.
5.875%, due 6/1/13.......... 75,000 74,477
Parker Drilling Co.
Series B
10.125%, due 11/15/09....... 95,000 99,275
------------
713,901
------------
FOOD & STAPLES RETAILING (0.2%)
Fred Meyer, Inc.
7.375%, due 3/1/05.......... 95,000 101,471
Safeway, Inc.
4.125%, due 11/1/08......... 70,000 69,762
Wal-Mart Stores, Inc.
4.55%, due 5/1/13........... 110,000 108,046
------------
279,279
------------
FOOD PRODUCTS (0.4%)
Seminis, Inc.
10.25%, due 10/1/13 (c)..... 90,000 96,300
Swift & Co.
10.125%, due 10/1/09........ 175,000 196,875
12.50%, due 1/1/10 (c)...... 170,000 192,950
------------
486,125
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CORPORATE BONDS (CONTINUED)
GAS UTILITIES (0.8%)
ANR Pipeline, Inc.
7.00%, due 6/1/25........... $ 70,000 $ 70,175
9.625%, due 11/1/21......... 325,000 367,250
Southern Natural Gas Co.
7.35%, due 2/15/31.......... 150,000 141,750
Transcontinental Gas Pipeline
Corp.
Series B
7.00%, due 8/15/11.......... 130,000 138,775
7.25%, due 12/1/26.......... 150,000 152,250
Series B
8.875%, due 7/15/12......... 65,000 76,050
------------
946,250
------------
HEALTH CARE EQUIPMENT & SUPPLIES (0.3%)
dj Orthopedics LLC
12.625%, due 6/15/09........ 82,000 91,020
Fisher Scientific
International, Inc.
8.00%, due 9/1/13 (c)....... 235,000 252,625
8.125%, due 5/1/12.......... 45,000 48,375
------------
392,020
------------
HEALTH CARE PROVIDERS & SERVICES (1.9%)
Ardent Health Services
10.00%, due 8/15/13 (c)..... 140,000 149,800
Harborside Healthcare Corp.
(zero coupon), due 8/1/07
15.00%, beginning 8/1/04
(d)(j)...................... 299,000 104,650
HCA, Inc.
7.50%, due 11/15/95......... 466,000 434,166
Highmark, Inc.
6.80%, due 8/15/13 (c)...... 235,000 251,077
Medco Health Solutions, Inc.
7.25%, due 8/15/13.......... 60,000 63,835
National Nephrology
Associates, Inc.
9.00%, due 11/1/11 (c)...... 75,000 77,437
QuadraMed Corp.
10.00%, due 4/1/08 (c)(n)... 178,188 153,242
Quest Diagnostics, Inc.
6.75%, due 7/12/06.......... 220,000 241,377
Quintiles Transnational Corp.
10.00%, due 10/1/13 (c)..... 330,000 348,150
Team Health, Inc.
Series B
12.00%, due 3/15/09......... 149,000 158,685
Tenet Healthcare Corp.
6.875%, due 11/15/31........ 255,000 224,400
------------
2,206,819
------------
HOTELS, RESTAURANTS & LEISURE (1.3%)
Chumash Casino & Resort
Enterprise
9.00%, due 7/15/10 (c)...... 200,000 219,000
FRI-MRD Corp.
12.00%, due 1/31/05
(d)(i)(j)(l)................ 246,817 103,663
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
HOTELS, RESTAURANTS & LEISURE (CONTINUED)
Hilton Hotels Corp.
7.625%, due 5/15/08......... $ 244,000 $ 268,705
Jacobs Entertainment, Inc.
11.875%, due 2/1/09......... 95,000 102,719
Park Place Entertainment
Corp.
8.875%, due 9/15/08......... 35,000 38,894
President Casinos, Inc.
12.00%, due 9/15/04
(c)(d)(e)(l)................ 32,000 22,400
13.00%, due 9/15/04
(e)(l)...................... 72,000 34,200
Starwood Hotels & Resorts
Worldwide, Inc.
7.375%, due 11/15/15........ 172,000 182,320
Vail Resorts, Inc.
8.75%, due 5/15/09.......... 201,342 211,661
Venetian Casino Resort LLC
11.00%, due 6/15/10......... 210,000 242,288
Wheeling Island Gaming, Inc.
10.125%, due 12/15/09....... 70,000 72,100
------------
1,497,950
------------
HOUSEHOLD DURABLES (0.2%)
Foamex L.P.
10.75%, due 4/1/09.......... 225,000 198,000
------------
INSURANCE (0.6%)
Crum & Forster Holding Corp.
10.375%, due 6/15/13 (c).... 220,000 236,500
Fremont General Corp.
Series B
7.875%, due 3/17/09......... 255,000 255,000
Fund American Cos., Inc.
5.875%, due 5/15/13......... 140,000 139,830
Lumbermens Mutual Casualty
Co.
8.45%, due 12/1/97 (c)(e)... 35,000 1,750
9.15%, due 7/1/26 (c)(e).... 535,000 26,750
------------
659,830
------------
INTERNET SOFTWARE & SERVICES (0.1%)
Globix Corp.
11.00%, due 5/1/08
(c)(d)(i)................... 87,049 73,992
------------
IT SERVICES (0.2%)
Unisys Corp.
6.875%, due 3/15/10......... 175,000 185,938
7.25%, due 1/15/05.......... 30,000 31,350
------------
217,288
------------
MACHINERY (0.5%)
Deere & Co.
7.85%, due 5/15/10.......... 95,000 114,405
Mark IV Industries, Inc.
7.50%, due 9/1/07........... 414,000 351,900
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
MainStay Strategic Income Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CORPORATE BONDS (CONTINUED)
MACHINERY (CONTINUED)
Titan Wheel International,
Inc.
8.75%, due 4/1/07........... $ 170,000 $ 100,300
------------
566,605
------------
MEDIA (3.2%)
Adelphia Communications Corp.
Series B
9.25%, due 10/1/04 (e)...... 20,000 16,100
10.25%, due 11/1/06 (e)..... 155,000 124,775
10.25%, due 6/15/11 (e)..... 165,000 138,600
Comcast Cable Communications,
Inc.
8.875%, due 5/1/17.......... 150,000 189,800
FrontierVision Holdings, L.P.
11.875%, due 9/15/07 (e).... 60,000 60,075
Series B
11.875%, due 9/15/07 (e).... 85,000 85,106
FrontierVision Operating
Partners L.P.
11.00%, due 10/15/06 (e).... 389,000 401,156
Garden State Newspapers, Inc.
Series B
8.75%, due 10/1/09.......... 220,000 226,875
General Media, Inc.
15.00%, due 3/29/04
(d)(e)(m2).................. 44 19,360
Hollinger Participation Trust
12.125%, due 11/15/10
(c)(i)...................... 145,234 168,471
Houghton Mifflin Co.
7.20%, due 3/15/11.......... 135,000 142,425
Liberty Media Corp.
3.50%, due 9/25/06.......... 50,000 49,379
Morris Publishing Group, Inc.
7.00%, due 8/1/13 (c)....... 220,000 224,400
Paxson Communications Corp.
(zero coupon), due 1/15/09
12.25%, beginning 1/15/06... 455,000 382,200
Radio Unica Corp.
11.75%, due 8/1/06 (e)...... 226,000 148,595
Radio One, Inc.
Series B
8.875%, due 7/1/11.......... 180,000 198,000
Time Warner, Inc.
6.875%, due 6/15/18......... 70,000 75,325
8.05%, due 1/15/16.......... 95,000 111,290
Time Warner Entertainment Co.
10.15%, due 5/1/12.......... 498,000 659,747
Vertis, Inc.
9.75%, due 4/1/09 (c)....... 120,000 127,500
Ziff Davis Media, Inc.
Series B
13.00%, due 8/12/09 (i)..... 175,506 157,955
------------
3,707,134
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
METALS & MINING (0.8%)
AK Steel Corp.
7.75%, due 6/15/12.......... $ 275,000 $ 187,000
Allegheny Technologies, Inc.
8.375%, due 12/15/11........ 185,000 151,700
Commonwealth Industries, Inc.
10.75%, due 10/1/06......... 293,000 295,930
Ormet Corp.
11.00%, due 8/15/08
(c)(e)...................... 172,000 39,560
United States Steel LLC
10.75%, due 8/1/08.......... 225,000 246,938
------------
921,128
------------
MULTILINE RETAIL (0.3%)
Target Corp.
6.35%, due 11/1/32.......... 150,000 157,172
8.60%, due 1/15/12.......... 125,000 155,740
------------
312,912
------------
MULTI-UTILITIES & UNREGULATED POWER (1.7%)
AES Corp. (The)
9.00%, due 5/15/15 (c)...... 335,000 358,450
10.00%, due 7/15/05 (c)..... 94,344 97,175
Calpine Corp.
7.625%, due 4/15/06......... 115,000 93,150
7.75%, due 4/15/09.......... 110,000 76,450
8.25%, due 8/15/05.......... 35,000 31,500
8.50%, due 7/15/10 (c)...... 410,000 375,150
PG&E National Energy Group,
Inc.
10.375%, due 5/16/11 (e).... 411,000 263,040
PSE&G Power LLC
6.875%, due 4/15/06......... 250,000 273,728
Reliant Resources, Inc.
9.25%, due 7/15/10 (c)...... 80,000 71,600
Salton Sea Funding Corp.
Series B
7.37%, due 5/30/05.......... 69,123 70,505
Westar Energy, Inc.
6.875%, due 8/1/04.......... 190,000 196,413
7.875%, due 5/1/07.......... 70,000 78,838
------------
1,985,999
------------
OIL & GAS (2.9%)
Comstock Resources, Inc.
11.25%, due 5/1/07.......... 170,000 184,450
Continental Resources, Inc.
10.25%, due 8/1/08.......... 175,000 171,937
Dynegy Holdings, Inc.
9.875%, due 7/15/10 (c)..... 240,000 258,000
10.125%, due 7/15/13 (c).... 115,000 124,775
El Paso Corp.
7.80%, due 8/1/31........... 150,000 113,625
El Paso Production Holding
Co.
7.75%, due 6/1/13 (c)....... 385,000 369,600
Encore Acquisition Co.
8.375%, due 6/15/12......... 200,000 214,000
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CORPORATE BONDS (CONTINUED)
OIL & GAS (CONTINUED)
Energy Corp. of America
Series A
9.50%, due 5/15/07.......... $ 294,000 $ 209,475
Kern River Funding Corp.
4.893%, due 4/30/18 (c)..... 269,402 264,294
Newfield Exploration Co.
7.625%, due 3/1/11.......... 15,000 16,425
8.375%, due 8/15/12......... 15,000 16,575
Petro Stopping Centers
Holdings L.P.
Series B
(zero coupon), due 8/1/08
15.00%, beginning 8/1/04.... 103,000 72,100
Plains Exploration &
Production Co.
Series B
8.75%, due 7/1/12........... 100,000 109,000
Tennessee Gas Pipeline Co.
7.00%, due 3/15/27.......... 180,000 182,700
7.625%, due 4/1/37.......... 130,000 121,550
8.375%, due 6/15/32......... 150,000 151,875
Tosco Corp.
8.125%, due 2/15/30......... 130,000 163,230
Vintage Petroleum, Inc.
7.875%, due 5/15/11......... 135,000 142,763
8.25%, due 5/1/12........... 370,000 405,150
Westport Resources Corp.
8.25%, due 11/1/11.......... 55,000 60,638
------------
3,352,162
------------
PAPER & FOREST PRODUCTS (1.0%)
Georgia-Pacific Corp.
7.25%, due 6/1/28........... 80,000 72,800
7.375%, due 12/1/25......... 65,000 59,312
7.75%, due 11/15/29......... 45,000 42,525
8.875%, due 2/1/10.......... 190,000 217,075
8.875%, due 5/15/31......... 305,000 324,062
9.375%, due 2/1/13.......... 100,000 115,000
Fort James Corp.
4.75%, due 6/29/04.......... E 100,000 115,959
Pope & Talbot, Inc.
8.375%, due 6/1/13.......... $ 212,000 206,700
------------
1,153,433
------------
PERSONAL PRODUCTS (0.1%)
Estee Lauder Cos., Inc.
5.75%, due 10/15/33......... 75,000 73,111
------------
REAL ESTATE (0.9%)
CB Richard Ellis Services,
Inc.
11.25%, due 6/15/11......... 244,000 273,585
CBRE Escrow, Inc.
9.75%, due 5/15/10 (c)...... 135,000 145,800
Crescent Real Estate Equities
L.P.
7.50%, due 9/15/07.......... 310,000 317,750
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
REAL ESTATE (CONTINUED)
OMEGA Healthcare Investors,
Inc.
6.95%, due 8/1/07........... $ 280,000 $ 270,200
------------
1,007,335
------------
SPECIALTY RETAIL (0.2%)
Rent-Way, Inc.
11.875%, due 6/15/10 (c).... 170,000 182,113
------------
THRIFTS & MORTGAGE FINANCE (0.2%)
Washington Mutual, Inc.
4.00%, due 1/15/09.......... 200,000 198,420
------------
TOBACCO (0.3%)
Commonwealth Brands, Inc.
9.75%, due 4/15/08 (c)...... 150,000 165,000
10.625%, due 9/1/08 (c)..... 160,000 174,400
------------
339,400
------------
WIRELESS TELECOMMUNICATION SERVICES (0.5%)
Alamosa (Delaware), Inc.
12.50%, due 2/1/11.......... 146,000 140,160
Alamosa PCS Holdings, Inc.
(zero coupon), due 2/15/10
12.875%, beginning
2/15/05..................... 151,000 117,780
AT&T Wireless Services, Inc.
8.75%, due 3/1/31........... 105,000 126,267
Loral CyberStar, Inc.
10.00%, due 7/15/06 (e)..... 233,000 175,915
------------
560,122
------------
Total Corporate Bonds
(Cost $36,177,711).......... 37,906,411
------------
CORPORATE BONDS--FOREIGN (10.2%)
AUSTRALIA (0.4%)
BHP Finance USA Ltd.
4.80%, due 4/15/13.......... $ 145,000 144,291
Burns Philp Capital Property
Ltd.
10.75%, due 2/15/11 (c)..... 265,000 279,575
------------
423,866
------------
BRAZIL (0.4%)
CIA Brasileira de Bebidas
10.50%, due 12/15/11........ $ 370,000 419,025
------------
CANADA (1.7%)
Baytex Energy Ltd.
9.625%, due 7/15/10......... $ 104,000 108,680
Calpine Canada Energy Finance
8.50%, due 5/1/08........... 426,000 313,110
Canadian Housing Trust
3.70%, due 9/15/08 (c)...... C$ 575,000 427,281
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
MainStay Strategic Income Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CORPORATE BONDS--FOREIGN (CONTINUED)
CANADA (CONTINUED)
Hollinger, Inc.
11.875%, due 3/1/11 (c)..... $ 215,000 $ 236,500
Inco Ltd.
5.70%, due 10/15/15......... 70,000 70,900
MBNA Canada Bank
6.625%, due 11/23/07........ C$ 300,000 243,430
Nortel Networks Ltd.
6.125%, due 2/15/06......... $ 55,000 56,306
Quebecor Media, Inc.
(zero coupon), due 7/15/11
13.75%, beginning 7/15/06... 286,000 247,390
11.125%, due 7/15/11........ 72,000 82,800
Sun Media Corp.
7.625%, due 2/15/13......... 210,000 224,700
------------
2,011,097
------------
CAYMAN ISLANDS (0.7%)
AES Drax Holdings Ltd.
Series B
10.41%, due 12/31/20 (e).... $ 180,000 141,300
Principal Financial Global
Funding LLC
Series E, Tranche 1
5.875%, due 6/8/09.......... L 225,000 382,947
Nextel International, Inc.
(zero coupon), due 11/1/09
13.00%, beginning 11/1/04
(d)......................... $ 231,389 238,331
------------
762,578
------------
CHILE (0.2%)
Corporacion Nacional del
Cobre-Codelco, Inc.
5.50%, due 10/15/13 (c)..... $ 55,000 55,249
Empresa Nacional de Petroleo
6.75%, due 11/15/12 (c)..... 200,000 215,387
------------
270,636
------------
DENMARK (0.6%)
Realkredit Danmark
6.00%, due 10/1/29.......... DK 4,526,518 719,551
------------
FRANCE (1.1%)
Crown Euro Holdings S.A.
9.50%, due 3/1/11........... $ 350,000 388,500
10.875%, due 3/1/13......... 215,000 245,100
Vivendi Universal S.A.
6.25%, due 7/15/08 (c)...... E 125,000 152,578
6.25%, due 7/15/08 (c)...... $ 70,000 73,150
9.25%, due 4/15/10 (c)...... 370,000 430,125
------------
1,289,453
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
GERMANY (0.8%)
Kreditanstalt fuer
Wiederaufbau
Series INTL
4.75%, due 8/18/06.......... E 724,000 $ 877,156
------------
ISLE OF MAN (0.1%)
Navigator Gas Transport PLC
10.50%, due 6/30/07
(c)(d)(e)................... $ 362,000 126,700
------------
KAZAKHSTAN (0.3%)
Kazkommerts International
B.V.
8.50%, due 4/16/13 (c)...... $ 400,000 396,000
------------
LUXEMBURG (0.5%)
Millicom International
Cellular S.A.
11.00%, due 6/1/06 (c)...... $ 377,000 385,483
Mobile Telesystems Finance
9.75%, due 1/30/08 (c)...... 150,000 159,375
------------
544,858
------------
MAURITIUS (0.0%) (b)
MEI Euro Finance Ltd.
8.75%, due 5/22/10 (c)...... $ 105,000 106,575
------------
MEXICO (0.6%)
Grupo Transportacion
Ferroviaria Mexicana, S.A.
de C.V.
12.50%, due 6/15/12......... $ 300,000 330,000
Telefonos de Mexico S.A. de
C.V.
8.25%, due 1/26/06.......... 230,000 254,438
Vitro S.A. de C.V.
11.75%, due 11/1/13 (c)..... 75,000 72,563
------------
657,001
------------
NETHERLANDS (0.3%)
Coca-Cola HBC Finance B.V.
5.125%, due 9/17/13 (c)..... $ 50,000 50,016
Mobifon Holdings B.V.
12.50%, due 7/31/10 (c)..... 60,000 66,150
Sealed Air Finance LLC
5.625%, due 7/19/06......... E 150,000 179,606
------------
295,772
------------
RUSSIA (0.6%)
AO Siberian Oil Co.
11.50%, due 2/13/07......... $ 100,000 107,500
Gazprom Oao
9.625%, due 3/1/13 (c)...... 160,000 173,600
Tyumen Oil Co.
11.00%, due 11/6/07 (c)..... 250,000 282,500
VimpelCom B.V.
10.45%, due 4/26/05 (c)..... 60,000 63,375
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
CORPORATE BONDS--FOREIGN (CONTINUED)
RUSSIA (CONTINUED)
Wimm-Bill-Dann Foods OJSC
8.50%, due 5/21/08 (c)...... $ 100,000 $ 102,250
------------
729,225
------------
SINGAPORE (0.3%)
PSA Corp. Ltd.
7.125%, due 8/1/05 (c)...... $ 190,000 206,670
Singapore Powerassets Ltd.
5.00%, due 10/22/13 (c)..... 175,000 174,453
------------
381,123
------------
SUPRANATIONAL (0.6%)
European Investment Bank
Series E
2.125%, due 9/20/07......... Y 50,000,000 482,522
Jafra Cosmetics
International, Inc.
10.75%, due 5/15/11......... $ 170,000 187,000
------------
669,522
------------
SWEDEN (0.2%)
Stena AB
9.625%, due 12/1/12......... $ 200,000 218,000
------------
UKRAINE (0.2%)
Kyivstar GSM
12.75%, due 11/21/05 (c).... $ 250,000 278,125
------------
UNITED KINGDOM (0.6%)
HSBC Holdings PLC
Tier II
5.25%, due 12/12/12......... $ 20,000 20,302
Marconi Corp. PLC
8.00%, due 4/30/08.......... 128,439 125,228
10.00%, due 10/31/08........ 16,685 17,936
Vodafone Group PLC
3.95%, due 1/30/08.......... 85,000 86,065
5.00%, due 12/16/13......... 390,000 384,174
------------
633,705
------------
Total Corporate
Bonds--Foreign
(Cost $11,257,248).......... 11,809,968
------------
FOREIGN GOVERNMENT BONDS (19.5%)
AUSTRALIA (0.4%)
Australian Government
Series 808
8.75%, due 8/15/08 (o)...... A$ 585,000 467,639
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
AUSTRIA (0.1%)
Republic of Austria
Series 2
4.65%, due 1/15/18.......... E 143,000 $ 166,131
------------
BRAZIL (0.9%)
Republic of Brazil
Series 11BR
4.75%, due 4/10/07.......... Y 25,000,000 214,625
Series 20 year
8.00%, due 4/15/14.......... $ 738,846 687,570
9.25%, due 10/22/10......... 100,000 99,700
------------
1,001,895
------------
BELGIUM (1.2%)
Kingdom of Belgium
Series 42
3.00%, due 9/28/08.......... E 825,000 932,022
Series 36
5.00%, due 9/28/11.......... 400,000 491,515
------------
1,423,537
------------
CANADA (0.7%)
Canadian Government
4.25%, due 9/1/08........... C$ 365,000 279,500
5.75%, due 6/1/33 (o)....... 550,000 442,879
Province of Quebec
5.00%, due 7/17/09.......... $ 80,000 84,216
------------
806,595
------------
DENMARK (0.6%)
Kingdom of Denmark
5.00%, due 11/15/13......... DK 4,000,000 650,726
------------
EL SALVADOR (0.2%)
Republic of El Salvador
7.75%, due 1/24/23 (c)...... $ 250,000 257,813
------------
FRANCE (0.4%)
French Treasury Note
4.75%, due 7/12/07.......... E 400,000 487,876
------------
GERMANY (4.6%)
Republic of Deutschland
Series 99
3.75%, due 1/4/09 (o)....... E 1,750,000 2,043,986
Series 132
4.125%, due 8/27/04......... 245,000 289,084
Series 01
5.00%, due 7/4/11........... 850,000 1,044,870
Series 98
5.25%, due 1/4/08........... 704,000 873,151
5.375%, due 1/4/10.......... 450,000 565,545
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
MainStay Strategic Income Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
FOREIGN GOVERNMENT BONDS (CONTINUED)
GERMANY (CONTINUED)
Republic of Deutschland (Continued)
Series 00
6.25%, due 1/4/30........... E 350,000 $ 481,338
------------
5,297,974
------------
GREECE (0.4%)
Hellenic Republic
5.90%, due 10/22/22......... E 406,000 521,480
------------
ITALY (2.0%)
Buoni Poliennali del Tesoro
5.25%, due 12/15/05......... E 321,000 391,752
5.50%, due 11/1/10.......... 865,000 1,092,873
6.50%, due 11/1/27.......... 372,000 519,891
Republic of Italy
3.80%, due 3/27/08.......... Y 30,000,000 310,424
------------
2,314,940
------------
JAPAN (1.8%)
Development Bank of Japan
Series INTL
1.05%, due 6/20/23.......... Y 41,000,000 320,431
1.75%, due 6/21/10.......... 68,000,000 650,241
Japan Finance Corp. for
Municipal Enterprises
Series INTL
1.55%, due 2/21/12 (o)...... 120,000,000 1,115,548
------------
2,086,220
------------
MEXICO (0.0%) (b)
United Mexican States
4.625%, due 10/8/08......... $ 15,000 15,038
6.625%, due 3/3/15.......... 35,000 35,963
------------
51,001
------------
NETHERLANDS (0.7%)
Netherlands Government
3.75%, due 7/15/09.......... E 634,000 736,435
------------
PANAMA (0.3%)
Republic of Panama
8.25%, due 4/22/08.......... $ 350,000 387,625
------------
PHILIPPINES (0.2%)
Republic of Philippines
9.875%, due 1/15/19......... $ 200,000 207,500
------------
PORTUGAL (0.3%)
Portugal Obrigacoes do
Tesouro OT
3.00%, due 7/17/06.......... E 335,000 389,173
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
RUSSIA (1.2%)
Russian Federation
5.00%, due 3/31/30.......... $ 1,007,000 $ 940,035
8.25%, due 3/31/10.......... 204,000 227,868
10.00%, due 6/26/07......... 183,000 215,391
------------
1,383,294
------------
SOUTH AFRICA (0.4%)
Republic of South Africa
5.25%, due 5/16/13.......... E 250,000 276,820
Series 3, Tranche 1
7.00%, due 4/10/08.......... 100,000 127,410
------------
404,230
------------
SWEDEN (0.9%)
Swedish Government
Series 1043
5.00%, due 1/28/09.......... SK 5,470,000 719,016
Series 1045
5.25%, due 3/15/11.......... 2,000,000 264,510
------------
983,526
------------
TURKEY (0.2%)
Republic of Turkey
9.875%, due 3/19/08......... $ 200,000 224,000
------------
UNITED KINGDOM (1.4%)
United Kingdom Treasury Bond
4.00%, due 3/7/09 (o)....... L 325,000 527,205
5.00%, due 3/7/12........... 200,000 338,507
6.00%, due 12/7/28.......... 175,000 345,313
8.50%, due 12/7/05.......... 225,000 411,330
------------
1,622,355
------------
VENEZUELA (0.6%)
Republic of Venezuela
Series DL
1.875%, due 12/18/07
(k)(p)...................... $ 535,700 494,183
13.625%, due 8/15/18........ 181,000 197,290
------------
691,473
------------
Total Foreign Government
Bonds
(Cost $21,249,728).......... 22,563,438
------------
LOAN ASSIGNMENT & PARTICIPATION (0.2%)
MULTI-UTILITIES & UNREGULATED POWER (0.2%)
Pacific Gas & Electric Co.
Bank debt, Revolver
8.75%, due 12/30/06
(d)(j)(k)................... 205,000 207,050
------------
Total Loan Assignment &
Participation
(Cost $199,492)............. 207,050
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
MORTGAGE-BACKED SECURITIES (0.5%)
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (0.5%)
Commercial Trust I
Series 1993-KA Class A2
7.63%, due 12/15/13 (e)..... $ 108,725 $ 21,745
Debit Securitized Lease Trust
Series 1994-K1 Class A2
8.375%, due 8/15/15......... 174,438 92,452
Series 1994-K1 Class A3
8.55%, due 8/15/19.......... 33,689 17,855
Fannie Mae Grantor Trust
Series 2003-T1 Class B
4.491%, due 11/25/12........ 405,000 401,105
------------
Total Mortgage-Backed
Securities
(Cost $578,056)............. 533,157
------------
MUNICIPAL BONDS (0.2%)
IOWA (0.1%)
Tobacco Settlement Financing
Corp.
5.30%, due 6/1/25........... 30,000 23,788
5.60%, due 6/1/35........... 45,000 34,777
------------
58,565
------------
NEW JERSEY (0.1%)
Tobacco Settlement Financing
Corp.
6.00%, due 6/1/37........... 20,000 16,408
6.25%, due 6/1/43........... 155,000 129,969
------------
146,377
------------
RHODE ISLAND (0.0%) (b)
Tobacco Settlement Financing
Corp.
6.25%, due 6/1/42........... 55,000 46,157
------------
Total Municipal Bonds
(Cost $299,431)............. 251,099
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (20.0%)
FEDERAL HOME LOAN MORTGAGE CORP
(MORTGAGE PASS-THROUGH SECURITIES) (1.6%)
5.00%, due 6/1/33-8/1/33.... 1,530,502 1,507,198
5.50%, due 2/1/33........... 360,572 363,778
------------
1,870,976
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (1.2%)
4.625%, due 5/1/13.......... 135,000 129,974
4.75%, due 1/2/07........... 480,000 503,624
5.25%, due 8/1/12........... 245,000 248,575
5.50%, due 5/2/06........... 155,000 165,831
7.00%, due 7/15/05.......... 263,000 285,293
------------
1,333,297
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (8.1%)
Federal National Mortgage
Association
4.00%, due 9/1/18........... $ 238,421 $ 232,368
4.50%, due 7/1/18........... 625,513 625,378
4.50%, due 11/18/18 (q)..... 795,000 794,006
5.00%, due 9/1/17-10/1/33... 998,461 1,007,308
5.50%, due 12/1/16-1/1/17... 471,474 485,589
5.50%, due 11/13/33-1/14/34
(q)......................... 3,025,000 3,041,517
6.00%, due 8/1/32........... 308,990 317,285
6.00%, due 11/13/33-1/14/34
(q)......................... 1,660,000 1,702,548
6.50%, due 6/1/31-6/1/32.... 545,467 566,730
7.00%, due 2/1/32-4/1/32.... 254,811 268,293
7.50%, due 8/1/31........... 227,757 242,687
------------
9,283,709
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (0.6%)
6.00%, due
4/15/29-8/15/32............. 484,221 500,565
7.50%, due
12/15/23-12/15/28........... 196,187 210,285
------------
710,850
------------
U.S. TREASURY BONDS (1.7%)
5.375%, due 2/15/31......... 760,000 785,382
6.25%, due 8/15/23.......... 265,000 299,077
6.25%, due 5/15/30 (r)...... 305,000 348,736
6.875%, due 8/15/25......... 220,000 266,673
8.75%, due 8/15/20.......... 200,000 284,094
------------
1,983,962
------------
U.S. TREASURY NOTES (6.8%)
3.00%, due 2/15/08.......... 1,005,000 1,005,550
4.375%, due 5/15/07......... 1,100,000 1,163,852
4.625%, due 5/15/06......... 170,000 180,419
4.875%, due 2/15/12......... 585,000 617,129
5.75%, due 11/15/05......... 2,105,000 2,267,809
5.75%, due 8/15/10.......... 660,000 738,272
6.00%, due 8/15/09.......... 220,000 248,755
6.75%, due 5/15/05.......... 1,509,000 1,627,126
------------
7,848,912
------------
Total U.S. Government &
Federal Agencies
(Cost $22,979,005).......... 23,031,706
------------
YANKEE BONDS (1.9%) (h)
DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%)
Call-Net Enterprises, Inc.
10.625%, due 12/31/08....... 175,895 168,419
------------
ENERGY EQUIPMENT & SERVICES (0.4%)
Petroleum Geo-Services ASA
6.25%, due 11/19/03 (e)..... 155,000 120,900
6.625%, due 3/30/08 (e)..... 5,000 3,900
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
MainStay Strategic Income Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
YANKEE BONDS (CONTINUED)
ENERGY EQUIPMENT & SERVICES (CONTINUED)
Petroleum Geo-Services ASA (Continued)
7.125%, due 3/30/28 (e)..... $ 305,000 $ 237,900
7.50%, due 3/31/07 (e)...... 45,000 35,100
8.15%, due 7/15/29 (e)...... 20,000 15,600
------------
413,400
------------
FOREIGN GOVERNMENTS (0.2%)
Financement Quebec
5.00%, due 10/25/12......... 190,000 193,560
------------
INSURANCE (0.2%)
Montpelier Re Holdings Ltd.
6.125%, due 8/15/13......... 170,000 171,732
------------
MARINE (0.2%)
Sea Containers Ltd., Series B
7.875%, due 2/15/08......... 36,000 33,120
10.75%, due 10/15/06........ 139,000 141,433
------------
174,553
------------
MEDIA (0.2%)
Rogers Cable, Inc.
7.875%, due 5/1/12.......... 245,000 269,500
------------
METALS & MINING (0.2%)
Algoma Steel, Inc.
11.00%, due 12/31/09
(d)(e)...................... 234,000 218,790
------------
OIL & GAS (0.0%) (B)
YPF Sociedad Anonima
9.125%, due 2/24/09......... 60,000 64,800
------------
PAPER & FOREST PRODUCTS (0.3%)
Doman Industries Ltd.
12.00%, due 7/1/04 (e)...... 305,000 320,250
------------
ROAD & RAIL (0.1%)
Grupo Transportacion
Ferroviaria Mexicana, S.A.
de C.V.
11.75%, due 6/15/09......... 150,000 151,125
------------
Total Yankee Bonds
(Cost $1,879,089)........... 2,146,129
------------
Total Long-Term Bonds
(Cost $99,106,822).......... 103,298,092
------------
<Caption>
SHARES VALUE
-------------------------------
COMMON STOCKS (1.0%)
COMMUNICATIONS EQUIPMENT (0.1%)
Marconi Corp. PLC
(a)(s)(t)................... 6,026 $ 110,276
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.4%)
Call-Net Enterprises, Inc.
(a)(u)...................... 7,010 29,582
ICO Global Communications
Holdings Ltd. (a)(d)........ 20,419 14,804
UGC Europe, Inc. (a)......... 6,625 443,875
------------
488,261
------------
HEALTH CARE PROVIDERS & SERVICES (0.0%) (b)
Fountain View, Inc.
(a)(d)(j)(l)................ 110 1
------------
INTERNET SOFTWARE & SERVICES (0.0%) (b)
Globix Corp.
(a)(d)(j)(l)(v)............. 9,129 28,072
------------
MACHINERY (0.2%)
Morris Material Handling,
Inc. (a)(d)(j)(l)........... 886 4,696
Thermadyne Holdings Corp.
(a)(d)...................... 11,719 153,285
------------
157,981
------------
METALS & MINING (0.1%)
Algoma Steel, Inc. (a)(u).... 21,046 58,760
Neenah Foundry Co.
(a)(c)(d)................... 42,445 21,223
------------
79,983
------------
WIRELESS TELECOMMUNICATION SERVICES (0.2%)
Minorplanet Systems USA, Inc.
(a)......................... 83,459 44,233
NEON Communications, Inc.
(a)(d)(j)(l)................ 17,266 21,583
NII Holdings, Inc. (a)(d).... 2,718 209,531
------------
275,347
------------
Total Common Stocks
(Cost $1,388,767)........... 1,139,921
------------
CONVERTIBLE PREFERRED STOCKS (0.0%) (b)
DIVERSIFIED FINANCIAL SERVICES (0.0%) (b)
Pacific & Atlantic
(Holdings), Inc.
7.50%, Class A
(d)(i)(j)(l)................ 898 9
------------
WIRELESS TELECOMMUNICATION SERVICES (0.0%) (b)
NEON Communications, Inc.
12.00% (a)(d)(i)(j)(l)...... 1,882 21,173
------------
Total Convertible Preferred
Stocks
(Cost $20,970).............. 21,182
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
SHARES VALUE
-------------------------------
PREFERRED STOCKS (0.6%)
MEDIA (0.1%)
Paxson Communications Corp.
13.25% (i).................. 12 $ 113,176
Ziff Davis Media, Inc.
10.00%, Series E-1
(a)(d)(l)................... 48 408
------------
113,584
------------
REAL ESTATE (0.5%)
Sovereign Real Estate
Investment Corp.
12.00%, Class A (c)......... 358 533,420
------------
Total Preferred Stocks
(Cost $427,948)............. 647,004
------------
WARRANTS (0.1%)
DIVERSIFIED FINANCIAL SERVICES (0.0%) (b)
ASAT Finance LLC
Strike Price $18.60
Expire 11/1/06 (a)(c)(d).... 175 263
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.0%) (b)
ICO Global Communications
Holdings Ltd.
Strike Price $60.00
Expire 5/16/06 (a)(d)....... 5,128 51
------------
HEALTH CARE PROVIDERS & SERVICES (0.1%)
Harborside Healthcare Corp.
Class A
Strike Price $0.01
Expire 8/1/09 (a)(d)(j)..... 5,531 55
QuadraMed Corp.
Strike Price $0.01
Expire 4/1/08 (a)(c)(d)..... 27,862 68,819
------------
68,874
------------
MEDIA (0.0%) (b)
Ono Finance PLC
Strike Price $0.01
Expire 2/15/11 (a)(c)(d).... 405 4
Ziff Davis Media, Inc.
Strike Price $0.001
Expire 8/12/12 (a)(c)....... 8,954 90
------------
94
------------
METALS & MINING (0.0%) (b)
Neenah Foundry Co.
Strike Price $0.01
Expire 10/17/13 (a)(c)(d)... 42,051 20,604
------------
</Table>
<Table>
<Caption>
SHARES VALUE
-------------------------------
TOBACCO (0.0%) (b)
North Atlantic Trading Co.
Strike Price $0.01
Expire 6/15/07
(a)(c)(d)(l)................ 16 $ 1
------------
WIRELESS TELECOMMUNICATION SERVICES (0.0%) (b)
NEON Communications, Inc.
Strike Price $0.01
Expire 12/2/12
(a)(d)(j)(l)................ 17,266 173
Class A
Strike Price $0.01
Expire 12/2/12
(a)(d)(j)(l)................ 9,411 11,764
Redeemable Preferred
Strike Price $0.01
Expire 12/2/12
(a)(d)(j)(l)................ 11,293 113
Ubiquitel Operating Co.
Strike Price $22.74
Expire 4/15/10 (a)(c)(d).... 225 2
------------
12,052
------------
Total Warrants
(Cost $116,367)............. 101,939
------------
<Caption>
NOTIONAL
AMOUNT
-------------
PURCHASED OPTION (0.0%) (b)
UNITED STATES (0.0%) (b)
Japanese Yen Call/U.S. Dollar
Put
Strike Price $110
Expire 1/7/04 (l)........... $ 3,000,000 15,000
------------
Total Purchased Option
(Cost $24,600).............. 15,000
------------
<Caption>
PRINCIPAL
AMOUNT
-------------
SHORT-TERM INVESTMENTS (11.9%)
COMMERCIAL PAPER (9.1%)
American Express Credit Corp.
1.02%, due 11/4/03.......... $ 1,335,000 1,334,887
Federal National Mortgage
Association
0.95%, due 11/3/03.......... 2,000,000 1,999,894
1.00%, due 11/5/03.......... 905,000 904,899
Freddie Mac Discount Note
1.01%, due 11/6/03.......... 150,000 149,979
General Electric Capital
Corp.
1.04%, due 11/13/03......... 1,650,000 1,649,428
1.04%, due 12/10/03......... 600,000 599,324
1.05%, due 11/12/03......... 680,000 679,782
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
MainStay Strategic Income Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-------------------------------
SHORT-TERM INVESTMENTS (CONTINUED)
COMMERCIAL PAPER (CONTINUED)
UBS Finance Delaware LLC
1.03%, due 11/3/03.......... $ 3,155,000 $ 3,154,819
------------
Total Commercial Paper
(Cost $10,473,012).......... 10,473,012
------------
<Caption>
SHARES
-------------
INVESTMENT COMPANY (2.7%)
Merrill Lynch Premier
Institutional Fund.......... 3,168,702 3,168,702
------------
Total Investment Company
(Cost $3,168,702)........... 3,168,702
------------
<Caption>
PRINCIPAL
AMOUNT
-------------
SHORT-TERM LOAN ASSIGNMENT & PARTICIPATION (0.1%)
BUILDING PRODUCTS (0.1%)
Owens Corning, Inc.
Bank debt, Revolver
3.62%, due 1/1/04
(d)(e)(j)(k)................ $ 235,552 154,679
------------
Total Short-Term Loan
Assignment & Participation
(Cost $159,706)............. 154,679
------------
Total Short-Term Investments
(Cost $13,801,420).......... 13,796,393
------------
Total Investments
(Cost $114,886,894) (w)..... 103.1% 119,019,531(x)
Liabilities in Excess of
Cash and Other Assets....... (3.1) (3,605,271)
------------- ------------
Net Assets................... 100.0% $115,414,260
============= ============
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Illiquid security.
(e) Issue in default.
(f) Issue in bankruptcy.
(g) Partially segregated as collateral for unfunded loan
commitments.
(h) Yankee bond--Dollar-denominated bonds issued in the
United States by foreign banks and corporations.
(i) PIK ("Payment in Kind")--Dividend payment is made with
additional securities.
(j) Restricted security.
(k) Floating rate. Rate shown is the rate in effect at
October 31, 2003.
(l) Fair valued security.
(m1) 362 Units--Each unit reflects $1,000 principal amount
of 13.875% Senior Notes plus 1 warrant to acquire
19.9718 shares of common stock at $0.01 per share at a
future date.
(m2) 44 Units--Each unit reflects $1,000 principal amount of
15.00% Senior Secured Notes plus 0.9123 shares of
Series A preferred stock.
(n) CIK ("Cash in Kind")--Interest payment is made with
cash or additional securities.
(o) Partially segregated for foreign currency forward
contracts.
(p) Brady bond.
(q) TBA: Securities purchased on a forward commitment basis
with an approximate principal amount and maturity date.
The actual amount and the maturity date will be
determined upon settlement. The market value of these
securities at October 31, 2003 is $5,538,071.
(r) Segregated as collateral for TBA.
(s) ADR--American Depositary Receipt.
(t) British security.
(u) Canadian security.
(v) An affiliate.
(w) The cost for federal income tax purposes is
$115,728,424.
(x) At October 31, 2003, net unrealized appreciation was
$3,291,107 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 $6,342,388 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $3,051,281.
The following abbreviations are used in the above
portfolio: A$--Australian Dollar.
C$--Canadian Dollar.
DK--Danish Krone.
E--Euro.
Y--Japanese Yen.
L--Pound Sterling.
SK--Swedish Krona.
$--U.S. Dollar.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$114,886,894)............................................. $119,019,531
Cash denominated in foreign currencies (identified cost
$189,082)................................................. 187,748
Cash........................................................ 924,119
Receivables:
Investment securities sold................................ 5,412,261
Dividends and interest.................................... 1,842,992
Fund shares sold.......................................... 226,191
Unrealized appreciation on foreign currency forward
contracts................................................. 94,433
Other assets................................................ 11,112
------------
Total assets........................................ 127,718,387
------------
LIABILITIES:
Payables:
Investment securities purchased........................... 11,391,096
Fund shares redeemed...................................... 114,201
NYLIFE Distributors....................................... 76,831
Manager................................................... 60,937
Transfer agent............................................ 49,997
Custodian................................................. 7,023
Trustees.................................................. 1,307
Accrued expenses............................................ 88,716
Unrealized depreciation on foreign currency forward
contracts................................................. 346,492
Dividend payable............................................ 167,527
------------
Total liabilities................................... 12,304,127
------------
Net assets.................................................. $115,414,260
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 35,380
Class B................................................... 84,301
Class C................................................... 12,078
Additional paid-in capital.................................. 118,972,546
Accumulated distributions in excess of net investment
income.................................................... (191,495)
Accumulated net realized loss on investments................ (7,396,776)
Net unrealized appreciation on investments.................. 4,132,637
Net unrealized depreciation on translation of other assets
and liabilities in foreign currencies and foreign currency
forward contracts......................................... (234,411)
------------
Net assets.................................................. $115,414,260
============
CLASS A
Net assets applicable to outstanding shares................. $ 31,042,163
============
Shares of beneficial interest outstanding................... 3,538,010
============
Net asset value per share outstanding....................... $ 8.77
Maximum sales charge (4.50% of offering price).............. 0.41
------------
Maximum offering price per share outstanding................ $ 9.18
============
CLASS B
Net assets applicable to outstanding shares................. $ 73,798,915
============
Shares of beneficial interest outstanding................... 8,430,101
============
Net asset value and offering price per share outstanding.... $ 8.75
============
CLASS C
Net assets applicable to outstanding shares................. $ 10,573,182
============
Shares of beneficial interest outstanding................... 1,207,849
============
Net asset value and offering price per share outstanding.... $ 8.75
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
----------- -----------
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 107,716 $ 133,653
Interest.................................................. 5,603,844 5,952,513
----------- -----------
Total income............................................ 5,711,560 6,086,166
----------- -----------
Expenses:
Manager................................................... 485,963 432,211
Distribution--Class B..................................... 408,154 394,929
Distribution--Class C..................................... 48,116 28,219
Transfer agent............................................ 234,052 212,551
Service--Class A.......................................... 50,418 39,038
Service--Class B.......................................... 136,012 131,643
Service--Class C.......................................... 16,054 9,407
Professional.............................................. 55,152 50,224
Shareholder communication................................. 42,615 41,009
Custodian................................................. 32,955 32,993
Registration.............................................. 31,778 29,628
Recordkeeping............................................. 29,090 27,344
Trustees.................................................. 7,863 7,029
Miscellaneous............................................. 59,146 63,498
----------- -----------
Total expenses.......................................... 1,637,368 1,499,723
----------- -----------
Net investment income....................................... 4,074,192 4,586,443
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN
OPTION AND FOREIGN CURRENCY TRANSACTIONS:
Net realized loss from:
Security transactions..................................... (340,354) (1,858,141)
Written option transactions............................... 2,310 --
Foreign currency transactions............................. (66,735) (638,172)
----------- -----------
Net realized loss on investments, written option and foreign
currency transactions..................................... (404,779) (2,496,313)
----------- -----------
Net change in unrealized appreciation (depreciation) on:
Security transactions..................................... 9,938,561 1,623,073
Translation of other assets and liabilities in foreign
currencies and foreign currency forward contracts....... 154,504 (567,638)
----------- -----------
Net unrealized gain (loss) on investments and foreign
currency transactions..................................... 10,093,065 1,055,435
----------- -----------
Net realized and unrealized gain (loss) on investments and
foreign currency transactions............................. 9,688,286 (1,440,878)
----------- -----------
Net increase in net assets resulting from operations........ $13,762,478 $ 3,145,565
=========== ===========
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
(a) Dividends recorded net of foreign withholding taxes of
$1,316 and $1,618 for 2003 and 2002, respectively.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
26
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ------------ ------------
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 4,074,192 $ 4,586,443 $ 5,217,275
Net realized loss on investments and foreign currency
transactions............................................ (404,779) (2,496,313) (1,766,782)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency transactions........... 10,093,065 1,055,435 647,327
------------ ------------ ------------
Net increase in net assets resulting from operations...... 13,762,478 3,145,565 4,097,820
------------ ------------ ------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (1,109,653) (900,911) (1,335,438)
Class B................................................. (2,669,684) (2,751,630) (3,295,728)
Class C................................................. (316,816) (201,027) (208,471)
Return of capital:
Class A................................................. (219,331) (310,381) (160,192)
Class B................................................. (527,683) (947,988) (395,338)
Class C................................................. (62,621) (69,258) (25,007)
------------ ------------ ------------
Total dividends and distributions to shareholders..... (4,905,788) (5,181,195) (5,420,174)
------------ ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 23,088,926 15,723,507 12,261,031
Class B................................................. 19,462,094 15,213,789 12,255,374
Class C................................................. 7,287,483 5,260,534 3,727,065
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 866,572 792,843 1,117,106
Class B................................................. 2,236,330 2,515,943 2,598,570
Class C................................................. 194,953 147,206 101,713
------------ ------------ ------------
53,136,358 39,653,822 32,060,859
Cost of shares redeemed:
Class A................................................. (13,364,688) (12,848,184) (16,886,152)
Class B................................................. (9,809,849) (12,009,384) (9,820,381)
Class C................................................. (3,509,989) (2,379,776) (3,717,875)
------------ ------------ ------------
Increase in net assets derived from capital share
transactions........................................ 26,451,832 12,416,478 1,636,451
------------ ------------ ------------
Net increase in net assets............................ 35,308,522 10,380,848 314,097
NET ASSETS:
Beginning of period......................................... 80,105,738 69,724,890 69,410,793
------------ ------------ ------------
End of period............................................... $115,414,260 $ 80,105,738 $ 69,724,890
============ ============ ============
Accumulated distributions in excess of net investment income
at end of period.......................................... $ (191,495) $ (274,716) $ (490,848)
============ ============ ============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
27
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
----------------------------------------------------------------------------
January 1, 2003
through Year ended December 31,
October 31, ----------------------------------------------------------
2003* 2002 2001 2000 1999 1998
--------------- ------- ------- ------- ------- -------
Net asset value at beginning of period............. $ 7.97 $ 8.22 $ 8.37 $ 9.20 $ 9.71 $ 9.91
------- ------- ------- ------- ------- -------
Net investment income.............................. 0.39(a) 0.55(a) 0.67(a)(d) 0.73 0.67 0.60
Net realized and unrealized gain (loss) on
investments....................................... 0.86 (0.03) (0.14)(d) (0.61) (0.45) (0.09)
Net realized and unrealized gain (loss) on foreign
currency transactions............................. 0.01 (0.15) 0.01 (0.26) 0.00(b) (0.01)
------- ------- ------- ------- ------- -------
Total from investment operations................... 1.26 0.37 0.54 (0.14) 0.22 0.50
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income........................ (0.38) (0.46) (0.62) (0.55) (0.70) (0.70)
From net realized gain on investments............. -- -- -- -- (0.03) --
Return of capital................................. (0.08) (0.16) (0.07) (0.14) (0.00)(c) --
------- ------- ------- ------- ------- -------
Total dividends and distributions.................. (0.46) (0.62) (0.69) (0.69) (0.73) (0.70)
------- ------- ------- ------- ------- -------
Net asset value at end of period................... $ 8.77 $ 7.97 $ 8.22 $ 8.37 $ 9.20 $ 9.71
======= ======= ======= ======= ======= =======
Total investment return (b)........................ 16.22% 4.78% 6.62% (1.57%) 2.30% 5.17%
Ratios (to average net assets)/
Supplemental Data:
Net investment income........................... 5.59%+ 6.95% 7.95%(d) 8.27% 6.97% 6.14%
Net expenses.................................... 1.46%+ 1.49% 1.44% 1.47% 1.34% 1.38%
Expenses (before reimbursement)................. 1.46%+ 1.49% 1.44% 1.47% 1.34% 1.42%
Portfolio turnover rate............................ 80% 84% 141% 187% 244% 325%
Net assets at end of period (in 000's)............. $31,042 $18,297 $15,066 $18,909 $19,922 $21,603
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
(c) Less than one cent per share.
(d) As required, effective January 1, 2001, the Fund has adopted
the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt
securities. The effect of this change for the year ended
December 31, 2001 is shown below. Per share ratios and
supplemental data for periods prior to January 1, 2001 have
not been restated to reflect this change in presentation.
</Table>
<Table>
<Caption>
CLASS A CLASS B CLASS C
------- ------- -------
Decrease net investment income.............................. ($0.00)(c) ($0.00)(c) ($0.00)(c)
Increase net realized and unrealized gains and losses....... 0.00(c) 0.00(c) 0.00(c)
Decrease ratio of net investment income..................... (0.13%) (0.13%) (0.13%)
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
28
<Table>
<Caption>
Class B Class C
--------------------------------------------------------------------------------- ---------------
January 1, 2003 January 1, 2003
through Year ended December 31, through
October 31, --------------------------------------------------------------- October 31,
2003* 2002 2001 2000 1999 1998 2003*
--------------- ------- ------- ------- ------- ------- ---------------
$ 7.95 $ 8.20 $ 8.36 $ 9.19 $ 9.70 $ 9.91 $ 7.95
------- ------- ------- ------- ------- ------- ----------
0.34(a) 0.49(a) 0.61(a)(d) 0.67 0.60 0.54 0.34(a)
0.86 (0.03)(d) (0.15) (0.61) (0.45) (0.11) 0.86
0.01 (0.15) 0.01 (0.26) 0.00(c) (0.01) 0.01
------- ------- ------- ------- ------- ------- ----------
1.21 0.31 0.47 (0.20) 0.15 0.42 1.21
------- ------- ------- ------- ------- ------- ----------
(0.34) (0.42) (0.56) (0.50) (0.63) (0.63) (0.34)
-- -- -- -- (0.03) -- --
(0.07) (0.14) (0.07) (0.13) (0.00)(c) -- (0.07)
------- ------- ------- ------- ------- ------- ----------
(0.41) (0.56) (0.63) (0.63) (0.66) (0.63) (0.41)
------- ------- ------- ------- ------- ------- ----------
$ 8.75 $ 7.95 $ 8.20 $ 8.36 $ 9.19 $ 9.70 $ 8.75
======= ======= ======= ======= ======= ======= ==========
15.55% 3.99% 5.78% (2.28%) 1.54% 4.35% 15.55%
4.84%+ 6.20% 7.20%(d) 7.52% 6.22% 5.39% 4.84%+
2.21%+ 2.24% 2.19% 2.22% 2.09% 2.13% 2.21%+
2.21%+ 2.24% 2.19% 2.22% 2.09% 2.17% 2.21%+
80% 84% 141% 187% 244% 325% 80%
$73,799 $55,842 $51,694 $47,607 $59,645 $66,273 $ 10,573
<Caption>
Class C
---------------------------------------------------------------------
September 1**
Year ended December 31, through
------------------------------------------------- December 31,
2002 2001 2000 1999 1998
------- ------- ------- ------- -------------
$ 8.20 $ 8.36 $ 9.19 $ 9.70 $ 9.59
------- ------- ------- ------- -------
0.49(a) 0.61(a)(d) 0.67 0.60 0.21
(0.03)(d) (0.15) (0.61) (0.45) 0.10
(0.15) 0.01 (0.26) 0.00(c) 0.01
------- ------- ------- ------- -------
0.31 0.47 (0.20) 0.15 0.32
------- ------- ------- ------- -------
(0.42) (0.56) (0.50) (0.63) (0.21)
-- -- -- (0.03) --
(0.14) (0.07) (0.13) (0.00)(c) --
------- ------- ------- ------- -------
(0.56) (0.63) (0.63) (0.66) (0.21)
------- ------- ------- ------- -------
$ 7.95 $ 8.20 $ 8.36 $ 9.19 $ 9.70
======= ======= ======= ======= =======
3.99% 5.78% (2.28%) 1.54% 3.41%
6.20% 7.20%(d) 7.52% 6.22% 5.39%+
2.24% 2.19% 2.22% 2.09% 2.13%+
2.24% 2.19% 2.22% 2.09% 2.13%+
84% 141% 187% 244% 325%
$ 5,967 $ 2,965 $ 2,895 $ 768 $ 91
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
29
MainStay Strategic Income Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
Strategic Income Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on February 28, 1997. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and within one year of purchase
of Class C shares. Class A shares, Class B shares and Class C shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions except that the Class B shares and
Class C shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the 1940 Act.
The Fund's objective is to provide current income and competitive overall return
by investing primarily in domestic and foreign debt securities.
The Fund also invests in high yield securities (sometimes called "junk bonds"),
which are generally considered speculative because they present a greater risk
of loss, including default, than higher quality debt securities. These
securities pay a premium--a high interest rate or yield--because of the
increased risk of loss. These securities can also be subject to a greater price
volatility.
The Fund also invests in foreign securities which carry certain risks in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
30
Notes to Financial Statements
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Debt securities are valued at prices supplied by a pricing agent or
brokers selected by the Fund's Manager, whose prices reflect broker/dealer
supplied valuations and electronic data processing techniques, if such prices
are deemed by the Fund's Manager to be representative of market values, at the
regular close of business of the Exchange, Options contracts are valued at the
last sale price on the market where such options are principally traded.
Temporary cash investments acquired over 60 days to maturity are valued using
the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. Should the Manager or Subadvisor conclude that such events
may have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund, adjust the value of the local price to reflect the impact on the price of
such securities as a result of such events.
(B) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward 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 may enter into foreign currency
forward contracts primarily to hedge its foreign currency denominated
investments and receivables and payables against adverse movements in future
foreign exchange rates or to try to enhance the Fund's returns.
The use of foreign currency 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
31
MainStay Strategic Income Fund
possible movements in the foreign exchange rates underlying these instruments.
The unrealized appreciation on forward contracts reflects the Fund's exposure at
period end to credit loss in the event of a counterparty's failure to perform
its obligations.
Foreign currency forward contracts open at October 31, 2003:
<Table>
<Caption>
Contract Contract Unrealized
Amount Amount Appreciation/
Sold Purchased (Depreciation)
------------- ---------- --------------
Foreign Currency Sale Contracts
- ------------------------------------------------------
Australian Dollar vs. U.S. Dollar, expiring
11/17/03............................................ A$ 264,000 $ 186,120 $ (656)
Canadian Dollar vs U.S. Dollar, expiring 1/8/04....... C$ 1,127,000 $ 817,455 (33,811)
Euro vs. U.S. Dollar, expiring 12/16/03............... E 1,302,000 $1,524,642 13,402
Euro vs. U.S. Dollar, expiring 12/16/03............... E 5,203,935 $5,944,093 (109,550)
Euro vs. U.S. Dollar, expiring 12/19/03............... E 4,831,706 $5,511,538 (96,150)
Japanese Yen vs. U.S. Dollar, expiring 1/23/04........ Y 29,956,000 $ 277,370 4,130
New Zealand Dollar vs. U.S. Dollar, expiring
11/10/03............................................ NZD 840,000 $ 481,320 (33,529)
Pound Sterling vs. U.S. Dollar, expiring 11/14/03..... L 420,000 $ 669,984 (41,967)
Swiss Franc vs. U.S. Dollar, expiring 11/25/03........ CF 1,375,000 $1,006,147 (24,266)
Foreign Currency Buy Contracts
- ------------------------------------------------------
Australian Dollar vs. U.S. Dollar, expiring
11/17/03............................................ A$ 264,000 $ 180,048 6,728
Canadian Dollar vs U.S. Dollar, expiring 1/8/04....... C$ 597,286 $ 450,833 320
Euro vs. U.S. Dollar, expiring 12/16/03............... E 1,129,935 $1,251,933 59,591
Euro vs. U.S. Dollar, expiring 12/16/03............... E 397,954 $ 464,732 (2,824)
Euro vs. U.S. Dollar, expiring 12/19/03............... E 600,000 $ 688,548 7,813
Euro vs. U.S. Dollar, expiring 12/19/03............... E 237,000 $ 276,816 (1,753)
Japanese Yen vs. U.S. Dollar, expiring 1/23/04........ Y 29,905,000 $ 274,761 (1,986)
New Zealand Dollar vs. U.S. Dollar, expiring
11/10/03............................................ NZD 840,000 $ 512,400 2,449
---------
Net unrealized depreciation on foreign currency
forward contracts................................... $(252,059)
=========
</Table>
(C) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted to
reflect the current value of the options written. Premiums received from writing
options which expire are treated as realized gains. Premiums received from
writing options which are exercised or are cancelled in closing purchase
transactions are added to the proceeds or netted against the amount paid on the
transaction to determine the realized gain or loss. By writing a covered call
option, a Fund foregoes in exchange for the premium the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security or foreign currency increase. By writing a covered put option, a Fund,
in exchange for the premium, accepts the risk of a decline in the market value
of the underlying security or foreign currency below the exercise
32
Notes to Financial Statements (continued)
price. A call option may be covered by the call writer's owning the underlying
security throughout the option period. A call option may also be covered by the
call writer's maintaining liquid assets valued at greater than the exercise
price of the call written, in a segregated account with its custodian.
The Fund may purchase call and put options on its portfolio securities or
foreign currencies. The Fund may purchase call options to protect against an
increase in the price of the security or foreign currency it anticipates
purchasing. The Fund may purchase put options on its securities or foreign
currencies to protect against a decline in the value of the security or foreign
currency or to close out covered written put positions. The Fund may also
purchase options to seek to enhance returns. Risks may arise from an imperfect
correlation between the change in market value of the securities or foreign
currencies held by the Fund and the prices of options relating to the securities
or foreign currencies purchased or sold by the Fund and from the possible lack
of a liquid secondary market for an option. The maximum exposure to loss for any
purchased option is limited to the premium initially paid for the option.
Written option activity for the ten months ended October 31, 2003 was as
follows:
<Table>
<Caption>
Notional
Amount Premium
-------- -------
Options outstanding at December 31, 2002.................... -- $ --
Options -- written.......................................... (825) (2,805)
Options -- buybacks......................................... 825 2,805
----- -------
Options outstanding at October 31, 2003..................... -- $ --
===== =======
</Table>
(D) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933 (the "1993 Act").
The Fund does not have the right to demand that such securities be registered.
Disposal of these securities may involve time-consuming negotiations and
expense, and prompt sale at an acceptable price may be difficult.
33
MainStay Strategic Income Fund
Restricted securities held at October 31, 2003:
<Table>
<Caption>
Principal
Date(s) of Amount/ 10/31/03 Percent of
Security Acquisition Shares Cost Value Net Assets
- -------- ---------------- --------- -------- -------- ----------
Fountain View, Inc.
Common Stock........................... 9/4/03 110 $ 1 $ 1 0.0%(a)
FRI-MRD Corp.
12.00%, due 1/31/05.................... 7/2/02-7/31/03 $246,817 246,126 103,663 0.1
Globix Corp.
Common Stock........................... 10/15/02 9,129 2,472 28,072 0.0(a)
Harborside Healthcare Corp.
(zero coupon), due 8/1/07
12.00%, beginning 8/1/04............... 5/15/01 299,000 215,070 104,650 0.1
Class A, Warrants...................... 5/15/01 5,531 8,407 55 0.0(a)
Millicom International Cellular S.A.
Convertible Bond
2.00%, due 6/1/06...................... 5/13/03 54,000 53,934 310,095 0.3
Morris Material Handling, Inc.
Common Stock........................... 12/28/01-10/17/02 886 413 4,696 0.0(a)
NEON Communications, Inc.
Common Stock........................... 9/11/03 17,266 15,295 21,583 0.0(a)
Convertible Preferred Stock
12.00%............................... 12/3/02 1,882 20,961 21,173 0.0(a)
Warrants............................... 9/11/03 17,266 15,295 173 0.0(a)
Warrants, Class A...................... 12/3/02 9,411 94 11,764 0.0(a)
Warrants, Redeemable Preferred......... 12/3/02 11,293 113 113 0.0(a)
Owens Corning, Inc.
Bank debt, Revolver
3.62%, due 1/1/04...................... 1/10/02-10/15/02 235,552 159,706 154,679 0.1
Pacific & Atlantic (Holdings), Inc.
Convertible Preferred Stock
7.50%, Class A......................... 2/4/00-6/30/03 898 9 9 0.0(a)
Pacific Gas & Electric Co.
Bank debt, Revolver
8.75%, due 12/30/06.................... 10/8/02 205,000 199,492 207,050 0.2
-------- -------- ---
$937,388 $967,776 0.8%
======== ======== ===
</Table>
- -------
(a) Less than one tenth of a percent.
(E) LOAN PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan commitments
and loan participations. Loan commitments and loan participations are agreements
to make money available to a borrower in a specified amount, at a specified rate
and within a specified time. The Fund records an investment when the borrower
withdraws money and records interest as earned. The unfunded amounts are
recorded in memorandum accounts. The Fund assumes the credit risk of the
Borrower,
34
Notes to Financial Statements (continued)
the Selling Participant and any other persons interpositioned between the Fund
and the Borrower ("Intermediate Participants"). As of October 31, 2003, the Fund
had an unfunded loan commitment pursuant to the following loan agreement:
<Table>
<Caption>
Unfunded
Borrower Commitment
- -------- ----------
Owens Corning, Inc. ........................................ $15,503
=======
</Table>
This commitment is available until maturity date of the respective security.
(F) MORTGAGE DOLLAR ROLLS. The Fund enters into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the portfolio of investments and liabilities for such purchase
commitments are included as payables for investments purchased. The Fund
maintains a segregated account with its custodian containing securities from its
portfolio having a value not less than the repurchase price, including accrued
interest. MDR transactions involve certain risks, including the risk that the
MBS returned to the Fund at the end of the roll, while substantially similar,
could be inferior to what was initially sold to the counterparty.
(G) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(H) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends monthly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income, accumulated net
realized loss on investments, accumulated net
35
MainStay Strategic Income Fund
realized loss on foreign currency transactions and additional paid in capital
arising from permanent differences; net assets at October 31, 2003, are not
effected.
<Table>
<Caption>
ACCUMULATED
ACCUMULATED NET REALIZED
DISTRIBUTIONS IN ACCUMULATED LOSS
EXCESS OF NET REALIZED ON FOREIGN
NET INVESTMENT LOSS ON CURRENCY
INCOME INVESTMENTS TRANSACTIONS
- ---------------- ------------ ------------
$105,182 $(171,917) $66,735
</Table>
The reclassifications for the Fund are primarily due to premium amortization
adjustments, foreign currency and paydown gain (loss).
(I) 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 as earned.
Discounts and premiums on securities, other than short-term securities,
purchased for the Fund are accreted and amortized, respectively, on the constant
yield method over the life of the respective securities or, in the case of a
callable security, over the period to the first date of call. Discounts and
premiums on short-term securities are accreted and amortized, respectively, on
the straight line method. Income from payment-in-kind securities is recorded
daily based on the effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized, and unrealized gains
and losses are incurred.
(J) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(K) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
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.
36
Notes to Financial Statements (continued)
The assets and liabilities are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented. Accordingly, gains and losses from foreign currency
transactions are included in the reported net realized gains (losses) on
investment transactions.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains and 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, other than investments, at period end
exchange rates are reflected in unrealized foreign exchange gains or losses.
Foreign currency held at October 31, 2003:
<Table>
<Caption>
CURRENCY COST VALUE
- --------------------------------- --------- ---------
Australian Dollar A$ 494 $ 337 $ 351
Danish Krone DK 827,635 130,463 129,428
Euro E 49,866 58,282 57,969
-------- --------
$189,082 $187,748
======== ========
</Table>
(L) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.60% of the Fund's
average daily net assets. For the ten months
37
MainStay Strategic Income Fund
ended October 31, 2003 and the year ended December 31, 2002, the Manager earned
from the Fund $485,963 and $432,211, respectively.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager pays the Subadvisor a monthly fee at an annual rate of
0.30% of the average daily net assets of the Fund.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Distribution Plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $11,932 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemption of Class A, Class B and Class C
shares of $661, $57,525 and $4,405, respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and the year ended December 31, 2002 amounted to $234,052
and $212,551, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting and $1,000 for
each Committee meeting and $500 for each
38
Notes to Financial Statements (continued)
Valuation Subcommittee telephonic meeting attended plus reimbursement for travel
and out-of-pocket expenses. The Lead Non-Interested Trustee is also paid an
annual fee of $20,000. Beginning January 1, 2003, the Audit Committee Chairman
receives an additional $2,000 for each meeting of the Audit Committee attended.
Also, beginning January 1, 2003, the Chairpersons of the Brokerage Committee and
the Operations Committee each receive an additional $1,000 for each meeting of
the Brokerage Committee and Operations Committee attended, respectively. The
Trust allocates trustees fees in proportion to the net assets of the respective
Funds. Thus the Strategic Income Fund only pays a portion of the fees identified
above.
(F) CAPITAL. At October 31, 2003, NYLIFE Distributors held shares of Class B
with a value of $6,976,840 which represents 9.5% of Class B net assets and 6.0%
of the total Fund's net assets at period end.
(G) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $2,159 for the ten months ended October
31, 2003 and $1,450 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $29,090 for the ten months ended October
31, 2003 and $27,344 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
- ------------------- ------------ -----------------
$(6,559,202) $3,036,684 $(3,522,518)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals, premium amortization adjustments,
interest write-offs, mark-to-market of foreign currency forward contracts and
bond reorganizations.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $6,559,202 were available as shown in the table below, to the extent provided
by the regulations to offset future realized
39
MainStay Strategic Income Fund
gains through the years indicated. 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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
- ----------------- ------
2007........................................................ $2,054
2008........................................................ 1,958
2009........................................................ 864
2010........................................................ 1,161
2011........................................................ 522
------
$6,559
======
</Table>
The tax character of distributions paid during the ten months ended October 31,
2003, and years ended December 31, 2002 and December 31, 2001, shown in the
Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2003 2002 2001
----------- ----------- -----------
Distributions paid from:
Ordinary Income $4,096,153 $3,853,568 $4,839,637
Return of Capital 809,635 1,327,627 580,537
---------- ---------- ----------
$4,905,788 $5,181,195 $5,420,174
========== ========== ==========
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of U.S.
Government securities were $37,954 and $21,952, respectively. Purchases and
sales of securities, other than U.S. Government securities and short-term
securities, were $57,937 and $49,381, respectively.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to the Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
40
Notes to Financial Statements (continued)
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
JANUARY 1 DECEMBER 31,
THROUGH ----------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- ----------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- --------
Shares sold.......... 2,739 2,303 855 1,977 1,919 668 1,466 1,464 450
Shares issued in
reinvestment of
dividends and
distributions...... 102 264 23 100 317 19 133 311 12
------ ------ ---- ------ ------ ---- ------ ------ ----
2,841 2,567 878 2,077 2,236 687 1,599 1,775 462
Shares redeemed...... (1,599) (1,159) (420) (1,614) (1,515) (298) (2,024) (1,167) (447)
------ ------ ---- ------ ------ ---- ------ ------ ----
Net increase
(decrease)......... 1,242 1,408 458 463 721 389 (425) 608 15
====== ====== ==== ====== ====== ==== ====== ====== ====
</Table>
- -------
*The Fund changed its fiscal year end from December 31 to October 31.
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
41
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Strategic Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Strategic Income Fund (one
of the funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 22, 2003
42
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
43
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
44
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
45
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MacKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
McMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
46
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. McGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY LOGO]
MainStay is a division of New York Life Investment
Management LLC, the investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSSI11- 12/03
NYLIM-A04429 16
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
Strategic Income Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY LOGO]
Table of Contents
<Table>
President's Letter 2
$10,000 Invested in MainStay International
Bond Fund versus Citigroup Non-U.S. Dollar
World Government Bond Index--Class A, Class
B, and Class C Shares 3
Portfolio Management Discussion and Analysis 4
Year-by-Year and 10-Month Performance 5
Portfolio of Investments 8
Financial Statements 11
Notes to Financial Statements 16
Report of Independent Auditors 27
Trustees and Officers 28
The MainStay(R) Funds 31
</Table>
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
2
$10,000 Invested in MainStay International
Bond Fund versus Citigroup Non-U.S.
Dollar World Government Bond Index
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 10.60%, 5 Years 1.78%, Since Inception
(9/13/94) 5.60%
[Class A Shares Bar Graph]
<Table>
<Caption>
MAINSTAY INTERNATIONAL BOND CITIGROUP NON-U.S. DOLLAR WORLD
FUND GOVERNMENT BOND INDEX(1)
--------------------------- -------------------------------
9/13/94 9550.00 10000.00
10/94 9751.00 10461.00
10/95 10944.00 12050.00
10/96 12677.00 12707.00
10/97 13308.00 12667.00
10/98 14386.00 14288.00
10/99 13841.00 13864.00
10/00 11926.00 12520.00
10/01 13160.00 13383.00
10/02 14205.00 14730.00
10/31/03 16452.00 17344.00
</Table>
CLASS B AND CLASS C SHARES
Class B Total Returns with Sales Charges: 1 Year 9.96%, 5 Years 1.62%, Since
Inception (9/13/94) 5.40%
Class C Total Returns with Sales Charges: 1 Year 13.96%, 5 Years 1.94%, Since
Inception (9/13/94) 5.40%
[Class B and C Shares Bar Graph]
<Table>
<Caption>
MAINSTAY INTERNATIONAL BOND CITIGROUP NON-U.S. DOLLAR WORLD
FUND GOVERNMENT BOND INDEX(1)
--------------------------- -------------------------------
9/13/1994 10000.00 10000.00
10/94 10210.00 10461.00
10/95 11405.00 12050.00
10/96 13117.00 12707.00
10/97 13681.00 12667.00
10/98 14689.00 14288.00
10/99 14020.00 13864.00
10/00 11987.00 12520.00
10/01 13137.00 13383.00
10/02 14064.00 14730.00
10/31/2003 16168.00 17344.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION PLEASE VISIT WWW.MAINSTAYFUNDS.COM. Performance tables and graphs
do not reflect the deduction of taxes that a shareholder would pay on
distributions or Fund-share redemptions. Total returns reflect change in
share price, reinvestment of dividend and capital gain distributions, and
maximum applicable sales charges explained in this paragraph. The graphs
assume an initial investment of $10,000 and reflect deduction of all sales
charges that would have applied for the period of investment. Class A share
performance reflects the effect of the maximum 4.5% initial sales charge and
includes the historical performance of the Class B shares for periods from
9/13/94 through 12/31/94. Performance figures for the two classes vary after
12/31/94, based on differences in their sales charges and expense structures.
Class C share performance includes the historical performance of the Class B
shares for periods from 9/13/94 through 8/31/98, Class B shares are subject
to a contingent deferred sales charge (CDSC) of up to 5% if shares are
redeemed within the first six years of purchase, and Class C shares would be
subject to a CDSC of 1% if redeemed within one year of purchase.
1. The Citigroup Non-U.S. Dollar World Government Bond Index is an unmanaged
index generally considered to be representative of the world bond market.
Results assume the reinvestment of all income and capital gains. An
investment cannot be made directly into an index. The Citigroup Non-U.S.
Dollar World Government Bond Index was formerly known as the Salomon Smith
Barney Non-U.S. Dollar World Government Bond Index.
3
-
4
- -------
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 3 for more information about the Citigroup Non-U.S.
Dollar World Government Bond Index.
3. Performance figures represent total returns of the specified markets for the
10-month period. Due to the fund's specific holdings and its purchases and
sales, Fund results in specific markets may differ from those of the markets
themselves.
Portfolio Management Discussion and Analysis
The year 2003 began with market participants still reeling from a series of
corporate scandals and gloomy economic forecasts both here and abroad. In
response, policy makers around the globe cut interest rates to remarkably low
levels. The United States introduced a massive fiscal stimulus package, and in
time, it became increasingly clear that the economic tide was turning.
Preliminary estimates from the Bureau of Economic Analysis indicate that real
U.S. gross
domestic product grew 8.2% in the third-quarter of 2003, the highest rate of
growth since early 1984. In Asia, Japan appears to be heading toward
self-sustaining growth, and the Chinese economic engine has fueled increases in
raw materials prices, which has helped exporters such as Australia and Chile.
Against this back drop, bond yields fell dramatically during much of the
10-month period, especially in the United States. The market, however, retraced
much of the associated price gains by the end of October 2003. Rates generally
declined in Europe and Canada, while Australia, Japan, and the U.K. saw rates
rise. Yield curves in the U.S. and Europe steepened, while yield curves
elsewhere tended to flatten. As growth prospects improved and the specter of
accounting improprieties diminished, investment-grade and non-investment grade
debt rallied strongly.
PERFORMANCE REVIEW
For the 10-month period ended October 31, 2003, MainStay International Bond Fund
returned 10.01% for Class A shares and 9.33% for Class B and Class C shares,
excluding all sales charges. Class A shares outperformed and Class B and Class C
shares underperformed the 9.61% return of the average Lipper(1) international
income fund over the same period. All share classes underperformed the 10.81%
return of the Citigroup Non-U.S. Dollar World Government Bond Index(2) for the
10 months ended October 31, 2003.
STRATEGIC POSITIONING
The Fund started 2003 with a relatively long duration, which positioned the
portfolio to take advantage of potential rate cuts in Europe. This strategy
provided positive results when several central banks eased interest rates, the
yield curve steepened, and European government debt returned 3.0% on average in
local currency terms.(3)
The Fund remained underweighted in the Japanese market, which also contributed
positively to performance, since Japan was the worst performer through the end
of October, returning -1.42% in local currency terms. Our decision to keep the
Fund at least market weighted in the U.K. proved less advantageous, since the
U.K. was the Fund's second-worst performing market for the 10-month period,
returning -0.45% in local currency terms.
5
-
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[CLASS A BAR GRAPH]
<Table>
<Caption>
CLASS A SHARES
--------------
12/94 0.20
12/95 18.68
12/96 13.90
12/97 1.83
12/98 11.61
12/99 -8.22
12/00 -5.50
12/01 1.15
12/02 15.97
10/03 10.01
</Table>
CLASS B AND CLASS C SHARES
[CLASS B AND CLASS C SHARES BAR GRAPH]
<Table>
<Caption>
CLASS B AND CLASS C SHARES
--------------------------
12/94 0.20
12/95 17.96
12/96 13.13
12/97 1.15
12/98 10.79
12/99 -8.94
12/00 -6.22
12/01 0.48
12/02 15.01
10/03 9.33
</Table>
Toward the end of the reporting period, we aggressively reduced the duration of
the Fund's European holdings. We also sold Canadian debt to add to the Fund's
Japanese holdings. With a 3.75% return in local currency terms for the 10-month
period, Canadian bonds performed well. On the other hand, when spreads to
comparable U.S. bonds dropped to about 0.5%, we found the reasons to be
overweighted in Canada less compelling than they had been at the beginning of
the year. We reduced Canadian exposure at the end of the reporting period, and
put the sale proceeds and some cash to work in Japan, doubling the Fund's
Japanese-bond allocation to 7% at the end of the reporting period.
6
4. The Group of Seven (G7) is a forum of seven lead- ing economic
powers--Canada, France, Germany, Italy, Japan, the United Kingdom, and the
United States--that meets to ensure the stability of the international
financial system. Russia joined the group in 1998, creating the G8, but
financial issues continue to be addressed by the G7.
In terms of bond holdings, clearly the Fund's most successful strategy during
the reporting period was to hold non-G7 investment-grade corporate and emerging-
market debt.(4) Of the two, emerging-market debt made the most significant
positive contribution to the Fund's performance, since yield spreads of
emerging-market bonds over U.S. Treasuries decreased from 6.6% to 4.5%. This
spread contraction translated into a principal return of approximately 11.5%
based on the duration of the JP Morgan Global Diversified Index. The Fund
continues to hold approximately 10% in emerging-market bonds, mainly U.S. dollar
denominated debt.
On the currency front, we have increasingly added currency exposure to the Fund.
By the end of the reporting period nearly 60% of the Fund was affected by
currency movements, most of which have contributed positively to performance.
The euro, yen, Australian dollar, Canadian dollar, and British pound all rose
during the reporting period. At the end of the period the Fund had 36% exposure
to the euro, 10% combined exposure to the Australian dollar and the Canadian
dollar, 7% exposure to the yen, and 6% to the British pound. The balance of the
Fund's exposure is in the Danish krone and the Swedish krona.
LOOKING AHEAD
Fundamentally, the global economy appears poised to resume at least trend growth
with little or no inflationary impact over the next several quarters. We expect
official interest rates to remain stable over this period, but we believe that
longer-dated government debt will remain vulnerable. We are likely to maintain a
shorter duration than the market, and we will continue to focus on individual
credit selection in our effort to outperform the market. We believe that the
dollar is likely to retrace some of its losses over the last 10 months, but we
expect continued weakness before the presidential elections and we are likely to
maintain, on average, 50% exposure to foreign currency until we see a reason to
change our strategy.
Whatever individual markets or the global economy may bring, the Fund will
continue to seek to provide competitive overall return commensurate with an
acceptable level of risk by investing primarily in a portfolio of non-U.S.
(primarily government) debt securities.
Joseph Portera
Portfolio Manager
MacKay Shields LLC
7
-
Foreign securities may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information, and changes in tax or currency laws or monetary policy. These risks
are likely to be greater in emerging markets than in developed markets.
High-yield securities ("junk bonds") are generally considered speculative
because they present a greater risk of loss than higher-quality debt securities
and may be subject to greater price volatility. The Fund may invest in
derivatives, which may increase the volatility of the Fund's net asset value and
may result in a loss to the Fund.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8
MainStay International Bond Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
LONG-TERM BONDS (94.4%)+
CORPORATE BONDS (25.3%)
BRAZIL (1.0%)
CIA Brasileira de Bebidas
10.50%, due 12/15/11.......... $ 275,000 $ 311,437
-----------
CANADA (1.8%)
Canadian Housing Trust
3.70%, due 9/15/08 (c)........ C$ 570,000 423,566
MBNA Canada Bank
Series DPNT
6.625%, due 11/23/07.......... 200,000 162,287
-----------
585,853
-----------
CAYMAN ISLANDS (0.9%)
Principal Financial Global
Funding LLC Series 5, Tranche
1
5.875%, due 6/8/09............ L 175,000 297,848
-----------
CHILE (1.0%)
Empresa Nacional de
Electricidad S.A. Series B
8.50%, due 4/1/09............. $ 100,000 110,034
Empresa Nacional de Petroleo
6.75%, due 11/15/12 (c)....... 100,000 107,693
Compania Nacional de
Transmision Electrica S.A.
7.875%, due 4/15/11........... 100,000 113,755
-----------
331,482
-----------
DENMARK (1.6%)
Danske Kredit
Realkreditaktieselskab 7.00%,
due 4/1/32.................... DK 330,385 54,508
Realkredit Danmark A/S
6.00%, due 10/1/29............ 2,914,334 463,273
-----------
517,781
-----------
FRANCE (1.3%)
Veolia Environnement
Series 1, Tranche 1
5.875%, due 6/27/08........... E 200,000 247,747
Vivendi Universal S.A.
6.25%, due 7/15/08 (c)........ 150,000 183,094
-----------
430,841
-----------
GERMANY (3.3%)
Kreditanstalt Fuer
Wiederaufbauf Series INTL
4.75%, due 8/18/06............ E 875,000 1,060,099
-----------
MAURITIUS (0.5%)
PT Medco Energi Internasional
8.75%, due 5/22/10 (c)........ $ 175,000 177,625
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
MEXICO (0.5%)
Grupo Transportacion
Ferroviaria Mexicana, S.A. de
C.V.
12.50%, due 6/15/12........... $ 90,000 $ 99,000
Vitro S.A. de C.V.
11.75%, due 11/1/13 (c)....... 75,000 72,562
-----------
171,562
-----------
NETHERLANDS (3.4%)
Allianz Finance II BV
6.125%, due 5/31/22........... E 100,000 122,679
Deutsche Post Finance BV
5.125%, due 10/4/12........... 250,000 298,130
Mobifon Holdings BV
12.50%, due 7/31/10 (c)....... $ 80,000 88,200
RWE Finance BV
6.50%, due 4/20/21............ L 225,000 405,357
Sealed Air Finance LLC BV
5.625%, due 7/19/06........... E 150,000 179,606
-----------
1,093,972
-----------
RUSSIA (1.6%)
Gazprom OAO
9.625%, due 3/1/13 (c)........ $ 260,000 282,100
VimpelCom BV
10.45%, due 4/26/05 (c)....... 110,000 116,187
Wimm-Bill-Dann Foods OJSC
8.50%, due 5/21/08 (c)........ 100,000 102,250
-----------
500,537
-----------
SINGAPORE (0.5%)
Singapore Powerassets Ltd.
5.00%, due 10/22/13 (c)....... $ 150,000 149,531
-----------
SUPRANATIONAL (1.8%)
European Investment Bank
2.125%, due 9/20/07........... Y 60,000,000 579,026
-----------
SWEDEN (2.5%)
Stadshypotek AB
Series 1564
6.00%, due 3/15/06............ SK 6,000,000 802,446
-----------
UNITED STATES (3.6%)
AT&T Corp.
6.00%, due 11/21/06 (c)....... E 100,000 124,097
Citigroup, Inc.
0.80%, due 10/30/08........... Y 30,000,000 271,824
Fort James Corp.
4.75%, due 6/29/04............ E 100,000 115,959
Goldman Sachs Group, Inc. (The)
5.125%, due 4/24/13........... E 230,000 273,312
McDonald's Corp.
5.125%, due 5/23/06........... 195,000 235,928
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
CORPORATE BONDS (CONTINUED)
UNITED STATES (CONTINUED)
wMorgan Stanley
5.375%, due 11/14/13.......... L 85,000 $ 139,314
-----------
1,160,434
-----------
Total Corporate Bonds
(Cost $7,156,646)............. 8,170,474
-----------
GOVERNMENTS & FEDERAL AGENCIES (68.2%)
AUSTRALIA (1.5%)
Australian Government
Series 808
8.75%, due 8/15/08............ A$ 590,000 471,636
-----------
AUSTRIA (1.0%)
Republic of Austria
Series 2
4.65%, due 1/15/18............ E 277,000 321,806
-----------
BELGIUM (2.5%)
Kingdom of Belgium
Series 42
3.00%, due 9/28/08............ E 425,000 480,132
Series 36
5.00%, due 9/28/11............ 270,000 331,773
-----------
811,905
-----------
BRAZIL (1.6%)
Republic of Brazil
Series 11BR
4.75%, due 4/10/07............ Y 30,000,000 257,549
9.25%, due 10/22/10........... $ 100,000 99,700
11.00%, due 1/11/12........... 140,000 149,800
-----------
507,049
-----------
CANADA (6.4%)
Canadian Government
4.25%, due 9/1/08............. C$ 405,000 310,130
5.25%, due 6/1/12............. 1,275,000 1,001,940
5.75%, due 6/1/33............. 385,000 310,015
5.75%, due 9/1/06............. 530,000 427,297
-----------
2,049,382
-----------
DENMARK (3.0%)
Kingdom of Denmark
5.00%, due 11/15/13........... DK 6,000,000 976,089
-----------
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
EL SALVADOR (0.3%)
Republic of El Salvador
7.75%, due 1/24/23 (c)........ $ 100,000 $ 103,125
-----------
FRANCE (4.6%)
French Treasury Note
4.75%, due 7/12/07............ E 500,000 609,845
Government of France
5.25%, due 4/25/08............ 700,000 869,998
-----------
1,479,843
-----------
GERMANY (19.0%)
Republic of Deutschland
Series 99
3.75%, due 1/4/09............. E 1,490,000 1,740,308
Series 01
5.00%, due 7/4/11............. 1,130,000 1,389,063
Series 98
5.25%, due 1/4/08............. 1,367,000 1,695,451
Series 99
5.375%, due 1/4/10............ 500,000 628,383
Series 00
6.25%, due 1/4/30............. 500,000 687,626
-----------
6,140,831
-----------
GREECE (2.4%)
Hellenic Republic
5.90%, due 10/22/22........... E 607,000 779,652
-----------
ITALY (7.5%)
Buoni Poliennali del Tesero
5.50%, due 11/1/10............ E 1,645,000 2,078,353
Republic of Italy
3.80%, due 3/27/08............ Y 33,000,000 341,467
-----------
2,419,820
-----------
JAPAN (1.9%)
Development Bank of Japan
1.05%, due 6/20/23............ Y 41,000,000 320,431
Japan Finance Corp. for
Municipal Enterprises
1.55%, due 2/21/12............ 30,000,000 278,887
-----------
599,318
-----------
MEXICO (0.5%)
United Mexican States
7.50%, due 1/14/12............ $ 150,000 167,625
-----------
NETHERLANDS (1.8%)
Netherlands Government
3.75%, due 7/15/09............ E 500,000 580,785
-----------
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
9
-
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay International Bond Fund
10
- -
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
GOVERNMENTS & FEDERAL AGENCIES (CONTINUED)
SOUTH AFRICA (1.6%)
Republic of South Africa
Series 3, Tranche 1
7.00%, due 4/10/08............ E 400,000 $ 509,640
-----------
SPAIN (3.3%)
Bonos Y Obligacion del Estado
4.50%, due 7/30/04............ E 250,000 295,356
5.15%, due 7/30/09............ 612,000 760,744
-----------
1,056,100
-----------
SWEDEN (2.0%)
Swedish Government
Series 1043
5.00%, due 1/28/09............ SK 4,625,000 607,943
Series 1045
5.25%, due 3/15/11............ 350,000 46,289
-----------
654,232
-----------
TURKEY (0.7%)
Republic of Turkey
9.875%, due 3/19/08........... $ 200,000 224,000
-----------
UKRAINE (0.6%)
Ukraine Government
7.65%, due 6/11/13 (c)........ $ 200,000 198,250
-----------
UNITED KINGDOM (5.3%)
United Kingdom Treasury Bond
5.00%, due 3/7/12............. L 366,000 619,468
5.75%, due 12/7/09............ 160,000 282,345
7.50%, due 12/7/06............ 300,000 548,284
8.50%, due 12/7/05............ 145,000 265,080
-----------
1,715,177
-----------
VENEZUELA (0.7%)
Republic of Venezuela
13.625%, due 8/15/18.......... $ 200,000 218,000
-----------
Total Governments & Federal
Agencies (Cost $20,084,795)... 21,984,265
-----------
LOAN PARTICIPATION (0.6%)
ALGERIA (0.6%)
Republic of Algeria
Term Loan, Tranch 3 Series YEN
0.9375%, due 3/4/10
(d)(e)(f)..................... Y 23,947,370 201,495
-----------
Total Loan Participation
(Cost $158,938)............... 201,495
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
YANKEE BOND (0.3%) (G)
MEXICO (0.3%)
Grupo Transportacion
Ferroviaria Mexicana, S.A. de
C.V.
11.75%, due 6/15/09........... $ 100,000 $ 100,750
-----------
Total Yankee Bond
(Cost $96,643)................ 100,750
-----------
Total Long-Term Bonds
(Cost $27,497,022)............ 30,456,984
-----------
<Caption>
NOTIONAL
AMOUNT
------------
PURCHASED OPTION (0.0%) (B)
UNITED STATES (0.0%) (B)
Japanese Yen Call/U.S. Dollar
Put Strike Price @ $110
Expire 1/7/04 (a)(h).......... $ 4,000,000 20,000
-----------
Total Purchased Option
(Cost $32,800)................ 20,000
-----------
Total Investments
(Cost $27,529,822) (i)........ 94.4% 30,476,984(j)
Cash and Other Assets,
Less Liabilities.............. 5.6 1,791,305
------------ -----------
Net Assets..................... 100.0% $32,268,289
============ ===========
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Floating rate. Rate shown is the rate in effect at
October 31, 2003.
(e) Restricted security.
(f) Illiquid security.
(g) Yankee Bond--Dollar denominated bond issued in the
United States by a foreign bank or corporation.
(h) Fair valued security.
(i) The cost for federal income tax purposes is $27,545,617.
(j) At October 31, 2003 net unrealized appreciation for
securities was $2,931,367, based on cost for federal
income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which
there was an excess of market value over cost of
$3,026,088, and aggregate gross unrealized depreciation
for all investments on which there was an excess of cost
over market value of $94,721.
The following abbreviations are used in the above portfolio:
A$--Australian Dollar
C$--Canadian Dollar
DK--Danish Krone
E--Euro
Y--Japanese Yen
L--Pound Sterling
SK--Swedish Krona
$--U.S. Dollar
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
-
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$27,529,822).............................................. $30,476,984
Cash........................................................ 1,022,819
Cash denominated in foreign currencies (identified cost
$164,633)................................................. 163,551
Receivables:
Investment securities sold................................ 1,075,414
Dividends and interest.................................... 673,344
Fund shares sold.......................................... 347,290
Manager................................................... 3,759
Unrealized appreciation on foreign currency forward
contracts................................................. 151,638
Other assets................................................ 9,407
-----------
Total assets........................................ 33,924,206
-----------
LIABILITIES:
Payables:
Investment securities purchased........................... 1,079,799
Transfer agent............................................ 26,474
Fund shares redeemed...................................... 20,423
NYLIFE Distributors....................................... 17,337
Custodian................................................. 3,509
Trustees.................................................. 372
Accrued expenses............................................ 67,689
Unrealized depreciation on foreign currency forward
contracts................................................. 405,717
Dividend payable............................................ 34,597
-----------
Total liabilities................................... 1,655,917
-----------
Net assets.................................................. $32,268,289
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 16,550
Class B................................................... 16,711
Class C................................................... 2,551
Additional paid-in capital.................................. 29,814,599
Accumulated undistributed net investment income............. 649,395
Accumulated net realized loss on investments and written
option transactions....................................... (954,846)
Net unrealized appreciation on investments.................. 2,947,162
Net unrealized depreciation on translation of other assets
and liabilities in foreign currencies and foreign currency
forward contracts......................................... (223,833)
-----------
Net assets.................................................. $32,268,289
===========
CLASS A
Net assets applicable to outstanding shares................. $14,956,620
===========
Shares of beneficial interest outstanding................... 1,655,022
===========
Net asset value per share outstanding....................... $ 9.04
Maximum sales charge (4.50% of offering price).............. 0.43
-----------
Maximum offering price per share outstanding................ $ 9.47
===========
CLASS B
Net assets applicable to outstanding shares................. $15,019,117
===========
Shares of beneficial interest outstanding................... 1,671,129
===========
Net asset value and offering price per share outstanding.... $ 8.99
===========
CLASS C
Net assets applicable to outstanding shares................. $ 2,292,552
===========
Shares of beneficial interest outstanding................... 255,072
===========
Net asset value and offering price per share outstanding.... $ 8.99
===========
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003 2002
----------- -----------
INVESTMENT INCOME:
Income:
Dividends................................................. $ 2,393 $ 3,084
Interest(a)............................................... 1,161,281 1,050,851
---------- ----------
Total income............................................ 1,163,674 1,053,935
---------- ----------
Expenses:
Manager................................................... 172,735 137,841
Transfer agent............................................ 129,951 127,247
Distribution--Class B..................................... 90,139 71,190
Distribution--Class C..................................... 9,886 2,578
Professional.............................................. 39,544 28,819
Service--Class A.......................................... 28,350 24,640
Service--Class B.......................................... 30,046 23,730
Service--Class C.......................................... 3,295 859
Registration.............................................. 28,840 26,793
Shareholder communication................................. 25,865 22,224
Custodian................................................. 16,723 10,195
Recordkeeping............................................. 11,072 12,000
Trustees.................................................. 3,720 4,638
Miscellaneous............................................. 29,986 30,328
---------- ----------
Total expenses before reimbursement..................... 620,152 523,082
Expense reimbursement by Manager............................ (100,631) (105,663)
---------- ----------
Net expenses............................................ 519,521 417,419
---------- ----------
Net investment income....................................... 644,153 636,516
---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN
OPTION AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions..................................... 811,079 25,341
Foreign currency transactions............................. 608,461 (362,948)
Written option transactions............................... 3,710 --
---------- ----------
Net realized gain (loss) on investments, written option and
foreign currency transactions............................. 1,423,250 (337,607)
---------- ----------
Net change in unrealized appreciation (depreciation) on:
Security transactions..................................... 505,637 3,077,060
Translation of other assets and liabilities in foreign
currencies and foreign currency forward contracts....... 72,170 (466,362)
---------- ----------
Net unrealized gain on investments and foreign currency
transactions.............................................. 577,807 2,610,698
---------- ----------
Net realized and unrealized gain on investments, written
option and foreign currency transactions.................. 2,001,057 2,273,091
---------- ----------
Net increase in net assets resulting from operations........ $2,645,210 $2,909,607
========== ==========
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
(a) Interest recorded net of foreign withholding taxes of $0 and
$2,157 for 2003 and 2002, respectively.
</Table>
12
- -
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
-
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ----------- -----------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 644,153 $ 636,516 $ 702,838
Net realized gain (loss) on investments, written option
and foreign currency transactions....................... 1,423,250 (337,607) (1,254,255)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency transactions........... 577,807 2,610,698 509,315
------------ ----------- -----------
Net increase (decrease) in net assets resulting from
operations.............................................. 2,645,210 2,909,607 (42,102)
------------ ----------- -----------
Dividends and distributions to shareholders:
From net investment income
Class A................................................. (408,805) (15,519) --
Class B................................................. (362,630) (12,207) --
Class C................................................. (41,303) (450) --
Return of capital
Class A................................................. -- (393,282) (816,346)
Class B................................................. -- (309,362) (529,563)
Class C................................................. -- (11,394) (16,977)
------------ ----------- -----------
Total dividends and distributions to shareholders..... (812,738) (742,214) (1,362,886)
------------ ----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 16,874,951 5,775,981 7,189,881
Class B................................................. 5,824,799 4,142,880 752,645
Class C................................................. 2,108,159 396,415 229,666
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 158,854 133,541 393,622
Class B................................................. 314,013 285,085 471,558
Class C................................................. 29,640 9,673 14,768
------------ ----------- -----------
25,310,416 10,743,575 9,052,140
Cost of shares redeemed:
Class A................................................. (14,317,905) (4,634,514) (13,591,627)
Class B................................................. (4,214,219) (1,661,666) (1,883,453)
Class C................................................. (476,818) (123,198) (212,895)
------------ ----------- -----------
Increase (decrease) in net assets derived from capital
share transactions.................................. 6,301,474 4,324,197 (6,635,835)
------------ ----------- -----------
Net increase (decrease) in net assets................. 8,133,946 6,491,590 (8,040,823)
NET ASSETS:
Beginning of period......................................... 24,134,343 17,642,753 25,683,576
------------ ----------- -----------
End of period............................................... $ 32,268,289 $24,134,343 $17,642,753
============ =========== ===========
Accumulated undistributed (distributions in excess of) net
investment income at end of period........................ $ 649,395 $ 49,959 $ (172,207)
============ =========== ===========
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
-------------------------------------------------------------------------
January 1,
2003
through Year ended December 31,
October 31, -----------------------------------------------------------
2003* 2002 2001 2000 1999 1998
----------- ------- ------- ------- ------- -------
Net asset value at beginning of period................ $ 8.47 $ 7.61 $ 8.02 $ 9.07 $ 10.57 $ 10.10
------- ------- ------- ------- ------- -------
Net investment income................................. 0.22(a) 0.29(a) 0.28(a)(d) 0.25(a) 0.36 0.54
Net realized and unrealized gain (loss) on
investments.......................................... 0.41 1.23 0.04(d) (0.05) (0.89) 0.58
Net realized and unrealized gain (loss) on foreign
currency transactions................................ 0.21 (0.33) (0.23) (0.71) (0.33) 0.02
------- ------- ------- ------- ------- -------
Total from investment operations...................... 0.84 1.19 0.09 (0.51) (0.86) 1.14
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income........................... (0.27) (0.01) -- -- (0.04) (0.58)
From net realized gain on investments................ -- -- -- -- (0.09) (0.09)
Return of capital.................................... -- (0.32) (0.50) (0.54) (0.51) --
------- ------- ------- ------- ------- -------
Total dividends and distributions..................... (0.27) (0.33) (0.50) (0.54) (0.64) (0.67)
------- ------- ------- ------- ------- -------
Net asset value at end of period...................... $ 9.04 $ 8.47 $ 7.61 $ 8.02 $ 9.07 $ 10.57
======= ======= ======= ======= ======= =======
Total investment return (b)........................... 10.01% 15.97% 1.15% (5.50%) (8.22%) 11.61%
Ratios (to average net assets)/
Supplemental Data:
Net investment income.............................. 3.02%+ 3.61% 3.51%(d) 3.17% 3.80% 5.17%
Net expenses....................................... 1.70%+ 1.75% 1.88% 1.86% 1.61% 1.59%
Expenses (before waiver)........................... 2.11%+ 2.28% 2.18% 2.16% 1.91% 1.89%
Portfolio turnover rate............................... 75% 54% 179% 197% 281% 287%
Net assets at end of period (in 000's)................ $14,957 $11,343 $ 9,006 $15,907 $12,326 $15,542
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
(c) Less than one thousand.
(d) As required, effective January 1, 2001, the Fund has adopted
the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt
securities. The effect of this change for the year ended
December 31, 2001 is shown below. Per share ratios and
supplemental data for periods prior to January 1, 2001 have
not been restated to reflect this change in presentation.
</Table>
<Table>
<Caption>
CLASS A CLASS B CLASS C
------- ------- -------
Decrease net investment income.............................. ($0.03) ($0.03) ($0.03)
Increase net realized and unrealized gains and losses....... 0.03 0.03 0.03
Decrease ratio of net investment income..................... (0.35%) (0.35%) (0.35%)
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
<Table>
<Caption>
Class B Class C
------------------------------------------------------------------------- -----------
January 1, January 1,
2003 2003
through Year ended December 31, through
October 31, ----------------------------------------------------------- October 31,
2003* 2002 2001 2000 1999 1998 2003*
----------- ------- ------- ------- ------- ------- -----------
$ 8.43 $ 7.58 $ 8.01 $ 9.08 $ 10.59 $ 10.12 $ 8.43
------- ------- ------- ------- ------- ------- -------
0.17(a) 0.22(a) 0.22(a)(d) 0.21(a) 0.29 0.46 0.17(a)
0.40 1.21 0.04(d) (0.05) (0.90) 0.58 0.40
0.21 (0.32) (0.22) (0.73) (0.33) 0.02 0.21
------- ------- ------- ------- ------- ------- -------
0.78 1.11 0.04 (0.57) (0.94) 1.06 0.78
------- ------- ------- ------- ------- ------- -------
(0.22) (0.01) -- -- (0.03) (0.50) (0.22)
-- -- -- -- (0.09) (0.09) --
-- (0.25) (0.47) (0.50) (0.45) -- --
------- ------- ------- ------- ------- ------- -------
(0.22) (0.26) (0.47) (0.50) (0.57) (0.59) (0.22)
------- ------- ------- ------- ------- ------- -------
$ 8.99 $ 8.43 $ 7.58 $ 8.01 $ 9.08 $ 10.59 $ 8.99
======= ======= ======= ======= ======= ======= =======
9.33% 15.01% 0.48% (6.22%) (8.94%) 10.79% 9.33%
2.27%+ 2.86% 2.76%(d) 2.42% 3.05% 4.42% 2.27%+
2.45%+ 2.50% 2.63% 2.61% 2.36% 2.34% 2.45%+
2.86%+ 3.03% 2.93% 2.91% 2.66% 2.64% 2.86%+
75% 54% 179% 197% 281% 287% 75%
$15,019 $12,219 $ 8,388 $ 9,546 $13,955 $18,797 $ 2,293
<Caption>
Class C
-----------------------------------------------------------------
September 1**
Year ended December 31, through
------------------------------------------------- December 31,
2002 2001 2000 1999 1998
------- ------- ------- ------- -------------
$ 7.58 $ 8.01 $ 9.08 $ 10.59 $ 10.13
------- ------- ------- ------- -------
0.22(a) 0.22(a)(d) 0.21(a) 0.29 0.16
1.21 0.04(d) (0.05) (0.90) 0.53
(0.32) (0.22) (0.73) (0.33) 0.02
------- ------- ------- ------- -------
1.11 0.04 (0.57) (0.94) 0.71
------- ------- ------- ------- -------
(0.01) -- -- (0.03) (0.16)
-- -- -- (0.09) (0.09)
(0.25) (0.47) (0.50) (0.45) --
------- ------- ------- ------- -------
(0.26) (0.47) (0.50) (0.57) (0.25)
------- ------- ------- ------- -------
$ 8.43 $ 7.58 $ 8.01 $ 9.08 $ 10.59
======= ======= ======= ======= =======
15.01% 0.48% (6.22%) (8.94%) 7.05%
2.86% 2.76%(d) 2.42% 3.05% 4.42%+
2.50% 2.63% 2.61% 2.36% 2.34%+
3.03% 2.93% 2.91% 2.66% 2.64%+
54% 179% 197% 281% 287%
$ 573 $ 249 $ 231 $ 48 $ --(c)
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay International Bond Fund
16
- -
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
International Bond Fund (the "Fund").
The Fund currently offers three classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and within one year of purchase of Class C
shares. Distribution of Class B shares and Class C shares commenced on September
13, 1994 and September 1, 1998, respectively. Class A shares, Class B shares and
Class C shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares and Class C shares are subject to higher distribution fee rates.
Each class of shares bears distribution and/or service fee payments under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek to provide a competitive overall
return commensurate with an acceptable level of risk by investing primarily in a
portfolio of non-U.S. (primarily government) debt securities. MainStay
International Bond Fund is "non-diversified," which means that it may invest a
greater percentage of its assets than diversified funds in a particular issuer.
This may make it more susceptible than diversified funds to risks associated
with an individual issuer, and to single economic, political or regulatory
occurrences.
The Fund invests in foreign securities which carry certain risks in addition to
the usual risks inherent in domestic instruments. These risks include those
resulting from currency fluctuations, future adverse political and economic
developments and possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions. These risks are likely to be greater
in emerging markets than in developed markets. The ability of issuers of debt
securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
The Fund invests in high yield securities (sometimes called "junk bonds"), which
are generally considered speculative because they present a greater risk of
loss, including default, than higher quality
Notes to Financial Statements
17
-
debt securities. These securities pay a premium--a high interest rate or
yield--because of the increased risk of loss. These securities can also be
subject to greater price volatility.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent selected by the Fund's Manager, whose prices reflect broker/dealer
supplied valuations and electronic data processing techniques if those prices
are deemed by the Fund's Manager to be representative of market values at the
regular close of business of the New York Stock Exchange. Temporary cash
investments acquired over 60 days to maturity are valued using the latest bid
prices or using valuations based on a matrix system (which considers such
factors as security prices, yields, maturities, and ratings), both as furnished
by independent pricing services. Other temporary cash investments are valued at
amortized cost, which approximates market value. Securities for which market
quotations are not readily available are valued by methods deemed by the Board
of Trustees to represent fair value. Foreign currency forward contracts are
valued at their fair market values determined on the basis of the mean between
the last current bid and asked prices based on dealer or exchange quotations.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. Should the Manager or Subadvisor conclude that such events
may have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund, adjust the value of the local price to reflect the impact on the price of
such securities as a result or such events.
(B) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward 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 may enter into foreign currency
forward contracts primarily to hedge its foreign currency denominated
investments and receivables and payables against adverse movements in future
foreign exchange rates or to try to enhance the Fund's returns.
The use of foreign currency 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
MainStay International Bond Fund
18
- -
possible movements in the foreign exchange rates underlying these instruments.
The unrealized appreciation on forward contracts reflects the Fund's exposure at
period end to credit loss in the event of a counterparty's failure to perform
its obligations.
Foreign currency forward contracts open at October 31, 2003:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
SOLD PURCHASED (DEPRECIATION)
--------------- ------------- --------------
Foreign Currency Sale Contracts
New Zealand Dollar vs. U.S. Dollar, expiring
11/10/03......................................... NZ$ 1,533,000 $ 878,409 $ (61,190)
Pound Sterling vs. U.S. Dollar, expiring
11/14/03......................................... L 685,000 $ 1,092,712 (68,446)
Australian Dollar vs. U.S. Dollar, expiring
11/17/03......................................... A$ 423,000 $ 298,215 (1,051)
Swiss Franc vs. U.S. Dollar, expiring 11/25/03..... CF 2,112,000 $ 1,545,441 (37,273)
Euro vs. U.S. Dollar, expiring 12/16/03............ E 1,971,000 $ 2,308,041 20,289
Euro vs. U.S. Dollar, expiring 12/16/03............ E 1,371,653 $ 1,521,948 (70,139)
Euro vs. U.S. Dollar, expiring 12/19/03............ E 3,745,000 $ 4,266,379 (80,075)
Canadian Dollar vs. U.S. Dollar, expiring 1/8/04... C$ 2,630,000 $ 1,905,801 (80,738)
Japanese Yen vs. U.S. Dollar, expiring 1/23/04..... Y 29,905,000 $ 276,898 4,123
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT
PURCHASED SOLD
--------------- -------------
Foreign Currency Buy Contracts
New Zealand Dollar vs. U.S. Dollar, expiring
11/10/03......................................... NZ$ 1,533,000 $ 935,130 $ 4,469
Pound Sterling vs. U.S. Dollar, expiring
11/14/03......................................... L 319,032 $ 509,079 31,719
Australian Dollar vs. U.S. Dollar, expiring
11/17/03......................................... A$ 423,000 $ 288,486 10,780
Euro vs. U.S. Dollar, expiring 12/16/03............ E 1,371,653 $ 1,519,964 72,122
Euro vs. U.S. Dollar, expiring 12/16/03............ E 328,130 $ 383,676 (2,814)
Euro vs. U.S. Dollar, expiring 12/19/03............ E 600,000 $ 688,548 7,813
Euro vs. U.S. Dollar, expiring 12/19/03............ E 271,000 $ 316,528 (2,005)
Canadian Dollar vs. U.S. Dollar, expiring 1/8/04... C$ 602,716 $ 454,931 323
Japanese Yen vs. U.S. Dollar, expiring 1/23/04..... Y 29,905,000 $ 274,761 (1,986)
---------
Net unrealized depreciation on foreign currency forward contracts................... $(254,079)
=========
</Table>
(C) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted to
reflect the current value of the options written. Premiums received from writing
options which expire are treated as realized gains. Premiums received from
writing options which are exercised or are cancelled in closing purchase
transactions are added to the proceeds or netted against the amount paid on the
transaction to determine the realized gain or loss. By writing a covered call
option, a Fund foregoes in exchange for the premium the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security or foreign currency increase. By writing a covered put option, a Fund,
in exchange for the premium, accepts the
Notes to Financial Statements (continued)
19
-
risk of a decline in the market value of the underlying security or foreign
currency below the exercise price. A call option may be covered by the call
writer's owning the underlying security throughout the option period. A call
option may also be covered by the call writer's maintaining liquid assets valued
at greater than the exercise price of the call written, in a segregated account
with its custodian.
The Fund may purchase call and put options on its portfolio securities or
foreign currencies. The Fund may purchase call options to protect against an
increase in the price of the security or foreign currency it anticipates
purchasing or to seek to enhance returns. The Fund may purchase put options on
its securities or foreign currencies to protect against a decline in the value
of the security or foreign currency or to close out covered written put
positions. Risks may arise from an imperfect correlation between the change in
market value of the securities or foreign currencies held by the Fund and the
prices of options relating to the securities or foreign currencies purchased or
sold by the Fund and from the possible lack of a liquid secondary market for an
option. The maximum exposure to loss for any purchased option is limited to the
premium initially paid for the option.
Written option activity for the period ended October 31, 2003 was as follows:
<Table>
<Caption>
NOTIONAL
AMOUNT PREMIUM
-------- -------
Options outstanding at December 31, 2002.......... -- $ --
Options--written.................................. (1,325) (4,505)
Options--buybacks................................. 1,325 4,505
------ -------
Options outstanding at October 31, 2003........... -- $ --
====== =======
</Table>
(D) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933 (the "1933 Act").
The Fund does not have the right to demand that such securities be registered.
Disposal of these securities may involve time-consuming negotiations and
expense, and prompt sale at an acceptable price may be difficult.
Restricted security held at October 31, 2003:
<Table>
<Caption>
PERCENT
DATE OF PRINCIPAL 10/31/03 OF
SECURITY ACQUISITION AMOUNT COST VALUE NET ASSETS
-------- ----------- ----------- -------- ---------- ----------
Republic of Algeria
Term Loan, Tranche 3
Series YEN
0.9375%, due 3/4/10................. 2/9/01 Y23,947,370 $158,938 $201,495 0.6%
======== ======== ===
</Table>
Y--Japanese Yen
MainStay International Bond Fund
20
- -
(E) LOAN PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan commitments
and loan participations. Loan commitments and loan participations are agreements
to make money available to a borrower in a specified amount, at a specified rate
and within a specified time. The Fund records an investment when the borrower
withdraws money and records interest as earned. The unfunded amounts are
recorded in memorandum accounts. 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").
(F) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated undistributed net
realized gain loss on investments, and accumulated undistributed net realized
loss on foreign currency transactions arising from permanent differences; net
assets at October 31, 2003, are not effected.
<Table>
<Caption>
ACCUMULATED
ACCUMULATED NET REALIZED
ACCUMULATED UNDISTRIBUTED LOSS
UNDISTRIBUTED NET REALIZED ON FOREIGN
NET INVESTMENT LOSS ON CURRENCY
INCOME INVESTMENTS TRANSACTIONS
- -------------- ------------- ------------
$768,021 $(159,560) $(608,461)
</Table>
The reclassifications for the Fund are primarily due to foreign currency gain
(loss).
(G) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends monthly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
(H) 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 as earned. Discounts and premiums on securities, other than short-
Notes to Financial Statements (continued)
21
-
term securities, purchased for the Fund are accreted and amortized,
respectively, on the constant yield method over the life of the respective
securities or, in the case of a callable security, over the period to the first
date of call. Discounts and premiums on short-term securities are accreted and
amortized, respectively, on the straight line method.
The investment income, and realized and unrealized gains and losses on
investments of the Fund are allocated to separate classes of shares based upon
their relative net assets on the date the income is earned or realized and
unrealized gains and losses are incurred.
(I) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(J) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
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 are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented. Accordingly, gains and losses from foreign currency
transactions are included in the reported net realized gain (loss) on investment
transactions.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains and 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 foreign currency denominated
assets and liabilities, other than investments, are reflected in unrealized
foreign exchange gains or losses at period end exchange rates.
MainStay International Bond Fund
22
- -
Foreign currency held at October 31, 2003:
<Table>
<Caption>
CURRENCY COST VALUE
- ---------------------------------- -------- --------
Australian Dollar A$ 501 $ 343 $ 356
Danish Krone DK 680,605 107,291 106,435
Euro E 48,638 56,784 56,541
New Zealand Dollar NZ$ 1 1 1
Pound Sterling L 124 206 210
Swedish Krona SK 60 8 8
-------- --------
$164,633 $163,551
======== ========
</Table>
(K) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.70% of the Fund's
average daily net assets. Through March 11, 2002, the Manager had agreed to
waive a portion of its fee, 0.30% of the Fund's average daily net assets, until
such time as the Fund reached $50 million in net assets. Effective March 12,
2002, the Manager voluntarily agreed to reimburse the expenses of the Fund to
the extent that operating expenses would exceed on an annualized basis 1.70%,
2.45% and 2.45% of the average daily net assets of the Class A, Class B and
Class C shares, respectively. For the ten months ended October 31, 2003 and year
ended December 31, 2002, the Manager earned from the Fund $172,735 and $137,841,
respectively. For the ten months ended October 31, 2003 and year ended December
31, 2002, the Manager reimbursed the Fund $100,631 and $105,663, respectively.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and
MacKay-Shields, the Manager paid the Subadvisor a monthly fee at an annual rate
of 0.45% of the average daily net assets of the Fund. To the
Notes to Financial Statements (continued)
23
-
extent that the Manager has agreed to reimburse Fund expenses, the Subadvisor
has voluntarily agreed to do so proportionately.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC. (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans ("the Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The distribution plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $918 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $99, $10,698 and $331, respectively, for the ten months ended October
31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expense accrued for the ten months ended October 31,
2003 and year ended December 31, 2002 amounted to $129,951 and $127,247,
respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the
MainStay International Bond Fund
24
- -
Operations Committee each receive an additional $1,000 for each meeting of the
Brokerage Committee and Operations Committee attended, respectively. The Trust
allocates trustees fees in proportion to the net assets of the respective Funds.
Thus the International Bond Fund only pays a portion of the fees identified
above.
(F) CAPITAL. At October 31, 2003, NYLIFE Distributors held shares of Class A
with a value of $7,099,461 which represents 47.5% of the Class A net assets and
22.0% of total fund net assets at period end.
(G) OTHER. Fees for the cost of legal services, included in Professional fees
as shown in the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $640 for the ten months ended October
31, 2003 and $403 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $11,072 for the ten months ended October
31, 2003 and $12,000 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED NET ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
INVESTMENT INCOME AND OTHER LOSSES APPRECIATION LOSS
- ------------------ ------------------- ------------ -----------------
$395,316 $(939,051) $2,961,613 $2,417,878
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals and mark-to-market of foreign currency
forward transactions.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $939,051 were available as shown in the table below, to the extent provided
by the regulations, to offset future realized gains of the Fund through the
years indicated. 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.
Notes to Financial Statements (continued)
25
-
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
- ------------------------------------------------------------ -------
2008................................................... $601
2009................................................... 338
----
$939
====
</Table>
The Fund utilized $639,537 of capital loss carryforward during the ten months
ended October 31, 2003.
The tax character of distributions paid during the ten months ended October 31,
2003 and years ended December 31, 2002 and 2001, shown in the Statement of
Changes in Net Assets, was as follows:
<Table>
<Caption>
2003 2002 2001
--------- --------- -----------
Distributions paid from:
Ordinary Income $812,738 $ 28,176 $ --
Return of Capital -- 714,038 1,362,886
-------- -------- ----------
$812,738 $742,214 $1,362,886
======== ======== ==========
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the period ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $26,169 and $21,143, respectively.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
MainStay International Bond Fund
26
- -
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
JANUARY 1, THROUGH ---------------------------------------------------------
OCTOBER 3, 2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold................ 1,909 664 237 731 518 50 910 96 30
Shares issued in
reinvestment of dividends
and distributions........ 18 35 3 17 36 1 50 61 2
------ ---- --- ---- ---- --- ------ ---- ---
1,927 699 240 748 554 51 960 157 32
Shares redeemed............ (1,612) (477) 53 (591) (212) (16) (1,760) (241) (28)
------ ---- --- ---- ---- --- ------ ---- ---
Net increase (decrease).... 315 222 187 157 342 35 (800) (84) 4
====== ==== === ==== ==== === ====== ==== ===
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
27
-
Report of Independent Auditors
To the Trustees of the MainStay Funds and Shareholders of
MainStay International Bond Fund
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 funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
28
- -
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
29
-
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
30
- -
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
31
-
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[NEW YORK LIFE INV. MGT. LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC All rights reserved. MSIB11-12/03
NYLIM-A04341 09
[RECYCLE.LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
International Bond Fund
ANNUAL REPORT
OCTOBER 31, 2003
[NEW YORK LIFE INV. MGT. LOGO]
Table of Contents
<Table>
President's Letter 2
$10,000 Invested in MainStay Government Fund
versus Lehman Brothers(R) Government Bond
Index and Inflation--Class A, Class B, and
Class C Shares 3
Portfolio Management Discussion and Analysis 4
Year-by-Year and 10-Month Performance 5
Portfolio of Investments 8
Financial Statements 11
Notes to Financial Statements 16
Report of Independent Auditors 23
Trustees and Officers 24
The MainStay(R) Funds 27
</Table>
2
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
3
-
$10,000 Invested in MainStay Government Fund versus Lehman Brothers(R)
Government Bond Index and Inflation
CLASS A SHARES Total Returns with Sales Charges: 1 Year -2.66%, 5 Years 4.15%,
10 Years 5.20%
<Table>
<Caption>
MAINSTAY GOVERNMENT LEHMAN BROTHERS
FUND GOVERNMENT BOND INDEX1 INFLATION (CPI)2
------------------- ---------------------- ----------------
10/31/93 9550.00 10000.00 10000.00
10/31/94 9233.00 9553.00 10261.00
10/31/95 10478.00 11023.00 10543.00
10/31/96 10910.00 11586.00 10865.00
10/31/97 11788.00 12590.00 11092.00
10/31/98 12938.00 14010.00 11257.00
10/31/99 12715.00 13841.00 11545.00
10/31/00 13631.00 14953.00 11944.00
10/31/01 15560.00 17208.00 12198.00
10/31/02 16292.00 18310.00 12452.00
10/31/03 16605.00 18842.00 12706.00
</Table>
CLASS B AND CLASS C SHARES
Class B Total Returns with Sales Charges: 1 Year -3.84%, 5 Years 3.98%, 10 Years
5.03%
Class C Total Returns with Sales Charges: 1 Year 0.07%, 5 Years 4.32%, 10 Years
5.03%
<Table>
<Caption>
MAINSTAY GOVERNMENT LEHMAN BROTHERS
FUND GOVERNMENT BOND INDEX1 INFLATION (CPI)2
------------------- ---------------------- ----------------
10/31/93 10000.00 10000.00 10000.00
10/31/94 9668.00 9553.00 10261.00
10/31/95 10918.00 11023.00 10543.00
10/31/96 11301.00 11586.00 10865.00
10/31/97 12141.00 12590.00 11092.00
10/31/98 13222.00 14010.00 11257.00
10/31/99 12891.00 13841.00 11545.00
10/31/00 13725.00 14953.00 11944.00
10/31/01 15554.00 17208.00 12198.00
10/31/02 16164.00 18310.00 12452.00
10/31/03 16334.00 18842.00 12706.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT
WWW.MAINSTAYFUNDS.COM. Performance tables and graphs do not reflect the
deduction of taxes that a shareholder would pay on distributions or Fund-share
redemptions. Total returns reflect change in share price, reinvestment of
dividend and capital gain distributions, and maximum applicable sales charges
explained in this paragraph. The graphs assume an initial investment of $10,000
and reflect deduction of all sales charges that would have applied for the
period of investment. Class A share performance reflects the effect of the
maximum 4.5% initial sales charge and includes the historical performance of the
Class B shares for periods from the Fund's inception on 5/1/86 through 12/31/94.
Performance figures for the two classes vary after 12/31/94, based on
differences in their sales charges and expense structures. Class C share
performance includes the historical performance of the Class B shares for
periods from the Fund's inception on 5/1/86 through 8/31/98. Class B shares
would be subject to a contingent deferred sales charge (CDSC) of up to 5% if
redeemed within the first six years of purchase, and Class C shares would be
subject to a CDSC of 1% if redeemed within one year of purchase.
1. The Lehman Brothers(R) Government Bond Index is an unmanaged index comprised
of all publicly issued, nonconvertible, domestic debt of the U.S. government
or any of its agencies, quasi-federal corporations, or corporate debt
guaranteed by the U.S. government. Results assume reinvestment of all income
and capital gains. An investment cannot be made directly into an index.
2. Inflation is measured 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. The rate of inflation does not represent an investment
return.
4
- -------
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 3 for more information about the Lehman Brothers
Government Bond Index.
Portfolio Management Discussion and Analysis
As the year 2003 got underway, economic growth was tepid, with consumer and
government spending buoying the economy, while business spending was anemic at
best. During the first half of 2003, the virtual absence of three key economic
drivers--business confidence, capital spending, and hiring--again left consumers
to pick up the slack. With interest rates falling, many homeowners moved to
refinance their mortgages and the "found money" helped to prop up the economy.
On June 25, 2003, the Federal Reserve lowered the targeted federal funds rate by
25 basis points to 1.0%, the lowest level in four decades.
In the first four months of 2003, turbulence in the Treasury market echoed
conflicting viewpoints regarding the economy, geopolitical tensions, falling
energy prices, a weaker dollar, and accommodative monetary and fiscal policies.
As the year progressed, the Federal Reserve's concerns over the threat of
deflation triggered a dramatic Treasury rally. By mid-June, 10-year notes
touched an exceedingly low yield of 3.1%. Shortly thereafter, the bond market
reversed course amid investor disappointment over the size of the Fed's June
easing move in the face of perceived deflationary risk. Ten-year Treasuries rose
to approximately 4.5% by early September, before falling slightly when mixed
economic news left the outlook uncertain. October's economic data--including an
unusually high advance estimate for third-quarter real GDP growth--was more
upbeat, and yields moved higher as the 10-month reporting period came to a
close.
Aside from Treasuries, the dominant theme in the bond market was a renewed
investor appetite for risk. Many investors turned risk averse in 2002 in the
midst of an uncertain stock market, a sluggish economy, and a series of
corporate scandals. In this context, gloomy assessments of the durability of
revenue streams led investors to reevaluate corporate-bond risk, and prices for
corporate securities declined accordingly. In 2003, however, the economic
picture brightened and corporate-bond prices rallied sharply, especially among
lower-rated securities. Investors were drawn to the higher yields available from
corporate bonds as government yields remained relatively low.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Government Fund returned
0.50% for Class A shares and -0.25% for Class B and Class C shares, excluding
all sales charges. Class A shares outperformed and Class B and Class C shares
underperformed the 0.31% return for the average Lipper(1) general U.S.
government fund over the same period. All share classes underperformed the 1.34%
return of the Lehman Brothers(R) Government Bond Index(2) for the 10 months
ended October 31, 2003.
5
-
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
<Table>
<Caption>
PERIOD-END TOTAL RETURN %
- ---------- --------------
12/94 -2.85
12/95 16.38
12/96 1.97
12/97 9.12
12/98 8.32
12/99 -2.81
12/00 12.20
12/01 6.33
12/02 9.75
10/03 0.50
</Table>
CLASS B AND CLASS C SHARES
<Table>
<Caption>
PERIOD-END TOTAL RETURN %
- ---------- --------------
12/94 -2.85
12/95 15.69
12/96 1.25
12/97 8.54
12/98 7.52
12/99 -3.60
12/00 11.49
12/01 5.54
12/02 8.94
10/03 -0.25
</Table>
CORE POSITIONING
We invest the Fund's assets with a long-term strategy that emphasizes sector and
issue selection as the main sources of total return. In particular, we seek to
identify securities that are mispriced relative to comparable issues, hoping to
see gains as prices realign. We also focus on sectors where the yield advantage
to Treasuries is expected to narrow. Finally, we seek to identify high-quality,
higher-yielding alternatives to Treasuries that present favorable risk-reward
characteristics. During the period, we sought an average portfolio yield at
least 100 basis points higher than the yield of a duration-matched Treasury.
6
In keeping with our long-term strategy, changes to the Fund's sector allocation
were modest over the 10-month reporting period. The Fund's Treasury holdings
were reallocated to give the Fund a greater presence among securities with
intermediate-term maturities. This was accomplished by selling a small portion
of the Fund's Treasury holdings with maturities of 20 years or more and com
bining the proceeds with cash. This rebalancing served to temper the Fund's
earlier bias toward a flatter Treasury yield curve. When the yield curve
flattens, the spread between the yields of longer- and intermediate-maturity
issues narrows. We concluded that the yield curve was unlikely to flatten
because of the growing fiscal deficit and the gradual pace of economic recovery.
The Fund's exposure to agency debentures was trimmed to a neutral position. We
believed that the sector was approaching fair value and we were concerned that
the sector could weaken as the housing government-sponsored enterprises (Fannie
Mae and Freddie Mac) came under pressure from two sources. First, Congress was
calling for reforms to curb the risks of the agencies' investment portfolios;
and second, accounting irregularities at Freddie Mac raised questions about
earnings quality. Despite these events, we elected not to underweight the
sector. We believed that operating fundamentals were still strong and that
mortgage refinancings were driving revenues to record levels.
For a two-month period this summer, we underweighted residential mortgage-
backed securities with the view that the sector's call risk in a low
interest-rate environment might damage the sector's future returns. When
interest-rates rose in August, however, we reestablished the position using
mortgage-backed sec urities with 5.5% and 6.0% coupons that were trading at a
price slightly above market value. These mortgage-backed bonds are on the
prepayment cusp, and we expect them to perform well as interest-rates rise and
prepayments taper off.
We took profits on the Fund's Treasury inflation-protected securities (TIPS) and
also lightened the Fund's exposure to commercial mortgage-backed securities. In
our opinion, investors were not being properly compensated to bear the risk of a
downturn in commercial real estate.
DURATION STRATEGY
In terms of duration, we typically keep the Fund close to the median duration of
the Lipper general U.S. government securities fund universe, which is approx
imately 4.5 years. On several occasions, however, we tactically repositioned the
Fund's duration to take advantage of interest-rate trends. These tilts normally
shortened or lengthened the Fund's duration within a range of 5% short or long
relative to the Lipper universe.
These adjustments proved beneficial for the Fund, as we profited from a num ber
of our tactical duration shifts. For example, we shortened the Fund's duration
in August to take advantage of rising interest rates, then lengthened
7
-
the Fund's duration in September to capitalize on falling rates. Our decision to
lengthen the Fund's duration in June, however, detracted from performance when
Treasury yields turned sharply upward.
LOOKING AHEAD
At the end of October, the Fund was positioned in anticipation of rising Trea
sury yields, lower volatility, contained inflation, and a narrowing of the yield
spread between government-related sectors--such as agency debentures,
mortgage-backed bonds, and commercial mortgage-backed securities--and
Treasuries.
The Fund's modestly overweighted position in mortgage-backed securities reflects
the sector's attractive incremental yield. As mortgage refinancings slow,
limited new supply of mortgage debt should be met by solid investor demand. With
supply and demand in balance, we think that the sector's healthy yield advantage
relative to Treasuries will prove valuable should interest rates rise.
Our flexibility to invest a portion of the Fund in non-government-related
securities--namely, asset-backed securities and corporate bonds--enhanced
results during the reporting period. We believe these sectors should continue to
offer favorable total-return opportunities, though perhaps, not as strong as
during the first 10 months of 2003.
Whatever the economy or the markets may bring, the Fund will continue to seek a
high level of current income, consistent with safety of principal.
Gary Goodenough
Joseph Portera
Portfolio Managers
MacKay Shields LLC
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8
MainStay Government Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
------------------------------
LONG-TERM INVESTMENTS (98.2%)+
ASSET-BACKED SECURITIES (6.6%)
CONSUMER FINANCE (2.3%)
BMW Vehicle Owner Trust
Series 2003-A Class A3
1.94%, due 2/25/07........... $2,920,000 $ 2,923,989
Harley-Davidson Motorcycle
Trust
Series 2002-1 Class A2
4.50%, due 1/15/10........... 7,040,000 7,295,299
Volkswagen Auto Loan
Enhanced Trust
Series 2003-2 Class A3
2.27%, due 10/22/07.......... 1,830,000 1,830,805
-------------
12,050,093
-------------
CONSUMER LOANS (0.5%)
Atlantic City Electric
Transition Funding LLC
Series 2002-1 Class A4
5.55%, due 10/20/23.......... 2,275,000 2,282,517
-------------
DIVERSIFIED FINANCIAL SERVICES (2.9%)
Capital One Master Trust
Series 2001-5 Class A
5.30%, due 6/15/09........... 1,620,000 1,724,916
DaimlerChrysler Auto Trust
Series 2001-D Class A3
3.15%, due 11/6/05........... 4,546,702 4,578,179
Massachusetts RRB
Special Purpose Trust
Series 2001-1 Class A
6.53%, due 6/1/13............ 7,751,774 8,599,330
-------------
14,902,425
-------------
MULTI-UTILITIES & UNREGULATED POWER (0.3%)
Public Service of New
Hampshire
Funding LLC
Series 2002-1 Class A
4.58%, due 2/1/08............ 1,654,994 1,734,450
-------------
THRIFTS & MORTGAGE FINANCE (0.6%)
Vanderbilt Mortgage Finance
Series 1999-B Class 1A4
6.545%, due 4/7/18........... 3,175,000 3,304,791
-------------
Total Asset-Backed Securities
(Cost $33,078,910)........... 34,274,276
-------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
------------------------------
CORPORATE BONDS (3.1%)
COMMERCIAL BANKS (0.5%)
Bank of America Corp.
5.125%, due 11/15/14......... $2,360,000 $ 2,355,941
-------------
CONSUMER FINANCE (0.5%)
CitiFinancial Credit Co.
6.625%, due 6/1/15........... 2,070,000 2,299,014
General Motors Acceptance
Corp.
6.875%, due 8/28/12.......... 451,000 462,307
-------------
2,761,321
-------------
MEDIA (0.9%)
Comcast Cable Communications,
Inc.
8.875%, due 5/1/17........... 2,750,000 3,479,669
Tele-Communications, Inc.
10.125%, due 4/15/22......... 860,000 1,197,987
-------------
4,677,656
-------------
MULTI-UTILITIES & UNREGULATED POWER (0.6%)
Consumers Energy Co.
4.80%, due 2/17/09 (a)....... 3,270,000 3,320,561
-------------
REAL ESTATE (0.6%)
HRPT Properties Trust
6.40%, due 2/15/15........... 2,700,000 2,820,660
-------------
Total Corporate Bonds
(Cost $15,919,482)........... 15,936,139
-------------
MORTGAGE-BACKED SECURITY (0.7%)
COMMERCIAL MORTGAGE LOANS
(COLLATERIZED MORTGAGE OBLIGATIONS) (0.7%)
Fannie Mae Grantor Trust
Series 2003-T1 Class B
4.491%, due 11/25/12......... 3,545,000 3,510,904
-------------
Total Mortgage-Backed Security
(Cost $3,545,000)............ 3,510,904
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES (87.8%)
FEDERAL HOME LOAN BANK (1.1%)
3.25%, due 8/15/05 (c)....... 5,600,000 5,722,069
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (2.9%)
6.25%, due 3/5/12 (c)........ 10,900,000 11,666,880
7.75%, due 6/7/17............ 3,300,000 3,414,411
-------------
15,081,291
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (3.0%)
5.00%, due 6/1/33-8/1/33
(d).......................... 15,870,656 15,629,009
-------------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003
9
-
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
------------------------------
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (4.0%)
5.25%, due 3/22/07-8/1/12.... $13,200,000 $ 13,726,397
5.50%, due 5/2/06 (c)........ 6,600,000 7,061,201
-------------
20,787,598
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (38.5%)
4.00%, due 9/1/18............ 5,836,921 5,688,733
4.50%, due 7/1/18............ 28,618,401 28,612,219
4.50%, due 11/18/18 TBA
(b).......................... 15,660,000 15,640,425
5.00%, due 9/1/17-10/1/33
(d).......................... 24,450,570 24,524,865
5.50%, due 1/1/17-2/1/17
(d).......................... 28,303,010 29,151,098
5.50%, due 11/13/33-1/14/34
TBA (b).................... 25,290,000 25,439,914
6.00%, due 12/1/16-11/1/32... 21,916,472 22,551,416
6.00%, due 11/13/33-1/14/34
TBA (b)(d)................. 16,440,000 16,854,148
6.50%, due 10/1/31 (d)....... 5,012,228 5,207,930
7.00%, due 7/1/31-11/1/32
(d).......................... 10,887,909 11,463,776
7.50%, due 1/1/30-8/1/31..... 13,945,527 14,889,045
-------------
200,023,569
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (6.3%)
6.00%, due 8/15/32-12/15/32
(d).......................... 15,386,130 15,900,392
6.50%, due 8/15/28-4/15/31
(d).......................... 10,835,767 11,355,374
7.50%, due
12/15/28-2/15/32............. 5,193,573 5,559,639
-------------
32,815,405
-------------
HVIDE VAN OMMEREN TANKERS LLC (1.2%)
Series I
7.54%, due 12/14/23 (f)...... 3,029,000 3,158,732
Series II
7.54%, due 12/14/23 (f)...... 3,029,000 3,158,732
-------------
6,317,464
-------------
OVERSEAS PRIVATE INVESTMENT CORPORATION (0.8%)
zero coupon, due 8/14/06
(f).......................... 4,303,331 4,367,787
-------------
UNITED STATES TREASURY BONDS (12.7%)
5.375%, due 2/15/31 (c)...... 18,401,000 19,015,557
6.25%, due 8/15/23-5/15/30
(c).......................... 16,905,000 19,189,023
6.875%, due 8/15/25 (c)...... 8,400,000 10,182,043
8.75%, due 8/15/20 (c)....... 12,550,000 17,826,886
-------------
66,213,509
-------------
UNITED STATES TREASURY NOTES (17.3%)
3.00%, due 2/15/08 (c)....... 9,685,000 9,690,298
4.375%, due 5/15/07 (c)...... 7,620,000 8,062,318
4.625%, due 5/15/06 (c)...... 17,210,000 18,264,784
4.875%, due 2/15/12 (c)...... 11,975,000 12,632,691
5.75%, due 8/15/10........... 790,000 883,689
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
------------------------------
UNITED STATES TREASURY NOTES (CONTINUED)
6.00%, due 8/15/09 (c)....... $34,425,000 $ 38,924,451
6.75%, due 5/15/05........... 1,700,000 1,833,078
-------------
90,291,309
-------------
Total U.S. Government &
Federal Agencies
(Cost $453,962,170).......... 457,249,010
-------------
Total Long-Term Investments
(Cost $506,505,562).......... 510,970,329
-------------
SHORT TERM INVESTMENTS (39.3%)
COMMERCIAL PAPER (3.6%)
AM Funding Corp. Limited
1.1162%, due 11/28/03 (e).... 18,663,590 18,663,590
-------------
Total Commercial Paper
(Cost $18,663,590)........... 18,663,590
-------------
FEDERAL AGENCIES (11.9%)
Federal Home Loan Bank
(Discount Note)
1.00%, due 11/7/03........... 10,000,000 9,998,333
Federal Home Loan Mortgage
Corporation
(Discount Notes)
1.01%, due 11/12/03.......... 14,000,000 13,995,678
1.011%, due 11/26/03......... 8,620,000 8,613,953
1.021%, due 12/1/03.......... 1,390,000 1,388,818
Federal National Mortgage
Association
(Discount Notes)
0.988%, due 11/3/03.......... 19,135,000 19,133,951
1.001%, due 11/12/03......... 8,800,000 8,797,310
-------------
Total Federal Agencies
(Cost $61,928,043)........... 61,928,043
-------------
INVESTMENT COMPANY (0.1%)
AIM Institutional Funds Group
1.010%, due 11/3/03 (e)...... 291,660 291,660
-------------
Total Investment Company
(Cost $291,660).............. 291,660
-------------
MASTER NOTE (0.5%)
Bank of America LLC
1.188%, due 11/3/03 (e)...... 3,000,000 3,000,000
-------------
Total Master Note
(Cost $3,000,000)............ 3,000,000
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Government Fund
10
- -
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
------------------------------
SHORT-TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENTS (23.2%)
Banc One Capital Markets, Inc.
1.180%, dated 10/31/03
due 11/3/03 (e)
Proceeds at Maturity
$5,000,825
(Collateralized by Various
Bonds with a Principal Amount
of $29,363,144 and a Market
Value of $26,249,998)........ $25,000,000 $ 25,000,000
Countrywide Securities Corp.
1.1424%, dated 10/31/03
due 11/3/03 (e)
Proceeds at Maturity
$10,725,340
(Collateralized by Various
Bonds with a Principal Amount
of $12,660,480 and a Market
Value of $10,990,509)........ 10,725,000 10,725,000
Credit Suisse First Boston
Corp.
1.1124%, dated 10/31/03
due 11/3/03 (e)
Proceeds at Maturity
$21,479,664
(Collateralized by Various
Bonds with a Principal Amount
of $19,958,623 and a Market
Value of $21,748,879)........ 21,479,000 21,479,000
Lehman Brothers Inc.
1.1124%, dated 10/31/03
due 11/3/03 (e)
Proceeds at Maturity
$21,718,671
(Collateralized by Various
Bonds with a Principal Amount
of $22,368,422 and a Market
Value of $22,111,010)........ 21,718,000 21,718,000
Merrill Lynch Government
Securities, Inc.
1.1424%, dated 10/31/03
due 11/3/03 (e)
Proceeds at Maturity
$3,485,111
(Collateralized by Various
Bonds with a Principal Amount
of $3,362,490 and a Market
Value of $3,616,994)......... 3,485,000 3,485,000
</Table>
<Table>
------------------------------
<Caption>
PRINCIPAL
AMOUNT VALUE
Morgan Stanley & Co.,Inc.
1.1124%, dated 10/31/03
due 11/3/03 (e)
Proceeds at Maturity
$18,417,569
(Collateralized by Various
Bonds with a Principal Amount
of $19,396,790 and a Market
Value of $19,338,970)........ $18,417,000 $ 18,417,000
Wachovia Capital Markets, LLC
1.1324%, dated 10/31/03
due 11/3/03 (e)
Proceeds at Maturity
$20,000,629
(Collateralized by Various
Bonds with a Principal Amount
of $20,087,139 and a Market
Value of $20,860,353)........ 20,000,000 20,000,000
-------------
Total Repurchase Agreements
(Cost $120,824,000).......... 120,824,000
-------------
Total Short-Term Investments
(Cost $204,707,293).......... 204,707,293
-------------
Total Investments
(Cost $711,212,855) (g)...... 137.5% 715,677,622(h)
Liabilities in Excess of
Cash and Other Assets........ (37.5) (195,260,231)
----------- -------------
Net Assets.................... 100.0% $ 520,417,391
=========== =============
</Table>
<Table>
- -------
(a) May be sold to institutional investors only.
(b) TBA: Securities purchased on a forward commitment basis
with an approximate principal amount and maturity date.
The actual principal amount and the maturity will be
determined upon settlement.
(c) Represents securities out on loan or a portion of which
is out on loan.
(d) Segregated as collateral for TBA.
(e) Represents security or a portion thereof, purchased with
cash collateral received for securities on loan.
(f) United States Government Guaranteed Security.
(g) The cost for federal income tax purpose is $711,484,024.
(h) At October 31, 2003 net unrealized appreciation was
$4,193,598, based on cost for federal income tax
purposes. This consisted of aggregate gross unrealized
appreciation for all investments on which there was an
excess of market value over cost of $9,282,447 and
aggregate unrealized depreciation for all investments on
which there was an excess of cost over market value of
$5,088,849.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
-
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$711,212,855) including $138,053,427 market value of
securities loaned......................................... $715,677,622
Cash........................................................ 617
Deposits with brokers for securities loaned................. 4,482
Receivables:
Interest.................................................. 4,419,097
Investment securities sold................................ 2,040,074
Fund shares sold.......................................... 453,544
Other assets................................................ 18,350
------------
Total assets........................................ 722,613,786
------------
LIABILITIES:
Securities lending collateral............................... 142,783,731
Payables:
Investment securities purchased........................... 57,402,823
Fund shares redeemed...................................... 510,701
Transfer agent............................................ 457,959
NYLIFE Distributors....................................... 383,568
Manager................................................... 275,206
Trustees.................................................. 6,453
Custodian................................................. 5,103
Accrued expenses............................................ 110,894
Dividends payable........................................... 259,957
------------
Total liabilities................................... 202,196,395
------------
Net assets.................................................. $520,417,391
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 118,655
Class B................................................... 485,889
Class C................................................... 14,742
Additional paid-in capital.................................. 564,398,591
Distributions in excess of net investment income............ (318,666)
Accumulated net realized loss on investments................ (48,746,587)
Net unrealized appreciation on investments.................. 4,464,767
------------
Net assets.................................................. $520,417,391
============
CLASS A
Net assets applicable to outstanding shares................. $ 99,852,320
============
Shares of beneficial interest outstanding................... 11,865,454
============
Net asset value per share outstanding....................... $ 8.42
Maximum sales charge (4.50% of offering price).............. 0.40
------------
Maximum offering price per share outstanding................ $ 8.82
============
CLASS B
Net assets applicable to outstanding shares................. $408,179,829
============
Shares of beneficial interest outstanding................... 48,588,924
============
Net asset value and offering price per share outstanding.... $ 8.40
============
CLASS C
Net assets applicable to outstanding shares................. $ 12,385,242
============
Shares of beneficial interest outstanding................... 1,474,212
============
Net asset value and offering price per share outstanding.... $ 8.40
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
- -
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
------------ -----------
INVESTMENT INCOME:
Income:
Interest.................................................. $ 19,466,243 $25,449,305
Income from securities loaned-net........................... 221,080 177,803
------------ -----------
Total income.............................................. 19,687,323 25,627,108
------------ -----------
Expenses:
Manager................................................... 2,888,946 3,104,474
Distribution--Class B..................................... 2,853,900 3,249,060
Distribution--Class C..................................... 101,685 92,677
Transfer agent............................................ 1,471,061 1,295,609
Service--Class A.......................................... 218,726 179,948
Service--Class B.......................................... 951,125 1,082,632
Service--Class C.......................................... 33,876 30,950
Shareholder communication................................. 95,285 104,841
Professional.............................................. 88,594 91,488
Recordkeeping............................................. 70,358 78,408
Registration.............................................. 55,034 41,501
Custodian................................................. 54,449 58,247
Trustees.................................................. 25,799 27,662
Miscellaneous............................................. 27,669 32,263
------------ -----------
Total expenses.......................................... 8,936,507 9,469,760
------------ -----------
Net investment income....................................... 10,750,816 16,157,348
------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments............................ 6,310,913 13,384,281
Net change in unrealized appreciation on investments........ (17,432,071) 14,691,813
------------ -----------
Net realized and unrealized gain (loss) on investments...... (11,121,158) 28,076,094
------------ -----------
Net increase (decrease) in net assets resulting from
operations................................................ $ (370,342) $44,233,442
============ ===========
</Table>
- -------
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
-
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
-------------- -------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 10,750,816 $ 16,157,348 $ 18,785,577
Net realized gain on investments.......................... 6,310,913 13,384,281 17,054,693
Net change in unrealized appreciation (depreciation) on
investments............................................. (17,432,071) 14,691,813 (10,882,747)
-------------- -------------- --------------
Net increase (decrease) in net assets resulting from
operations.............................................. (370,342) 44,233,442 24,957,523
-------------- -------------- --------------
Dividends to shareholders:
From net investment income:
Class A................................................. (3,589,522) (3,148,466) (2,397,758)
Class B................................................. (12,703,616) (15,614,432) (16,556,438)
Class C................................................. (447,985) (453,946) (297,833)
Return of capital:
Class A................................................. -- -- (341,814)
Class B................................................. -- -- (2,359,233)
Class C................................................. -- -- (42,247)
-------------- -------------- --------------
Total dividends and distributions to shareholders..... (16,741,123) (19,216,844) (21,995,323)
-------------- -------------- --------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 141,504,732 207,805,168 135,129,711
Class B................................................. 48,161,809 132,321,833 87,353,492
Class C................................................. 7,797,317 14,085,627 10,286,389
Net asset value of shares issued to shareholders in
reinvestment of dividends:
Class A................................................. 3,096,505 2,650,009 3,251,086
Class B................................................. 10,444,747 12,557,843 14,988,182
Class C................................................. 342,006 350,032 259,375
-------------- -------------- --------------
211,347,116 369,770,512 251,268,235
Cost of shares redeemed:
Class A................................................. (134,112,683) (180,730,168) (137,813,347)
Class B................................................. (114,314,699) (99,780,727) (97,243,713)
Class C................................................. (13,253,516) (6,334,835) (6,358,583)
-------------- -------------- --------------
Increase (decrease) in net assets derived from capital
share transactions.................................. (50,333,782) 82,924,782 9,852,592
-------------- -------------- --------------
Net increase (decrease) in net assets................. (67,445,247) 107,941,380 12,814,792
NET ASSETS:
Beginning of period......................................... $ 587,862,638 479,921,258 467,106,466
-------------- -------------- --------------
End of period............................................... $ 520,417,391 $ 587,862,638 $ 479,921,258
============== ============== ==============
Distributions in excess of net investment income............ $ (318,666) $ (58,709) $ (180,564)
============== ============== ==============
</Table>
- -------
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
---------------------------------------------------------------------------------
January 1,
2003
through Year ended December 31,
October 31, ----------------------------------------------------------------
2003* 2002 2001 2000 1999 1998
----------- -------- -------- -------- -------- --------
Net asset value at beginning of period........ $ 8.67 $ 8.25 $ 8.19 $ 7.75 $ 8.46 $ 8.27
-------- -------- -------- -------- -------- --------
Net investment income......................... 0.20 0.32 0.39(a)(d) 0.46(a) 0.42 0.43
Net realized and unrealized gain (loss) on
investments.................................. (0.16) 0.47 0.12(d) 0.45 (0.65) 0.24
-------- -------- -------- -------- -------- --------
Total from investment operations.............. 0.04 0.79 0.51 0.91 (0.23) 0.67
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income................... (0.29) (0.37) (0.39) (0.46) (0.42) (0.43)
Return of capital............................ -- -- (0.06) (0.01) (0.06) (0.05)
-------- -------- -------- -------- -------- --------
Total dividends and distributions............. (0.29) (0.37) (0.45) (0.47) (0.48) (0.48)
-------- -------- -------- -------- -------- --------
Net asset value at end of period.............. $ 8.42 $ 8.67 $ 8.25 $ 8.19 $ 7.75 $ 8.46
======== ======== ======== ======== ======== ========
Total investment return (b)................... 0.50% 9.75% 6.33% 12.20% (2.81%) 8.32%
Ratios (to average net assets)/
Supplemental Data:
Net investment income...................... 2.85%+ 3.76% 4.71%(d) 5.89% 5.17% 5.20%
Expenses................................... 1.25%+ 1.19% 1.17% 1.16% 1.13% 1.12%
Portfolio turnover rate....................... 99% 117% 151% 324% 255% 371%
Net assets at end of period (in 000's)........ $ 99,852 $ 92,581 $ 59,405 $ 58,674 $ 34,116 $ 22,189
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
(c) Less than one cent per share.
(d) As required, effective January 1, 2001 the Fund has adopted
the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt
securities. The effect of this change for the year ended
December 31, 2001 is shown below. Per share ratios and
supplemental data for periods prior to January 1, 2001 have
not been restated to reflect this change in presentation.
</Table>
<Table>
<Caption>
Class A Class B Class C
------- ------- -------
Decrease net investment income.............................. ($0.03) ($0.03) ($0.03)
Increase net realized and unrealized gains and losses....... 0.03 0.03 0.03
Decrease ratio of net investment income..................... (0.37%) (0.37%) (0.37%)
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
<Table>
<Caption>
Class B Class C
-------------------------------------------------------------------------------------- -----------
January 1, January 1,
2003 2003
through Year ended December 31, through
October 31, ------------------------------------------------------------------------ October 31,
2003* 2002 2001 2000 1999 1998 2003*
----------- -------- ------------------ ------------------ -------- -------- -----------
$ 8.66 $ 8.24 $ 8.18 $ 7.73 $ 8.44 $ 8.25 $ 8.66
-------- -------- -------- -------- -------- -------- --------
0.14 0.26 0.33(a)(d) 0.40(a) 0.36 0.37 0.14
(0.16) 0.46 0.12(d) 0.46 (0.66) 0.24 (0.16)
-------- -------- -------- -------- -------- -------- --------
(0.02) 0.72 0.45 0.86 (0.30) 0.61 (0.02)
-------- -------- -------- -------- -------- -------- --------
(0.24) (0.30) (0.34) (0.41) (0.36) (0.37) (0.24)
-- -- (0.05) (0.00)(c) (0.05) (0.05) --
-------- -------- -------- -------- -------- -------- --------
(0.24) (0.30) (0.39) (0.41) (0.41) (0.42) (0.24)
-------- -------- -------- -------- -------- -------- --------
$ 8.40 $ 8.66 $ 8.24 $ 8.18 $ 7.73 $ 8.44 $ 8.40
======== ======== ======== ======== ======== ======== ========
(0.25)% 8.94% 5.54% 11.49% (3.60%) 7.52% (0.25)%
2.10%+ 3.01% 3.96%(d) 5.14% 4.42% 4.45% 2.10%+
2.00%+ 1.94% 1.92% 1.91% 1.88% 1.87% 2.00%+
99% 117% 151% 324% 255% 371% 99%
$408,180 $477,341 $411,271 $403,374 $483,495 $590,592 $ 12,385
<Caption>
Class C
------------------------------------------------------------------------------
September 1,**
Year ended December 31, through
------------------------------------------------------------- December 31,
2002 2001 2000 1999 1998
-------- ------------------ ------------------ -------- --------------
$ 8.24 $ 8.18 $ 7.73 $ 8.44 $ 8.43
-------- -------- -------- -------- --------
0.26 0.33(a)(d) 0.40(a) 0.36 0.12
0.46 0.12(d) 0.46 (0.66) 0.03
-------- -------- -------- -------- --------
0.72 0.45 0.86 (0.30) 0.15
-------- -------- -------- -------- --------
(0.30) (0.34) (0.41) (0.36) (0.12)
-- (0.05) (0.00)(c) (0.05) (0.02)
-------- -------- -------- -------- --------
(0.30) (0.39) (0.41) (0.41) (0.14)
-------- -------- -------- -------- --------
$ 8.66 $ 8.24 $ 8.18 $ 7.73 $ 8.44
======== ======== ======== ======== ========
8.94% 5.54% 11.49% (3.60%) 1.75%
3.01% 3.96%(d) 5.14% 4.42% 4.45%+
1.94% 1.92% 1.91% 1.88% 1.87%+
117% 151% 324% 255% 371%
$ 17,940 $ 9,245 $ 5,059 $ 532 $ 94
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
MainStay Government Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
Government Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and within one year of purchase of Class C
shares. Distribution of Class B shares and Class C shares commenced on May 1,
1986 and September 1, 1998, respectively. Class A shares, Class B shares and
Class C shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares and Class C shares are subject to higher distribution fee rates.
Each class of shares bears distribution and/or service fee payments under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek a high level of current income,
consistent with safety of principal.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Debt securities at prices supplied by a pricing agent
selected by the Fund's Manager, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques, if those prices are deemed
by the Fund's Manager to be representative of market values, at the regular
close of business of the New York Stock Exchange. Temporary cash investments
acquired over 60 days to maturity are valued using the latest bid prices or
using valuations based on a matrix system (which considers such factors as
security prices, yields, maturities, and ratings), both as furnished by
independent pricing services. Other temporary cash investments are valued at
amortized cost, which approximates market value. Securities for which market
quotations are not readily available are valued by methods deemed by the Board
of Trustees to represent fair value.
(B) MORTGAGE DOLLAR ROLLS. The Fund enters into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund
Notes to Financial Statements
17
-
has agreed to acquire are included at market value in the portfolio of
investments and liabilities for such purchase commitments are included as
payables for investments purchased. The Fund maintains a segregated account with
its custodian containing securities from its portfolio having a value not less
than the repurchase price, including accrued interest. MDR transactions involve
certain risks, including the risk that the MBS returned to the Fund at the end
of the roll, while substantially similar, could be inferior to what was
initially sold to the counterparty.
(C) SECURITIES LENDING. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are collateralized by cash or securities at
least equal at all times to the market value of the securities loaned. The Fund
may bear the risk of delay in recovery of, or loss of rights in, the securities
loaned should the borrower of the securities experience financial difficulty.
The Fund receives compensation for lending its securities in the form of fees or
it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(D) 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.
(E) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends monthly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current year reclassifications between and
additional paid-in capital arising from permanent differences; net assets at
October 31, 2003 are not affected.
<Table>
<Caption>
DISTRIBUTIONS IN EXCESS ACCUMULATED NET
NET INVESTMENT REALIZED LOSS ON ADDITIONAL
INCOME INVESTMENTS PAID-IN CAPITAL
- ----------------------- ---------------- ---------------
$5,730,350 $(2,841,442) $(2,888,908)
</Table>
The reclassifications for the Fund are primarily due to paydown gain (loss) and
reclassification of distributions.
(F) 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 as earned. Discounts and premiums on securities, other than
short-term securities,
MainStay Government Fund
18
- -
purchased for the Fund are accreted and amortized, respectively, on the constant
yield method over the life of the respective securities or, in the case of
callable security, over the period to the first date of call. Discounts and
premiums on short-term securities are accreted and amortized, respectively, on
the straight line method.
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 assets on the date the income is earned or realized and
unrealized gains and losses are incurred.
(G) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(H) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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.
Certain amounts have been reclassified to conform to current year presentation.
Such reclassifications had no effect on the Fund's net income or capital.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment adviser and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.60% of the Fund's
average daily net assets. Through March 11, 2002, the Manager had voluntarily
established a fee breakpoint of 0.55% on assets in excess of $1 billion.
Effective March 12, 2002, the Manager established contractual fee breakpoints
for its management fee of 0.60% annually on assets up to $1 billion and 0.55%
annually on assets in excess of $1 billion. For the ten months ended October 31,
2003 and year ended December 31, 2002, the Manager earned from the Fund
$2,888,946 and $3,104,474, respectively.
Notes to Financial Statements (continued)
19
-
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor a monthly fee of 0.30% of the Fund's
average daily net assets through March 11, 2002. Effective March 12, 2002, the
Manager pays the Subadvisor a monthly fee at an annual rate of 0.30% on assets
up to $1 billion and 0.275% on assets in excess of $1 billion. To the extent
that the Manager had voluntarily established a fee breakpoint prior to March 11,
2002, the Subadvisor had voluntarily agreed to do so proportionately.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Distribution Plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $4,729 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges for redemption of Class A, Class B and Class C
shares of $85,689, $266,736 and $8,887, respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and year ended December 31, 2002 amounted to $1,471,061
and $1,295,609, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the
MainStay Government Fund
20
- -
Audit Committee Chairman receives an additional $2,000 for each meeting of the
Audit Committee attended. Also, beginning January 1, 2003, the Chairpersons of
the Brokerage Committee and the Operations Committee each receive an additional
$1,000 for each meeting of the Brokerage Committee and Operations Committee
attended, respectively. The Trust allocates trustees fees in proportion to the
net assets of the respective Funds. Thus the Government Fund only pays a portion
of the fees identified above.
(F) OTHER. Fees for the cost of legal services, included in professional
expenses as shown on the Statement of Operations, provided to the Fund by the
Office of the General Counsel of NYLIM amounted to $11,834 for the period ended
October 31, 2003 and $10,432 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $70,358 for the ten months ended October
31, 2003 and $78,408 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
TOTAL
UNREALIZED ACCUMULATED
ACCUMULATED CAPITAL APPRECIATION LOSS
AND OTHER LOSSES -- ------------ ------------
$(48,534,126) $4,193,598 $(44,340,528)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals and premium amortization adjustments.
At October 31, 2003 for federal income tax purposes, capital loss carryforwards
of $48,534,126 were available as shown in the table below, to the extent
provided by the regulations, to offset future realized gains of the Fund through
the years indicated. To the extent that these carryforwards are used to offset
future capital gains, it is probable that the capital gains so offset will not
be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
- ----------------- --------
2004.................................................. $ 9,647
2005.................................................. 1,897
2007.................................................. 30,060
2008.................................................. 6,930
-------
$48,534
=======
</Table>
Notes to Financial Statements (continued)
21
-
During the ten months ended October 31, 2003, for federal income tax purposes,
the Fund utilized $3,643,794 of capital loss carryforwards to offset realized
gain.
The tax character of distributions paid during the ten months ended October 31,
2003 and the years ended December 31, 2002 and December 31, 2001, shown in the
Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2003 2002 2001
----------- ----------- -----------
Distributions paid from Ordinary
Income............................. $16,741,123 $19,216,844 $19,252,029
Long term Capital Gains.............. -- -- 2,743,294
----------- ----------- -----------
$16,741,123 $19,216,844 $21,995,323
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of U.S.
Government securities were $611,488 and $504,121, respectively. Purchases and
sales of securities other than U.S. Government securities and short-term
securities, were $55,167 and $53,565, respectively.
As of October 31, 2003, the Fund had securities on loan with an aggregate market
value of $138,053,427. The Fund received $142,783,731 in cash as collateral for
securities on loan which was used to purchase highly liquid short-term
investments in accordance with the Fund's securities lending procedures.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
MainStay Government Fund
22
- -
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
JANUARY 1, YEAR ENDED DECEMBER 31,
THROUGH ---------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold................. 16,411 5,582 907 24,465 15,607 1,659 16,354 10,522 1,241
Shares issued in
reinvestment of dividends
and distributions......... 361 1,219 40 314 1,491 41 394 1,816 31
------- ------- ------ ------- ------- ----- ------- ------- -----
16,772 6,801 947 24,779 17,098 1,700 16,748 12,338 1,272
Shares redeemed............. (15,587) (13,363) (1,545) (21,296) (11,840) (749) (16,714) (11,762) (769)
------- ------- ------ ------- ------- ----- ------- ------- -----
Net increase (decrease)..... 1,185 (6,562) 598 3,483 5,258 951 34 576 503
======= ======= ====== ======= ======= ===== ======= ======= =====
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
23
-
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Government Fund
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 funds constituting The MainStay Funds, hereafter referred to as the "Fund")
at October 31, 2003, the results of its operations for the ten months ended
October 31, 2003 and the year ended December 31, 2002, the changes in its net
assets for the ten months ended October 31, 2003 and each of the two years in
the period ended December 31, 2002 and the financial highlights for each of the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
24
- -
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
25
-
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
26
- -
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
27
-
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
D/B/A MERCURY ADVISORS
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSG11- 12/03
NYLIM-A04344 07
[RECYCLE.LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
Government Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO]
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay Growth
Opportunities Fund versus S&P 500(R) Index,
Russell 1000(R) Index, and Inflation--Class
A, Class B, and Class C Shares 4
Portfolio Management Discussion and Analysis 6
Year-by-Year and 10-Month Performance 7
Portfolio of Investments 11
Financial Statements 13
Notes to Financial Statements 18
Report of Independent Auditors 24
Trustees and Officers 25
The MainStay(R) Funds 28
</Table>
2
This page intentionally left blank
3
-
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
4
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
$10,000 Invested in MainStay Growth
Opportunities Fund versus S&P 500(R) Index,
Russell 1000(R) Index, and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 8.86%, 5 Years -0.41%, Since Inception
(6/1/98) 0.47%
<Table>
<Caption>
MAINSTAY GROWTH
OPPORTUNITIES FUND S&P 500 INDEX(1) RUSSELL 1000 INDEX(2) INFLATION (CPI)(3)
------------------ ---------------- --------------------- ------------------
6/1/98 9450.00 10000.00 10000.00 10000.00
10/31/98 9894.00 10133.00 10036.00 10080.00
10/31/99 12606.00 12734.00 12603.00 10338.00
10/31/00 14580.00 13510.00 13744.00 10695.00
10/31/01 10706.00 10146.00 10166.00 10923.00
10/31/02 8902.00 8613.00 8681.00 11150.00
10/31/03 10255.00 10404.00 10619.00 11378.00
</Table>
CLASS B SHARES
Total Returns with Sales Charges: 1 Year 9.38%, 5 Years -0.42%, Since Inception
(6/1/98) 0.58%
<Table>
<Caption>
MAINSTAY GROWTH
OPPORTUNITIES FUND S&P 500 INDEX(1) RUSSELL 1000 INDEX(2) INFLATION (CPI)(3)
------------------ ---------------- --------------------- ------------------
6/1/98 10000.00 10000.00 10000.00 10000.00
10/31/98 10430.00 10133.00 10036.00 10080.00
10/31/99 13200.00 12734.00 12603.00 10338.00
10/31/00 15149.00 13510.00 13744.00 10695.00
10/31/01 11038.00 10146.00 10166.00 10923.00
10/31/02 9108.00 8613.00 8681.00 11150.00
10/31/03 10318.00 10404.00 10619.00 11378.00
</Table>
CLASS C SHARES
Total Returns with Sales Charges: 1 Year 13.27%, 5 Years -0.04%, Since Inception
(6/1/98) 0.74%
<Table>
<Caption>
MAINSTAY GROWTH
OPPORTUNITIES FUND S&P 500 INDEX(1) RUSSELL 1000 INDEX(2) INFLATION (CPI)(3)
------------------ ---------------- --------------------- ------------------
6/1/98 10000.00 10000.00 10000.00 10000.00
10/31/98 10430.00 10133.00 10036.00 10080.00
10/31/99 13200.00 12734.00 12603.00 10338.00
10/31/00 15149.00 13510.00 13744.00 10695.00
10/31/01 11038.00 10146.00 10166.00 10923.00
10/31/02 9108.00 8613.00 8681.00 11150.00
10/31/03 10408.00 10404.00 10619.00 11378.00
</Table>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION, PLEASE VISIT WWW.MAINSTAYFUNDS.COM.
5
-
- -------
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect change in share price, reinvestment of dividend and capital
gain distributions, and maximum applicable sales charges explained in this
paragraph. The graphs assume an initial investment of $10,000 and reflect
deduction of all sales charges that would have applied for the period of
investment. Class A share performance reflects the effect of the maximum 5.5%
initial sales charge. Class B shares are subject to a contingent deferred
sales charge (CDSC) of up to 5% if shares are redeemed within the first six
years of purchase. Class B share performance reflects a CDSC of 1%, which
would apply for the period shown. Class C share performance includes the
historical performance of the Class B shares for periods from 6/1/98 through
8/31/98. Class C shares would be subject to a CDSC of 1% if redeemed within
one year of purchase.
1. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500
Index is an unmanaged index and is widely regarded as the standard for
measuring large-cap U.S. stock-market performance. Results assume
reinvestment of all income and capital gains. An investment cannot be made
directly into an index.
2. The Russell 1000(R) Index is an unmanaged index that measures the
performance of the 1,000 largest U.S. companies based on total market
capitalization. Results assume reinvestment of all income and capital
gains. An investment cannot be made directly into an index.
3. Inflation is measured 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. The rate of inflation does not represent an
investment return.
6
- -------
1. The Russell 1000(R) Index is an unmanaged index that measures the performance
of the 1,000 largest U.S. companies based on total market capitalization. The
Russell Midcap(R) Index is an unmanaged index that measures the performance
of the 800 smallest companies in the Russell 1000 Index. The Russell 2000(R)
Index is an unmanaged index that measures the performance of the 2,000
smallest companies in the Russell 3000(R) Index, which, in turn, is an
unmanaged index that measures the performance of the 3,000 largest U.S.
companies based on total market capitalization. For each of these Russell
indices, the corresponding Growth Index measures the performance of those
companies in the index with higher price-to-book ratios and higher forecasted
growth values, and the corresponding Value Index measures the performance of
those companies in the index with lower price-to-book ratios and lower
forecasted growth values. Results for all indices assume reinvestment of all
income and capital gains. An investment cannot be made directly into an
index.
2. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
3. See footnote on page 5 for more information about the S&P 500 Index.
Portfolio Management Discussion and Analysis
The U.S. equity market produced strong returns for the 10 months ended October
31, 2003. Equity gains were broadly based, with almost every sector end ing the
10-month period in positive territory. Russell data shows that growth stocks
outperformed value stocks at all capitalization levels and that mid- and
smaller-capitalization stocks generally outperformed larger-capitalization
issues.(1)
The year 2003 started off slowly, with the uncertainty of a war with Iraq
hanging over both the U.S. economy and the equity market. As coalition troops
assembled in Kuwait in mid-March, the stock market began to rise, rebounding
sharply as it became increasingly evident that the military conflict would be
resolved quickly. Further support for the equity market came in late June when
the Federal Reserve lowered the targeted federal funds rate by 25 basis points
to a low 1.0%. Fiscal policy also contributed to the economy when Congress
passed a highly stimulative tax bill that reduced tax rates on corporate divi
dends. Stock prices continued to climb through the remainder of the period.
The combination of factors proved beneficial to the U.S. economy. According to
preliminary estimates from the Bureau of Economic Analysis, real gross domestic
product grew at a seasonally adjusted annual rate of 8.2% in the third calendar
quarter of 2003. Not only has the U.S. economy rebounded, but most of the
nation's foreign trading partners have also seen economic improvements. This, in
turn, helped buoy U.S. corporate earnings.
Cyclical sectors, such as information technology and consumer discretionary, led
U.S. equity market performance for the year-to-date period. Less-cyclical
sectors, such as telecommunication services and health care, lagged on a
relative basis. Interestingly, the growth expectations prompted by monetary and
fiscal stimulus had a stronger impact on the relative returns of lower-quality
stocks, which helped them outperform higher-quality issues for the year-to-date
period.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Growth Opportunities Fund
returned 18.51% for Class A shares, 17.80% for Class B shares, and 17.68% for
Class C shares, excluding all sales charges. All share classes underperformed
the 19.16% return of the average Lipper(2) large-cap core fund over the same
period. All share classes also underperformed the 21.21% return of the S&P 500
Index(3) and the 22.49% return of the Russell 1000(R) Index for the first 10
months of 2003.
The Fund's relative performance was negatively impacted by a core orientation
toward higher-quality companies with steady earnings and strong balance sheets
during the first six months of the reporting period. We shifted the Fund to a
7
-
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[FUND PERFORMANCE BAR CHART-CLASS A]
<Table>
<Caption>
CLASS A SHARES
--------------
12/98 18.60
12/99 29.67
12/00 -2.70
12/01 -17.77
12/02 -25.58
10/03 18.51
</Table>
CLASS B SHARES
[CLASS B SHARES CHART]
<Table>
<Caption>
CLASS B SHARES
--------------
12/98 18.00
12/99 28.80
12/00 -3.46
12/01 -18.41
12/02 -26.12
10/03 17.80
</Table>
slightly more aggressive stance during the last four months of the reporting
period, which improved the Fund's relative performance.
STRATEGY AND SECTOR ALLOCATION
At the end of the 10-month period, the Fund had a cyclical orientation, with
overweighted positions in the information technology and industrials sectors.
Our decision to orient the Fund in this way was based primarily on our positive
view of the U.S. economy through early 2004. The Fund's holdings in these two
sectors benefited during the period from the strengthening global economic
8
- -------
4. Percentages reflect the total return performance of the indicated securities
for the 10 months ended October 31, 2003, or for the portion of the reporting
period such securities were held in the Fund, if shorter. Due to purchases
and sales, the performance of Fund holdings may differ from the performance
of the securities themselves.
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES), CONTINUED
CLASS C SHARES
[CLASS C SHARES CHART]
<Table>
<Caption>
CLASS C SHARES
--------------
12/98 18.00
12/99 28.80
12/00 -3.46
12/01 -18.41
12/02 -26.12
10/03 17.68
</Table>
environment and the weak U.S. dollar, since many of the Fund's holdings in these
sectors have high exposure to international markets.
The Fund had an overweighted position in the health care sector, but little
exposure to the pharmaceuticals industry. Within the health care sector, we
focused on companies with superior earnings-growth prospects based on new
products or services. We continue to believe that the health care sector should
benefit from an aging U.S. population, but we are carefully monitoring potential
governmental restrictions in certain subindustries.
At the end of the 10-month period, the Fund held underweighted positions in the
consumer staples, energy, and telecommunication services sectors, each for
different reasons. Growth of the consumer staples sector historically lags the
broader equity market during improving earnings cycles. We expect commodity
prices in the energy sector to moderate from last winter's high levels. And the
telecommunication services sector has faced an increasingly difficult
competitive pricing environment in the last few years.
STRONG AND WEAK PERFORMERS
Intel (+112%)(4) and Applied Materials (+79%) were strong performers for the
Fund during the 10-month period, as earnings expectations at both of these
semiconductor companies increased with the improving economy. Video-game
provider Electronic Arts (+98%) also performed well as the company's stock
rebounded strongly from a depressed price level at year-end 2002. Electronic
Arts was able to distinguish itself from its peers by exceeding earnings
expectations. Medical-
9
-
supplies company Boston Scientific (+59%) provided strong returns during the
reporting period, since investors expect new-product approvals to provide a
significant boost to the company's earnings in 2004. Cisco Systems (+58%), the
large networking and communications equipment company, benefited from the
improving economy and from expectations of increased business spending for the
company's products next year.
Given the broad-based strength of the U.S. equity market year-to-date, only a
few stocks in the Fund's portfolio provided disappointing results. Defense con
tractor Lockheed Martin (-20%) was one of the Fund's weakest holdings. Even
though the company's operating performance was positive, the stock suffered
based on consensus expectations for reduced earnings in 2004.
SIGNIFICANT PURCHASES AND SALES
One of the Fund's best-performing new purchases was wireless communications
provider Nextel Communications (+82%). The stock reacted favorably to the
company's improving cash-flow generation from operations. The Fund also added
copper producer Phelps Dodge (+58%), which benefited from improved copper
pricing as global economic growth began to recover. Regional bank PNC Financial
Services Group (+24%) was another new purchase that performed well during the
portion of the reporting period it was held in the Fund. The com-
pany's share price rose as a result of a merger late in the reporting period,
and the transaction helped raise valuations for several regional banks.
Most of the Fund's sales were based not on declining absolute returns but rather
on underperformance relative to an equity market that showed strong overall
performance. Nevertheless, our decision to sell the Fund's position in consumer-
products manufacturer Newell Rubbermaid generated significant benefit to the
Fund. Newell Rubbermaid's stock declined 20% after our sale date, since the
company suffered from a significant earnings disappointment and from lowered
expectations regarding future earnings.
LOOKING AHEAD
Positive economic news may have helped support the U.S. equity market over the
first 10 months of 2003, but we believe that much of this news has already been
discounted in many equity sectors. We also believe that lofty forward earnings
multiples may leave equity valuations highly susceptible to changes in interest
rates. Since we expect interest rates to remain low for some time, however, we
believe the next market advance will likely depend on continued improvement in
corporate earnings. In our view, the U.S. equity market may see increased
volatility and more selective successes.
10
- -
We consider it rather ironic that over the last 10 months, companies that don't
pay dividends outperformed those that do pay them, especially given the recent
reduction of tax rates on corporate dividends. We expect this trend to reverse
as later-cycle stocks, which tend to be higher-quality dividend-paying
companies, assume market leadership in a maturing economic recovery. We also see
oppor tunity potential in companies with sizable exposure to international
markets, as we anticipate little upside in the value of the U.S. dollar in light
of next year's projected fiscal deficit. No matter what the economy or the
markets may bring, the Fund will continue to seek long-term growth of capital,
with income as a secondary consideration.
James Agostisi
Patricia S. Rossi
Portfolio Managers
New York Life Investment Management LLC
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
Portfolio of Investments October 31, 2003
11
-
<Table>
<Caption>
SHARES VALUE
---------------------------
COMMON STOCKS (97.7%)+
AEROSPACE & DEFENSE (2.6%)
Empresa Brasileira de
Aeronautica S.A. ADR (b)....... 23,100 $ 599,445
Northrop Grumman Corp. ......... 10,000 894,000
United Technologies Corp. ...... 11,800 999,342
-----------
2,492,787
-----------
AIR FREIGHT & LOGISTICS (1.1%)
United Parcel Service, Inc.
Class B........................ 14,400 1,044,288
-----------
BEVERAGES (2.4%)
Anheuser-Busch Cos., Inc. ...... 18,000 886,680
PepsiCo, Inc. .................. 29,500 1,410,690
-----------
2,297,370
-----------
BIOTECHNOLOGY (4.9%)
Amgen, Inc. (a)................. 21,100 1,303,136
Chiron Corp. (a)................ 21,700 1,185,471
Genzyme Corp. (a)............... 24,600 1,129,140
Gilead Sciences, Inc. (a)....... 8,500 463,930
Invitrogen Corp. (a)............ 8,700 553,233
-----------
4,634,910
-----------
CAPITAL MARKETS (5.2%)
Bank of New York Co., Inc.
(The).......................... 31,000 966,890
Franklin Resources, Inc. ....... 21,500 1,019,530
Goldman Sachs Group, Inc.
(The).......................... 15,400 1,446,060
Morgan Stanley.................. 28,100 1,541,847
-----------
4,974,327
-----------
CHEMICALS (2.0%)
E.I. du Pont de Nemours &
Co. ........................... 10,900 440,360
Eastman Chemical Co. ........... 13,700 444,702
PPG Industries, Inc. ........... 16,900 974,285
-----------
1,859,347
-----------
COMMERCIAL BANKS (6.3%)
Bank of America Corp. .......... 11,750 889,828
Bank One Corp. ................. 23,300 989,085
FleetBoston Financial Corp. .... 29,500 1,191,505
PNC Financial Services
Group, Inc. (The).............. 18,300 980,331
U.S. Bancorp.................... 39,900 1,086,078
Wells Fargo & Co. .............. 14,400 811,008
-----------
5,947,835
-----------
COMMUNICATIONS EQUIPMENT (2.6%)
Avaya, Inc. (a)................. 34,100 441,254
Cisco Systems, Inc. (a)......... 59,200 1,242,016
Nokia Corp. ADR (b)............. 47,900 813,821
-----------
2,497,091
-----------
</Table>
<Table>
<Caption>
SHARES VALUE
---------------------------
COMPUTERS & PERIPHERALS (3.9%)
Dell, Inc. (a).................. 48,700 $ 1,759,044
EMC Corp. (a)................... 78,900 1,091,976
International Business Machines
Corp. ......................... 9,800 876,904
-----------
3,727,924
-----------
CONSUMER FINANCE (1.6%)
American Express Co. ........... 22,000 1,032,460
MBNA Corp. ..................... 19,500 482,625
-----------
1,515,085
-----------
DIVERSIFIED FINANCIAL (2.4%)
Citigroup, Inc. ................ 47,197 2,237,138
-----------
ELECTRIC UTILITIES (3.0%)
Dominion Resources, Inc. ....... 14,200 874,720
Exelon Corp. ................... 15,700 996,165
Southern Co. (The).............. 34,600 1,031,080
-----------
2,901,965
-----------
ENERGY EQUIPMENT & SERVICES (0.4%)
ENSCO International, Inc. ...... 13,400 353,090
-----------
FOOD & STAPLES RETAILING (1.5%)
Wal-Mart Stores, Inc. .......... 23,900 1,408,905
-----------
HEALTH CARE EQUIPMENT & SUPPLIES (4.9%)
Boston Scientific Corp. (a)..... 26,000 1,760,720
Guidant Corp. .................. 20,100 1,025,301
Stryker Corp. .................. 9,500 770,545
Zimmer Holdings, Inc. (a)....... 17,500 1,116,675
-----------
4,673,241
-----------
HEALTH CARE PROVIDERS & SERVICES (2.7%)
Aetna, Inc. .................... 8,700 499,467
Anthem, Inc. (a)................ 14,000 958,020
WellPoint Health Networks, Inc.
(a)............................ 12,100 1,075,690
-----------
2,533,177
-----------
HOTELS, RESTAURANTS & LEISURE (2.2%)
International Game Technology... 40,700 1,332,925
Starwood Hotels & Resorts
Worldwide, Inc. ............... 23,900 806,147
-----------
2,139,072
-----------
HOUSEHOLD PRODUCTS (2.6%)
Colgate-Palmolive Co. .......... 19,500 1,037,205
Procter & Gamble Co. (The)...... 14,100 1,385,889
-----------
2,423,094
-----------
INDUSTRIAL CONGLOMERATES (4.7%)
3M Co. ......................... 24,300 1,916,541
General Electric Co. ........... 67,700 1,963,977
Textron, Inc. .................. 10,700 531,683
-----------
4,412,201
-----------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Growth Opportunities Fund
12
- -
<Table>
<Caption>
SHARES VALUE
---------------------------
COMMON STOCKS (CONTINUED)
INSURANCE (3.3%)
ACE, Ltd. ...................... 25,100 $ 903,600
Allstate Corp. (The)............ 33,900 1,339,050
Travelers Property Casualty
Corp. Class A.................. 52,800 860,640
-----------
3,103,290
-----------
INTERNET & CATALOG RETAIL (0.8%)
eBay, Inc. (a).................. 13,700 766,378
-----------
IT SERVICES (1.0%)
SunGard Data Systems, Inc.
(a)............................ 34,000 953,700
-----------
MACHINERY (2.2%)
Eaton Corp. .................... 10,000 1,002,400
Illinois Tool Works, Inc. ...... 14,400 1,059,120
-----------
2,061,520
-----------
MEDIA (4.9%)
Clear Channel Communications,
Inc. .......................... 25,400 1,036,828
Comcast Corp. Class A (a)....... 22,700 769,984
EchoStar Communications Corp.
Class A (a).................... 24,700 946,504
Time Warner, Inc. (a)........... 63,200 966,328
Viacom, Inc. Class B............ 23,300 928,971
-----------
4,648,615
-----------
METALS & MINING (1.1%)
Phelps Dodge Corp. (a).......... 17,000 1,049,580
-----------
OIL & GAS (3.0%)
ConocoPhillips.................. 19,100 1,091,565
Devon Energy Corp. ............. 16,600 805,100
Exxon Mobil Corp. .............. 25,800 943,764
-----------
2,840,429
-----------
PERSONAL PRODUCTS (1.5%)
Avon Products, Inc. ............ 21,100 1,433,956
-----------
PHARMACEUTICALS (3.6%)
Abbott Laboratories............. 21,400 912,068
Mylan Laboratories, Inc. ....... 21,300 514,395
Pfizer, Inc. ................... 30,500 963,800
Teva Pharmaceutical Industries
Ltd. ADR (b)................... 17,400 989,886
-----------
3,380,149
-----------
</Table>
<Table>
<Caption>
SHARES VALUE
---------------------------
REAL ESTATE (2.3%)
Equity Office Properties
Trust.......................... 27,800 $ 778,678
Equity Residential.............. 32,013 936,380
ProLogis........................ 15,800 466,732
-----------
2,181,790
-----------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (7.1%)
Applied Materials, Inc. (a)..... 58,500 1,367,145
Intel Corp. .................... 54,900 1,814,445
Micron Technology, Inc. (a)..... 93,700 1,343,658
Teradyne, Inc. (a).............. 46,800 1,066,104
Texas Instruments, Inc. ........ 38,300 1,107,636
-----------
6,698,988
-----------
SOFTWARE (6.3%)
BEA Systems, Inc. (a)........... 57,700 802,030
Electronic Arts, Inc. (a)....... 12,500 1,238,000
Mercury Interactive Corp. (a)... 15,200 705,888
Microsoft Corp. ................ 59,800 1,563,770
SAP AG ADR (b).................. 22,200 811,188
VERITAS Software Corp. (a)...... 22,700 820,605
-----------
5,941,481
-----------
SPECIALTY RETAIL (1.7%)
Home Depot, Inc. (The).......... 26,200 971,234
TJX Cos., Inc. (The)............ 32,300 677,977
-----------
1,649,211
-----------
TEXTILES, APPAREL & LUXURY GOODS (1.1%)
NIKE, Inc. Class B.............. 15,700 1,003,230
-----------
WIRELESS TELECOMMUNICATION SERVICES (0.8%)
Nextel Communications, Inc.
Class A (a).................... 31,100 752,620
-----------
Total Investments
(Cost $82,675,538) (c)......... 97.7% 92,537,784(d)
Cash and Other Assets,
Less Liabilities............... 2.3 2,150,331
---------- -----------
Net Assets...................... 100.0% $94,688,115
========== ===========
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) ADR-American Depositary Receipt.
(c) The cost for federal income tax purposes is $82,968,094.
(d) At October 31, 2003, net unrealized appreciation was
$9,569,690 based on cost for federal income tax purposed.
This consisted of aggregate gross unrealized appreciation
for all investments on which there was an excess of
market value over cost of $11,286,349 and aggregate
unrealized depreciation for all investments on which
there was an excess of cost over market value of
$1,716,659.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
-
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$82,675,538).............................................. $ 92,537,784
Receivables:
Investment securities sold................................ 1,726,882
Fund shares sold.......................................... 1,076,771
Dividends and interest.................................... 89,062
Other assets................................................ 10,594
------------
Total assets........................................ 95,441,093
------------
LIABILITIES:
Due to custodian............................................ 271,856
Payables:
Fund shares redeemed...................................... 173,351
Transfer agent............................................ 89,094
Investment securities purchased........................... 59,889
NYLIFE Distributors....................................... 54,859
Manager................................................... 36,372
Shareholder communication................................. 30,386
Custodian................................................. 3,960
Accrued expenses............................................ 33,211
------------
Total liabilities................................... 752,978
------------
Net assets.................................................. $ 94,688,115
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 35,857
Class B................................................... 52,596
Class C................................................... 2,369
Additional paid-in capital.................................. 118,283,304
Accumulated net realized loss on investments................ (33,548,257)
Net unrealized appreciation on investments.................. 9,862,246
------------
Net assets.................................................. $ 94,688,115
============
CLASS A
Net assets applicable to outstanding shares................. $ 38,313,351
============
Shares of beneficial interest outstanding................... 3,585,689
============
Net asset value per share outstanding....................... $ 10.69
Maximum sales charge (5.50% of offering price).............. 0.62
------------
Maximum offering price per share outstanding................ $ 11.31
============
CLASS B
Net assets applicable to outstanding shares................. $ 53,945,686
============
Shares of beneficial interest outstanding................... 5,259,632
============
Net asset value and offering price per share outstanding.... $ 10.26
============
CLASS C
Net assets applicable to outstanding shares................. $ 2,429,078
============
Shares of beneficial interest outstanding................... 236,882
============
Net asset value and offering price per share outstanding.... $ 10.25
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
Statement of Operations for the period January 1, 2003 through
October 31, 2003* and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
----------- ------------
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 1,060,850 $ 1,270,526
Interest.................................................. 25,463 51,684
----------- ------------
Total income............................................ 1,086,313 1,322,210
----------- ------------
Expenses:
Manager................................................... 479,681 654,351
Transfer agent............................................ 442,580 540,900
Distribution--Class B..................................... 306,052 447,840
Distribution--Class C..................................... 12,139 13,137
Service--Class A.......................................... 65,251 80,038
Service--Class B.......................................... 102,017 149,280
Service--Class C.......................................... 4,046 4,379
Shareholder communication................................. 40,302 45,809
Professional.............................................. 39,703 36,010
Registration.............................................. 29,116 29,054
Recordkeeping............................................. 25,617 33,991
Custodian................................................. 16,129 19,514
Trustees.................................................. 5,756 8,000
Amortization of organization expense...................... 5,633 13,490
Miscellaneous............................................. 19,844 22,150
----------- ------------
Total expenses before reimbursement..................... 1,593,866 2,097,943
Expense reimbursement from Manager........................ (145,000) (94,568)
----------- ------------
Net expenses............................................ 1,448,866 2,003,375
----------- ------------
Net investment loss......................................... (362,553) (681,165)
----------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments..................... 916,561 (18,412,322)
Net change in unrealized depreciation on investments........ 13,344,388 (9,712,182)
----------- ------------
Net realized and unrealized gain (loss) on investments...... 14,260,949 (28,124,504)
----------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ $13,898,396 $(28,805,669)
=========== ============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
(a) Dividends recorded net of foreign withholding taxes of
$4,936 and $1,582 for 2003 and 2002, respectively.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
Statement of Changes in Net Assets for the period January 1, 2003 to October 31,
2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
----------- ------------ ------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss....................................... $ (362,553) $ (681,165) $ (1,066,590)
Net realized gain (loss) on investments................... 916,561 (18,412,322) (14,706,029)
Net change in unrealized appreciation (depreciation) on
investments............................................. 13,344,388 (9,712,182) (8,506,176)
----------- ------------ ------------
Net increase (decrease) in net assets resulting from
operations.............................................. 13,898,396 (28,805,669) (24,278,795)
----------- ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 15,132,019 14,219,392 6,796,136
Class B................................................. 5,900,587 8,949,625 14,489,535
Class C................................................. 577,629 1,202,762 653,976
Cost of shares redeemed:
Class A................................................. (10,924,221) (7,164,908) (6,568,060)
Class B................................................. (8,490,629) (15,108,651) (15,736,874)
Class C................................................. (203,580) (614,541) (814,757)
----------- ------------ ------------
Increase (decrease) in net assets derived from capital
share transactions.................................. 1,991,805 1,483,679 (1,180,044)
----------- ------------ ------------
Net increase (decrease) in net assets................. 15,890,201 (27,321,990) (25,458,839)
NET ASSETS:
Beginning of period......................................... 78,797,914 106,119,904 131,578,743
----------- ------------ ------------
End of period............................................... $94,688,115 $ 78,797,914 $106,119,904
=========== ============ ============
</Table>
- -------
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
--------------------------------------------------------------------------------------
January 1,
2003 June 1**
through Year ended December 31, through
October 31, --------------------------------------------------- December 31,
2003* 2002 2001 2000 1999 1998
----------- ------------ ------- ------- ------- ------------
Net asset value at beginning of period... $ 9.02 $ 12.12 $ 14.74 $ 15.37 $ 11.86 $ 10.00
------- ------- ------- ------- ------- -------
Net investment loss (a).................. (0.01) (0.02) (0.05) (0.04) (0.02) (0.05)
Net realized and unrealized gain (loss)
on investments.......................... 1.68 (3.08) (2.57) (0.38) 3.54 1.91
------- ------- ------- ------- ------- -------
Total from investment operations......... 1.67 (3.10) (2.62) (0.42) 3.52 1.86
------- ------- ------- ------- ------- -------
Less distributions to shareholders:
From net realized gain on investments... -- -- -- (0.17) (0.01) --
In excess of net realized gain on
investments........................... -- -- -- (0.04) -- --
------- ------- ------- ------- ------- -------
Total distributions to shareholders...... -- -- -- (0.21) (0.01) --
------- ------- ------- ------- ------- -------
Net asset value at end of period......... $ 10.69 $ 9.02 $ 12.12 $ 14.74 $ 15.37 $ 11.86
======= ======= ======= ======= ======= =======
Total investment return (b).............. 18.51% (25.58%) (17.77%) (2.70%) 29.67% 18.60%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss................... (0.06%)+ (0.24%) (0.42%) (0.26%) (0.16%) (1.09%)+
Net expenses.......................... 1.65%+ 1.65% 1.58% 1.49% 1.59% 2.53%+
Expenses (before reimbursement)....... 1.86%+ 1.75% 1.58% 1.49% 1.59% 2.53%+
Portfolio turnover rate.................. 71% 130% 95% 70% 72% 32%
Net assets at end of period (in 000's)... $38,313 $28,639 $31,389 $38,040 $26,214 $13,293
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Commencement of Operations.
*** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
(c) Less than one thousand.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
-
<Table>
<Caption>
Class B Class C
------------------------------------------------------------------ ---------------------------------------------------
January 1, January 1,
2003 June 1** 2003
through Year ended December 31, through through Year ended December 31,
October 31, ------------------------------------- December 31, October 31, -------------------------------------
2003* 2002 2001 2000 1999 1998 2003* 2002 2001 2000 1999
----------- ------- ------- ------- ------- ------------ ----------- ------- ------- ------- -------
$ 8.71 $ 11.79 $ 14.45 $ 15.19 $ 11.80 $ 10.00 $ 8.71 $ 11.79 $ 14.45 $ 15.19 $ 11.80
------- ------- ------- ------- ------- ------- ------ ------- ------- ------- -------
(0.06) (0.10) (0.15) (0.15) (0.11) (0.08) (0.06) (0.10) (0.15) (0.15) (0.11)
1.61 (2.98) (2.51) (0.38) 3.51 1.88 1.60 (2.98) (2.51) (0.38) 3.51
------- ------- ------- ------- ------- ------- ------ ------- ------- ------- -------
1.55 (3.08) (2.66) (0.53) 3.40 1.80 1.54 (3.08) (2.66) (0.53) 3.40
------- ------- ------- ------- ------- ------- ------ ------- ------- ------- -------
-- -- -- (0.17) (0.01) -- -- -- -- (0.17) (0.01)
-- -- -- (0.04) -- -- -- -- -- (0.04) --
------- ------- ------- ------- ------- ------- ------ ------- ------- ------- -------
-- -- -- (0.21) (0.01) -- -- -- -- (0.21) (0.01)
------- ------- ------- ------- ------- ------- ------ ------- ------- ------- -------
$ 10.26 $ 8.71 $ 11.79 $ 14.45 $ 15.19 $ 11.80 $10.25 $ 8.71 $ 11.79 $ 14.45 $ 15.19
======= ======= ======= ======= ======= ======= ====== ======= ======= ======= =======
17.80% (26.12%) (18.41%) (3.46%) 28.80% 18.00% 17.68% (26.12%) (18.41%) (3.46%) 28.80%
(0.81%)+ (0.99%) (1.17%) (1.01%) (0.91%) (1.84%)+ (0.81%)+ (0.99%) (1.17%) (1.01%) (0.91%)
2.40%+ 2.40% 2.33% 2.24% 2.34% 3.28%+ 2.40%+ 2.40% 2.33% 2.24% 2.34%
2.61%+ 2.50% 2.33% 2.24% 2.34% 3.28%+ 2.61%+ 2.50% 2.33% 2.24% 2.34%
71% 130% 95% 70% 72% 32% 71% 130% 95% 70% 72%
$53,946 $48,434 $73,048 $91,246 $58,937 $12,351 $2,429 $ 1,724 $ 1,683 $ 2,293 $ 806
<Caption>
Class C
--------------
September 1***
through
December 31,
1998
--------------
$ 9.22
-------
(0.06)
2.64
-------
2.58
-------
--
--
-------
--
-------
$ 11.80
=======
27.98%
(1.84%)+
3.28%+
3.28%+
32%
$ --(c)
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Growth Opportunities Fund
18
- -
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and is comprised of twenty-four funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to MainStay
Growth Opportunities Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on invest-
ments of $1 million or more (and certain other qualified purchases) in Class A
shares, but a contingent deferred sales charge is imposed on certain redemptions
of such shares within one year of the date of purchase. Class B shares and Class
C shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and within one year of purchase of Class C
shares. Class A shares, Class B shares and Class C shares bear the same voting
(except for issues that relate solely to one class), dividend, liquidation and
other rights and conditions except that the Class B shares and Class C shares
are subject to higher distribution fee rates. Each class of shares bears
distribution and/or service fee payments under a distribution plan pursuant to
Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek long-term growth of capital, with
income as a secondary consideration.
Effective January 1, 2004, the Fund will change its name to MainStay Common
Stock Fund.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
(B) ORGANIZATION COSTS. Costs incurred in connection with the Fund's initial
organization and registration totalled $67,460 and were amortized over 60 months
beginning at the commencement of operations.
Notes to Financial Statements
19
-
(C) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay any
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current period reclassification between
accumulated net investment loss and additional paid-in capital arising permanent
differences; net assets at October 31, 2003, are not affected.
<Table>
<Caption>
ACCUMULATED
NET INVESTMENT ADDITIONAL
LOSS PAID-IN-CAPITAL
- -------------- ---------------
$362,553 $(362,553)
</Table>
The reclassification for the Fund is primarily due to net operating losses.
(E) 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 as earned.
Discounts and premiums on short-term securities are accreted and amortized,
respectively, on the straight line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(F) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The
MainStay Growth Opportunities Fund
20
- -
expenses borne by the Fund, including those of related parties to the Fund, are
shown in the Statement of Operations.
(G) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER. New York Life Investment Management LLC ("NYLIM" or the
"Manager"), an indirect wholly-owned subsidiary of New York Life, serves as the
Fund's Manager. The Manager provides offices, conducts clerical, recordkeeping
and bookkeeping services, and keeps the financial and accounting records
required for the Fund. The Manager also pays the salaries and expenses of all
personnel affiliated with the Fund and all the operational expenses that are not
the responsibility of the Fund. The Fund is advised by the Manager directly,
without a Subadvisor.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.70% of the Fund's
average daily net assets. The Manager has voluntarily agreed to reimburse the
expenses of the Fund to the extent that operating expenses would exceed on an
annualized basis 1.65%, 2.40% and 2.40% of the average daily net assets of the
Class A, Class B and Class C shares, respectively. For the ten months ended
October 31, 2003, the Manager earned from the Fund $479,681 and reimbursed the
Fund for $145,000. For the year ended December 31, 2002, the Manager earned from
the Fund $654,351 and reimbursed the Fund for $94,568.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC ("the Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Distribution Plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
Notes to Financial Statements (continued)
21
-
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $862 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $347, $55,741 and $670, respectively, for the ten months ended October
31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and year ended December 31, 2002, amounted to $442,580
and $540,900, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the Growth
Opportunities Fund only pays a portion of the fees identified above.
(F) CAPITAL. At October 31, 2003, New York Life held shares of Class A with a
value of $9,766,549. This represents 25.5% of the Class A net assets at period
end and 10.3% of the Fund's total net assets at period end.
(G) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $1,738 for the ten months ended October
31, 2003 and $1,801 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $25,617 for the ten months ended October
31, 2003 and $33,991 for the year ended December 31, 2002.
MainStay Growth Opportunities Fund
22
- -
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
- ------------------- ------------ -----------------
$(33,255,701) $9,569,690 $(23,686,011)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $33,255,701 were available as shown in the table below, to the extent
provided by the regulations, to offset future realized gains through the years
indicated. 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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
- ------------------------------------------------------------ -------
2009................................................... $14,676
2010................................................... 16,193
2011................................................... 2,387
-------
$33,256
=======
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $59,149 and $56,781, respectively.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive share-
holder redemption requests. The funds pay a commitment fee, at an annual rate of
..075% of the average commitment amount, regardless of usage, to The Bank of New
York, which acts as agent to the syndicate. Such commitment fees are allocated
among the funds based upon net assets and other factors. Interest on any
revolving credit loan is charged based upon the Federal Funds Advances rate.
There were no borrowings on the line of credit during the ten months ended
October 31, 2003.
Notes to Financial Statements (continued)
23
-
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
JANUARY 1 YEAR ENDED
THROUGH DECEMBER 31,
OCTOBER 31 ------------------------------------------------------------
2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold.......... 1,518 649 62 1,271 891 118 534 1,152 50
Shares redeemed...... (1,108) (951) (23) (685) (1,523) (63) (525) (1,273) (66)
------ ---- --- ----- ------ --- ---- ------ ---
Net increase
(decrease)......... 410 (302) (39) 586 (632) 55 9 (121) (16)
====== ==== === ===== ====== === ==== ====== ===
</Table>
- -------
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
</Table>
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
24
- -
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Growth Opportunities Fund
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 Growth Opportunities Fund
(one of the funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
25
-
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
26
- -
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
27
-
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
28
- -
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
29
-
This page intentionally left blank
30
- -
This page intentionally left blank
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY.LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSGP11- 12/03
NYLIM-A04347 21
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R) Growth
Opportunities Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY.LOGO]
Table of Contents
<Table>
President's Letter 2
$10,000 Invested in MainStay High Yield
Corporate Bond Fund versus Credit Suisse
First Boston(TM) High Yield Index and
Inflation--Class A, Class B, and Class C
Shares 3
Portfolio Management Discussion and Analysis 4
Year-by-Year and 10-Month Performance 5
Portfolio of Investments 8
Financial Statements 21
Notes to Financial Statements 26
Report of Independent Auditors 38
Trustees and Officers 39
The MainStay(R) Funds 42
</Table>
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
2
$10,000 Invested in MainStay High Yield
Corporate Bond Fund versus Credit Suisse
First Boston(TM) High Yield Index and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 37.30%, 5 Years 6.90%, 10 Years 8.19%
[Class A Shares LINE GRAPH]
<Table>
Period-end MainStay High Yield Corporate Bond Fund
- ----------
10/31/93 $ 9,550.00
94 $ 10,006.00
95 $ 11,690.00
96 $ 13,504.00
97 $ 15,567.00
98 $ 15,030.00
99 $ 16,963.00
00 $ 17,159.00
01 $ 16,251.00
02 $ 15,280.00
10/31/03 $ 21,968.00
Period-end
- ---------- Credit Suisse First Boston High Yield Index(1) Inflation (CPI)(2)
10/31/93 $ 10,000.00 $ 10,000.00
94 $ 10,165.00 $ 10,261.00
95 $ 11,714.00 $ 10,543.00
96 $ 12,941.00 $ 10,865.00
97 $ 14,850.00 $ 11,092.00
98 $ 14,480.00 $ 11,257.00
99 $ 15,282.00 $ 11,545.00
00 $ 15,165.00 $ 11,944.00
01 $ 15,221.00 $ 12,198.00
02 $ 15,211.00 $ 12,452.00
10/31/03 $ 19,996.00 $ 12,706.00
</Table>
CLASS B AND CLASS C SHARES
Class B Total Returns with Sales Charges: 1 Year 37.53%, 5 Years 6.84%, 10 Years
8.03%
Class C Total Returns with Sales Charges: 1 Year 41.53%, 5 Years 7.09%, 10 Years
8.03%
[Class B Shares LINE GRAPH]
<Table>
Period-end
- ---------- MainStay High Yield Corporate Bond Fund
10/31/93 $ 10,000.00
94 $ 10,477.00
95 $ 12,179.00
96 $ 13,989.00
97 $ 16,045.00
98 $ 15,371.00
99 $ 17,227.00
00 $ 17,287.00
01 $ 16,239.00
02 $ 15,190.00
10/31/03 $ 21,650.00
Period-end
- ---------- Credit Suisse First Boston High Yield Index(1) Inflation (CPI)(2)
10/31/93 $ 10,000.00 $ 10,000.00
94 $ 10,165.00 $ 10,261.00
95 $ 11,714.00 $ 10,543.00
96 $ 12,941.00 $ 10,865.00
97 $ 14,850.00 $ 11,092.00
98 $ 14,480.00 $ 11,257.00
99 $ 15,282.00 $ 11,545.00
00 $ 15,165.00 $ 11,944.00
01 $ 15,221.00 $ 12,198.00
02 $ 15,211.00 $ 12,452.00
10/31/03 $ 19,996.00 $ 12,706.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES UPON REDEMPTION MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE INFORMATION,
PLEASE VISIT WWW.MAINSTAYFUNDS.COM. Performance tables and graphs do not
reflect the deduction of taxes that a shareholder would pay on distributions
or Fund-share redemptions. Total returns reflect change in share price,
reinvestment of dividend and capital gain distributions, and maximum
applicable sales charges explained in this paragraph. The graphs assume an
initial investment of $10,000 and reflect deduction of all sales charges that
would have applied for the period of investment. Class A share performance
reflects the effect of the maximum 4.5% initial sales charge and includes the
historical performance of the Class B shares for periods from the Fund's
inception on 5/1/86 through 12/31/94. Performance figures for the two classes
vary after 12/41/94 based on differences in their sales charges and expense
structures. Class C share performance includes the historical performance of
the Class B shares for periods from the Fund's inception on 5/1/86 through
8/31/98. Class B shares would be subject to a contingent deferred sales
charge (CDSC) of up to 5% if redeemed within the first six years of purchase,
and Class C shares would be subject to a CDSC of 1% if redeemed within one
year of purchase.
1. The Credit Suisse First Boston(TM) High Yield Index is an unmanaged,
market-weighted index that includes publicly traded bonds rated below BBB
by Standard & Poor's and Baa by Moody's. Results assume reinvestment of
all income and capital gains. An investment cannot be made directly into
an index.
2. Inflation is measured 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. The rate of inflation does not represent an
investment return.
3
Portfolio Management Discussion and Analysis
The economy strengthened over the first three quarters of 2003, with real gross
domestic product rising from 1.4% in the first quarter to 3.3% in the second.
According to preliminary estimates by the Bureau of Economic Analysis, real GDP
growth rose to 8.2% in the third quarter, its highest level since early 1984.
Signs of a strengthening economy helped the stock market advance and con
tributed to a renewed appetite for risk.
The high-yield bond market generated outstanding returns over the first 10
months of 2003. Low interest rates, declining default rates, and strong demand
propelled high-yield prices higher. The technicals of the market remained
positive throughout the 10-month reporting period, despite a brief pullback at
the end of July. In the beginning of August, we saw some technical selling
pressure in the market. The primary reasons were an increase in U.S. Treasury
rates, retail money flows out of the high-yield asset class, and an unusual
flood of new issuance during the normally slow summer months. Even so, some $23
billion flowed into the high-yield market from January through October of 2003.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay High Yield Corporate Bond
Fund returned 31.57% for Class A shares and 30.82% for Class B and Class C
shares, excluding all sales charges. All share classes outperformed the 19.96%
return of the average Lipper(1) high current yield fund over the same period.
All share classes also outperformed the 23.35% return of the Credit Suisse First
Boston(TM) High Yield Index(2) for the 10 months ended October 31, 2003.
As these returns indicate, the Fund posted impressive absolute and relative
results over the reporting period. At times, incoming investments caused the
Fund's cash levels to run high. We also proactively sold positions that met the
Fund's price targets and meticulously redeployed the proceeds to invest in high-
yield bonds that met our stringent credit requirements.
As of October 31, 2003, MainStay High Yield Corporate Bond Fund Class A and
Class B shares were rated four stars overall out of 326 high yield bond funds
and Class C shares were rated five stars overall out of 326 high yield bond
funds by Morningstar.(3) The Fund's Class A and B shares were both rated three
stars out of 326 high yield bond funds and Class C shares were rated four stars
out of 326 high yield bond funds for the three-year period then ended. The
Fund's Class A and Class B shares were rated four stars out of 239 high yield
bond funds and Class C shares were rated five stars out of 239 high yield bond
funds for the five-year period then ended. The Fund's Class B shares were rated
five stars out of 74 high yield bond funds for the 10-year period ended October
31, 2003.
- -------
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 3 for more information about the Credit Suisse First
Boston High Yield Index.
3. For each fund with at least a three-year history, Morningstar calculates a
Morningstar Rating(TM) based on a Morningstar Risk-Adjusted Return measure
that accounts for variation in a fund's monthly performance (including the
effects of sales charges, loads, and redemption fees), placing more emphasis
on downward variations and rewarding consistent performance. The top 10% of
funds in each category receive five stars, the next 22.5% receive four stars,
the middle 35% receive three stars, the next 22.5% receive two stars, and the
bottom 10% receive one star. The Overall Morning- star Rating(TM) for a fund
is derived from a weighted average of the performance figures associated with
its three-, five- and 10-year (if applicable) Morningstar Rating(TM) metrics.
4
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[CLASS A SHARES BAR GRAPH]
<Table>
<Caption>
Period-end CLASS A SHARES
- ---------- --------------
12/94 1.50
12/95 20.28
12/96 16.33
12/97 12.20
12/98 2.07
12/99 10.33
12/00 -6.48
12/01 2.49
12/02 -0.78
10/03 31.57
</Table>
Returns reflect the historical performance of the Class B shares through
12/31/94. See footnote on page 3 for more information on performance.
CLASS B AND CLASS C SHARES
[CLASS B SHARES BAR GRAPH]
<Table>
<Caption>
Period-end CLASS B AND CLASS C SHARES
- ---------- --------------------------
12/94 1.50
12/95 19.71
12/96 15.58
12/97 11.55
12/98 1.31
12/99 9.51
12/00 -7.20
12/01 1.72
12/02 -1.53
10/03 30.82
</Table>
Class C returns reflect the historical performance of the Class B shares through
8/31/98. See footnote on page 3 for more information on performance.
FUND MANAGEMENT DECISIONS
The Fund's telecommunications holdings aided results during the reporting
period, with Nextel International providing the strongest performance. The firm
recently completed a reorganization, and as a result, the Fund received equity
in the reorganized company. Other strong performers in this industry included
Qwest, Call Net Enterprises, and Colt Telecom. Beginning in the second quarter
of 2003, investors overcame their concerns regarding Qwest's lack of audited
financials and the company's limited liquidity position. Investors were also
encouraged that the company reduced its debt burden through asset sales and
5
a debt exchange. In the wireless area, Sprint affiliates generated strong
results, and the Fund was rewarded for holding Alamosa and U.S. Unwired.
Utilities are currently the largest industry group in the Credit Suisse First
Boston High Yield Index, and the Fund maintained an overweighted position in the
sector throughout the reporting period. This positioning contributed positively
to the Fund's results, since the industry was among the top performers for the
10-month period. Within the utilities industry group, the Fund emphasized gas-
pipeline companies such as El Paso, Tennessee Gas Pipeline, and PG&E.
High-yield information technology bonds outperformed the Index over the
reporting period. Many information technology companies have benefited from cost
cutting and balance-sheet strengthening. Avaya, Juniper Networks, Lucent
Technologies, and Nortel Networks were examples of Fund holdings that enhanced
results. While revenues for telecom equipment makers are not growing, the market
reacted positively to balance-sheet repair and cash-flow restructurings, which
bolstered the returns of these bonds. Xerox performed well as the firm showed
revenue gains as well as an increase in its margins. Other technology holdings
that helped results were Advanced Micro Devices, Ciena, and LSI Logic.
Cable-company bonds sold off significantly in 2002, driven in part by the poor
performance of Adelphia and Charter, and the negative perception of the
industry's ability to generate free cash flow. In 2003, however, the industry's
improving free cash flow situation and resulting credit improvements led to
investor interest and strong performance. The Fund's holdings in FrontierVision,
Comcast, Quebecor Media, and Rogers Cablesystems all enhanced results. We have
recently lowered the Fund's exposure to this industry as some of the companies
that we purchased at a discount have appreciated to a point where we felt it
would be prudent to capture profits.
Airline-industry bonds were extremely volatile over the 10-month reporting
period. In the first quarter of 2003, these bonds performed poorly as the
pressure of war, financial difficulties, and union negotiations loomed over
industry. In striking contrast, the industry experienced a significant reversal
of fortune in the second quarter of 2003. During this period, major combat
operations in Iraq wound down, union negotiations were finalized, and summer
bookings began to grow. Investors were encouraged by these positive
developments, which helped airline bonds to rebound sharply. The Fund's holdings
in Delta Airlines and Northwest Airlines were among its top performers.
Bonds of health care companies have been lackluster year-to-date, and the Fund's
relative performance was aided by its underweighted position in the sector.
Among the Fund's health care holdings were Caremark, dj Orthopedics, Medaphis,
and Vertex Pharmaceuticals. HealthSouth was particularly disappointing, since
the company is being sued by the Securities and Exchange Commission for
overstating
6
profits and its CEO and a number of executives are being investigated. The
Fund's position in the company has been sold.
SECTOR WEIGHTS
The top-performing portions of the portfolio over the 10-month period were
wireless communications, telecommunications, and utilities. The Fund was
overweighted relative to its benchmark in these areas at the beginning of the
reporting period, and at the end of October 2003, it remained overweighted in
wireless communications and utilities, while it held a neutral position in
telecommunications. The Fund also benefited from an underweighted position in
consumer durables and consumer nondurables as these areas underperformed the
Index. The Fund was hurt, however, by its market-weighted position in
metals/minerals, as this portion of the Fund's portfolio underperformed the
Credit Suisse First Boston High Yield Index.
LOOKING AHEAD
Our view of the high-yield market remains positive. Low real interest rates,
significant Federal Reserve stimulus, and continuing improvements in the world's
equity markets could all contribute to an improving economy. In addition, the
average high-yield company has been able to dramatically repair its balance
sheet, lowering the likelihood of defaults in the coming years. With declining
default rates, we believe that the high-yield market was still selling at an
attractive yield premium relative to U.S. Treasuries at the end of October.
Whatever the markets or the economy may bring, the Fund will continue to seek
maximum current income through investment in a diversified portfolio of
high-yield debt securities. Capital appreciation will remain a secondary
objective.
Donald E. Morgan
J. Matthew Philo
Portfolio Managers
MacKay Shields LLC
High-yield securities ("junk bonds") are generally considered speculative
because they present a greater risk of loss than higher-quality debt securities
and may be subject to greater price volatility. Foreign securities may be
subject to greater risks than U.S. investments, including currency fluctuations,
less-liquid trading markets, greater price volatility, political and economic
instability, less publicly available information, and changes in tax or currency
laws or monetary policy. These risks are likely to be greater in emerging
markets than in developed markets.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
7
MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
LONG-TERM BONDS (80.4%)+
ASSET-BACKED SECURITIES (1.5%)
AIRLINES (0.0%) (b)
Northwest Airlines, Inc.
Pass-Through Certificates
Series 1996-1
8.97%, due 1/2/15........... $ 2,079,445 $ 1,355,008
--------------
MEDIA (0.1%)
United Artists Theatre
Circuit, Inc.
Pass-Through Certificates
Series 1995-A
9.30%, due 7/1/15 (d)....... 5,029,585 4,903,845
--------------
MULTILINE RETAIL (0.0%) (b)
Kmart Corp.
Pass-Through Certificates
Series 1995 Class K3
8.54%, due 1/2/15 (e)....... 3,504,283 1,401,713
--------------
MULTI-UTILITIES & UNREGULATED POWER (1.4%)
AES Eastern Energy L.P.
Pass-Through Certificates
Series 1999-A
9.00%, due 1/2/17 (f)....... 19,140,831 20,767,802
Series 1999-B
9.67%, due 1/2/29 (f)....... 16,765,000 18,190,025
Tiverton/Rumford Power
Associates Ltd., L.P.
Pass-Through Certificates
9.00%, due 7/15/18 (c)(f)... 29,970,000 24,575,400
--------------
63,533,227
--------------
Total Asset-Backed Securities
(Cost $73,141,882).......... 71,193,793
--------------
CONVERTIBLE BONDS (6.9%)
AIRLINES (0.2%)
Delta Air Lines, Inc.
8.00%, due 6/3/23 (c)....... 11,530,000 11,097,625
--------------
BIOTECHNOLOGY (0.0%) (b)
Vertex Pharmaceuticals, Inc.
5.00%, due 9/19/07.......... 1,055,000 938,950
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
COMMUNICATIONS EQUIPMENT (2.0%)
Brocade Communications
Systems, Inc.
2.00%, due 1/1/07........... $ 4,880,000 $ 4,361,500
CIENA Corp.
3.75%, due 2/1/08........... 39,835,000 34,955,213
Nortel Networks Corp.
4.25%, due 9/1/08........... 38,480,000 36,459,800
Riverstone Networks, Inc.
3.75%, due 12/1/06 (c)...... 15,490,000 15,102,750
--------------
90,879,263
--------------
CONSUMER FINANCE (0.2%)
Providian Financial Corp.
3.25%, due 8/15/05.......... 9,040,000 8,723,600
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (1.4%)
At Home Corp.
4.75%, due 12/15/06 (e)..... 61,533,853 8,614,739
COLT Telecom Group PLC
2.00%, due 3/29/06 (c)...... E 15,270,000 18,106,404
2.00%, due 12/16/06 (c)..... 7,103,000 8,422,383
2.00%, due 4/3/07 (c)....... 16,605,000 19,689,380
Premiere Technologies, Inc.
5.75%, due 7/1/04........... $ 7,862,000 7,920,965
--------------
62,753,871
--------------
ENERGY EQUIPMENT & SERVICES (0.0%) (b)
Parker Drilling Co.
5.50%, due 8/1/04 (g)....... 943,000 945,358
--------------
HEALTH CARE PROVIDERS & SERVICES (0.2%)
Laboratory Corp. of America
Holdings
(zero coupon), due
9/11/21..................... 110,000 78,650
Province Healthcare Co.
4.25%, due 10/10/08......... 7,345,000 6,913,481
--------------
6,992,131
--------------
MEDIA (0.2%)
Adelphia Communications Corp.
6.00%, due 2/15/06 (e)...... 23,250,000 10,113,750
--------------
METALS & MINING (0.1%)
Algoma Steel, Inc.
1.00%, due 12/31/30
(d)(e)(h)................... 10,371,000 4,718,805
--------------
PHARMACEUTICALS (0.2%)
ICN Pharmaceuticals, Inc.
6.50%, due 7/15/08.......... 9,965,000 10,027,281
--------------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
8
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
CONVERTIBLE BONDS (CONTINUED)
REAL ESTATE (0.2%)
Koninklijke Ahold N.V.
4.00%, due 5/19/05.......... E 7,800,000 $ 8,795,476
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (1.5%)
Atmel Corp.
(zero coupon), due
5/23/21..................... $ 33,300,000 13,902,750
LSI Logic Corp.
4.00%, due 11/1/06.......... 48,465,000 47,132,213
Vitesse Semiconductor Corp.
4.00%, due 3/15/05.......... 9,240,000 9,020,550
--------------
70,055,513
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.7%)
Millicom International
Cellular S.A.
2.00%, due 6/1/06
(d)(i)(j)................... 5,438,000 31,227,715
--------------
Total Convertible Bonds
(Cost $263,631,268)......... 317,269,338
--------------
CORPORATE BONDS (54.7%)
AEROSPACE & DEFENSE (0.9%)
BE Aerospace, Inc.
Series B
8.00%, due 3/1/08 (g)....... 4,630,000 4,213,300
Series B
8.875%, due 5/1/11 (g)...... 1,375,000 1,237,500
9.50%, due 11/1/08 (g)...... 1,000,000 947,500
K & F Industries, Inc.
Series B
9.625%, due 12/15/10........ 6,985,000 7,823,200
Sequa Corp.
Series B
8.875%, due 4/1/08.......... 5,525,000 6,029,157
9.00%, due 8/1/09........... 14,755,000 16,230,500
Vought Aircraft Industries,
Inc.
8.00%, due 7/15/11 (c)...... 5,290,000 5,316,450
--------------
41,797,607
--------------
AIRLINES (1.8%)
AMR Corp.
9.00%, due 8/1/12 (g)....... 2,555,000 2,114,262
Delta Air Lines, Inc.
Series C
6.65%, due 3/15/04.......... 8,925,000 8,902,687
8.30%, due 12/15/29......... 20,623,000 13,662,737
Series A
9.25%, due 12/27/07 (d)..... 5,175,000 4,437,562
9.25%, due 3/15/22.......... 9,000,000 6,142,500
9.75%, due 5/15/21.......... 900,000 614,250
10.375%, due 12/15/22....... 4,685,000 3,244,362
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
AIRLINES (CONTINUED)
Northwest Airlines, Inc.
7.625%, due 3/15/05 (g)..... $ 2,575,000 $ 2,446,250
8.375%, due 3/15/04 (g)..... 6,310,000 6,310,000
8.52%, due 4/7/04 (g)....... 9,895,000 9,870,262
8.875%, due 6/1/06.......... 960,000 852,000
9.875%, due 3/15/07 (g)..... 25,955,000 23,164,837
--------------
81,761,709
--------------
AUTO COMPONENTS (0.8%)
ArvinMeritor, Inc.
8.75%, due 3/1/12 (g)....... 3,995,000 4,194,750
Dana Corp.
7.00%, due 3/1/29........... 15,620,000 13,862,750
9.00%, due 8/15/11 (g)...... 2,020,000 2,257,350
Goodyear Tire & Rubber Co.
(The)
6.625%, due 12/1/06 (g)..... 3,000,000 2,880,000
7.857%, due 8/15/11......... 2,155,000 1,842,525
8.50%, due 3/15/07 (g)...... 4,605,000 4,420,800
Tenneco Automotive, Inc.
Series B
10.25%, due 7/15/13 (g)..... 7,625,000 8,425,625
--------------
37,883,800
--------------
AUTO LEASES (0.0%) (b)
Williams Scotsman, Inc.
10.00%, due 8/15/08 (c)..... 315,000 346,500
--------------
AUTOMOBILES (0.4%)
General Motors Corp.
8.375%, due 7/15/33......... 16,575,000 17,487,618
--------------
BUILDING PRODUCTS (0.5%)
Dayton Superior Corp.
10.75%, due 9/15/08 (c)..... 11,730,000 12,228,525
Interline Brands, Inc.
11.50%, due 5/15/11 (c)..... 10,360,000 11,188,800
--------------
23,417,325
--------------
CHEMICALS (2.1%)
Equistar Chemicals L.P.
7.55%, due 2/15/26.......... 6,355,000 5,020,450
10.125%, due 9/1/08 (g)..... 7,435,000 7,806,750
10.625%, due 5/1/11 (c)..... 4,615,000 4,822,675
General Chemical Industrial
Products, Inc.
10.625%, due 5/1/09 (e)..... 6,160,000 1,848,000
Lyondell Chemical Co.
9.50%, due 12/15/08 (g)..... 7,930,000 7,930,000
Series A
9.625%, due 5/1/07 (g)...... 1,925,000 1,953,875
10.50%, due 6/1/13.......... 17,985,000 18,524,550
Millennium America, Inc.
7.625%, due 11/15/26........ 5,960,000 5,095,800
</Table>
9
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
CORPORATE BONDS (CONTINUED)
CHEMICALS (CONTINUED)
Sovereign Specialty
Chemicals, Inc.
11.875%, due 3/15/10........ $ 11,750,000 $ 11,691,250
Terra Capital, Inc.
12.875%, due 10/15/08....... 28,655,000 33,239,800
--------------
97,933,150
--------------
COMMERCIAL SERVICES & SUPPLIES (0.9%)
American Color Graphics, Inc.
10.00%, due 6/15/10 (c)..... 7,250,000 7,775,625
El Comandante Capital Corp.
11.75%, due 12/15/03
(d)(e)...................... 17,186,051 8,593,025
Phoenix Color Corp.
10.375%, due 2/1/09......... 7,935,000 7,220,850
Protection One Alarm
Monitoring, Inc.
7.375%, due 8/15/05......... 19,566,000 16,141,950
--------------
39,731,450
--------------
COMMUNICATIONS EQUIPMENT (1.7%)
Avaya, Inc.
11.125%, due 4/1/09......... 19,180,000 22,632,400
Lucent Technologies, Inc.
5.50%, due 11/15/08 (g)..... 15,409,000 14,330,370
6.45%, due 3/15/29 (g)...... 38,455,000 29,706,487
6.50%, due 1/15/28.......... 5,485,000 4,250,875
7.25%, due 7/15/06 (g)...... 8,425,000 8,593,500
--------------
79,513,632
--------------
CONSTRUCTION & ENGINEERING (0.9%)
Amsted Industries, Inc.
10.25%, due 10/15/11 (c).... 3,200,000 3,528,000
Shaw Group, Inc. (The)
10.75%, due 3/15/10
(c)(g)...................... 11,114,000 11,725,270
URS Corp.
11.50%, due 9/15/09......... 20,360,000 23,108,600
Series B
12.25%, due 5/1/09.......... 4,100,000 4,346,000
--------------
42,707,870
--------------
CONTAINERS & PACKAGING (1.3%)
Applied Extrusion
Technologies, Inc.
Series B
10.75%, due 7/1/11.......... 8,255,000 6,356,350
Owens-Brockway Glass
Container, Inc.
8.25%, due 5/15/13.......... 5,695,000 6,008,225
8.75%, due 11/15/12......... 8,710,000 9,537,450
8.875%, due 2/15/09......... 24,495,000 26,577,075
Owens-Illinois, Inc.
7.80%, due 5/15/18.......... 10,445,000 10,027,200
--------------
58,506,300
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
DIVERSIFIED FINANCIAL SERVICES (2.6%)
Caithness Coso Funding Corp.
Series B
9.05%, due 12/15/09......... $ 24,438,317 $ 26,149,000
Calpine Construction Finance
Corp.
9.75%, due 8/26/11 (c)(g)... 13,875,000 13,770,937
ESI Tractebel Acquisition
Corp.
Series B
7.99%, due 12/30/11......... 14,852,000 15,334,690
FINOVA Group, Inc. (The)
7.50%, due 11/15/09......... 28,155,000 14,077,500
IPC Acquisition Corp.
11.50%, due 12/15/09........ 20,630,000 21,584,137
UCAR Finance, Inc.
10.25%, due 2/15/12......... 23,505,000 26,031,787
--------------
116,948,051
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (3.4%)
COLO.COM
13.875%, due 3/15/10
(c)(d)(e)(l1)(m)(n)......... 15,895 158,950
Mountain States Telephone &
Telegraph Co.
7.375%, due 5/1/30.......... 9,455,000 9,076,800
Qwest Communications
International, Inc.
Series B
7.50%, due 11/1/08.......... 2,208,000 2,141,760
Qwest Corp.
8.875%, due 3/15/12
(c)(g)...................... 25,295,000 28,583,350
Qwest Services Corp.
13.00%, due 12/15/07
(c)(g)...................... 11,631,000 13,201,185
13.50%, due 12/15/10 (c).... 36,083,000 42,126,902
14.00%, due 12/15/14
(c)(g)...................... 7,841,000 9,566,020
TSI Telecommunication
Services, Inc.
Series B
12.75%, due 2/1/09.......... 31,825,000 32,779,750
U.S. West Capital Funding
6.25%, due 7/15/05.......... 11,415,000 11,300,850
U.S. West Communications,
Inc.
5.625%, due 11/15/08........ 1,420,000 1,391,600
7.20%, due 11/1/04.......... 1,385,000 1,419,625
7.50%, due 6/15/23.......... 260,000 249,600
8.875%, due 6/1/31.......... 3,595,000 3,774,750
--------------
155,771,142
--------------
ELECTRIC UTILITIES (2.0%)
Cedar Brakes II LLC
9.875%, due 9/1/13.......... 48,549,357 49,034,851
Mirant Americas Generation
LLC
7.20%, due 10/1/08 (e)...... 4,730,000 3,925,900
8.30%, due 5/1/11 (e)....... 1,325,000 1,096,438
8.50%, due 10/1/21 (e)...... 8,630,000 7,141,325
9.125%, due 5/1/31 (e)...... 6,220,000 5,147,050
</Table>
10
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
CORPORATE BONDS (CONTINUED)
ELECTRIC UTILITIES (CONTINUED)
Mirant Americas Generation LLC (Continued)
Southern California Edison
Co.
8.00%, due 2/15/07.......... $ 12,365,000 $ 13,879,712
TECO Energy, Inc.
7.20%, due 5/1/11........... 5,715,000 5,757,862
7.50%, due 6/15/10.......... 7,270,000 7,469,925
--------------
93,453,063
--------------
ELECTRICAL EQUIPMENT (0.7%)
Knowles Electronics Holdings,
Inc.
13.125%, due 10/15/09....... 25,030,000 24,779,700
Thomas & Betts Corp.
6.625%, due 5/7/08.......... 7,050,000 7,138,125
--------------
31,917,825
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.3%)
ON Semiconductor Corp.
13.00%, due 5/15/08......... 10,470,000 12,145,200
--------------
ENERGY EQUIPMENT & SERVICES (0.7%)
El Paso Natural Gas Co.
7.50%, due 11/15/26......... 3,555,000 3,163,950
Series A
7.625%, due 8/1/10.......... 1,445,000 1,430,550
8.375%, due 6/15/32......... 16,000,000 14,880,000
Grant Prideco, Inc.
9.00%, due 12/15/09......... 1,550,000 1,674,000
Halliburton Co.
8.75%, due 2/15/21.......... 3,145,000 3,728,256
Parker Drilling Co.
Series B
10.125%, due 11/15/09 (g)... 7,185,000 7,508,325
--------------
32,385,081
--------------
FOOD & STAPLES RETAILING (0.0%) (b)
Ahold Finance USA, Inc.
6.25%, due 5/1/09 (g)....... 1,810,000 1,800,950
--------------
FOOD PRODUCTS (1.4%)
Chiquita Brands
International, Inc.
10.56%, due 3/15/09......... 13,444,000 14,687,570
Dole Food Co., Inc.
8.75%, due 7/15/13.......... 4,685,000 5,118,362
Seminis, Inc.
10.25%, due 10/1/13 (c)..... 7,860,000 8,410,200
Swift & Co.
10.125%, due 10/1/09........ 12,685,000 14,270,625
12.50%, due 1/1/10 (c)...... 19,535,000 22,172,225
--------------
64,658,982
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
GAS UTILITIES (1.4%)
ANR Pipeline, Inc.
7.00%, due 6/1/25........... $ 5,545,000 $ 5,558,862
7.375%, due 2/15/24......... 1,785,000 1,722,525
9.625%, due 11/1/21......... 20,606,000 23,284,780
Southern Natural Gas Co.
7.35%, due 2/15/31.......... 5,790,000 5,471,550
Transcontinental Gas PipeLine
Corp.
Series B
7.00%, due 8/15/11.......... 475,000 507,062
7.25%, due 12/1/26.......... 27,085,000 27,491,275
--------------
64,036,054
--------------
HEALTH CARE EQUIPMENT & SUPPLIES (0.4%)
dj Orthopedics LLC
12.625%, due 6/15/09........ 15,045,000 16,699,950
Fisher Scientific
International, Inc.
8.125%, due 5/1/12.......... 2,430,000 2,612,250
--------------
19,312,200
--------------
HEALTH CARE PROVIDERS & SERVICES (2.8%)
Columbia/HCA Healthcare Corp.
7.50%, due 11/15/95......... 54,125,000 50,427,505
Harborside Healthcare Corp.
(zero coupon), due 8/1/07
12.00%, beginning 8/1/04
(d)(j)...................... 52,015,000 18,205,250
Manor Care, Inc.
7.50%, due 6/15/06.......... 400,000 432,500
National Nephrology
Associates, Inc.
9.00%, due 11/1/11 (c)...... 6,425,000 6,633,812
QuadraMed Corp.
10.00%, due 4/1/08 (c)(o)... 9,895,000 8,509,700
Quintiles Transnational Corp.
10.00%, due 10/1/13 (c)..... 28,620,000 30,194,100
Service Corp. International
6.875%, due 10/1/07......... 1,615,000 1,639,225
Team Health, Inc.
Series B
12.00%, due 3/15/09......... 11,145,000 11,869,425
Tenet Healthcare Corp.
6.875%, due 11/15/31........ 455,000 400,400
--------------
128,311,917
--------------
HOTELS, RESTAURANTS & LEISURE (2.9%)
FRI-MRD Corp.
12.00%, due 1/31/05
(d)(i)(j)(m)................ 46,852,794 19,678,173
Gaylord Entertainment Co.
8.00%, due 11/15/13 (c)..... 4,475,000 4,603,656
Hollywood Casino Shreveport
Capital Corp.
13.00%, due 8/1/06 (e)...... 4,000,000 2,815,000
Jacobs Entertainment Co.
11.875%, due 2/1/09......... 13,320,000 14,402,250
MGM Mirage, Inc.
8.375%, due 2/1/11 (g)...... 6,000,000 6,690,000
</Table>
11
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
CORPORATE BONDS (CONTINUED)
HOTELS, RESTAURANTS & LEISURE (CONTINUED)
Mohegan Tribal Gaming
Authorities
6.375%, due 7/15/09 (c)..... $ 3,650,000 $ 3,736,687
President Casinos, Inc.
12.00%, due 9/15/04
(c)(d)(e)(m)................ 7,567,000 5,296,900
13.00%, due 9/15/04
(d)(e)(m)................... 16,273,000 7,729,675
Prime Hospitality Corp.
Series B
8.375%, due 5/1/12.......... 4,000,000 4,080,000
Speedway Motorsports, Inc.
6.75%, due 6/1/13........... 5,805,000 5,906,587
Starwood Hotels & Resorts
Worldwide, Inc.
7.375%, due 11/15/15 (g).... 18,405,000 19,509,300
Vail Resorts, Inc.
8.75%, due 5/15/09.......... 12,225,000 12,851,531
Venetian Casino Resort LLC
11.00%, due 6/15/10 (g)..... 16,900,000 19,498,375
Wheeling Island Gaming, Inc.
10.125%, due 12/15/09....... 3,250,000 3,347,500
--------------
130,145,634
--------------
HOUSEHOLD DURABLES (0.1%)
Foamex L.P.
10.75%, due 4/1/09 (g)...... 3,930,000 3,458,400
--------------
INDUSTRIAL CONGLOMERATES (0.2%)
SCG Holdings Corp.
12.00%, due 8/1/09 (g)...... 6,510,000 6,933,150
--------------
INSURANCE (0.7%)
Crum & Forster Holding Corp.
10.375%, due 6/15/13 (c).... 19,680,000 21,156,000
Fremont General Corp.
Series B
7.875%, due 3/17/09......... 8,630,000 8,630,000
Lumbermens Mutual Casualty
Co.
8.30%, due 12/1/37 (c)(e)... 8,300,000 415,000
8.45%, due 12/1/97 (c)(e)... 2,575,000 128,750
9.15%, due 7/1/26 (c)(e).... 41,823,000 2,091,150
--------------
32,420,900
--------------
INTERNET SOFTWARE & SERVICES (0.2%)
Globix Corp.
11.00%, due 5/1/08
(c)(d)(i)................... 9,992,021 8,493,218
--------------
IT SERVICES (0.1%)
Unisys Corp.
6.875%, due 3/15/10......... 3,050,000 3,240,625
8.125%, due 6/1/06.......... 2,194,000 2,402,430
--------------
5,643,055
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
MACHINERY (1.0%)
Columbus McKinnon Corp.
8.50%, due 4/1/08 (g)....... $ 1,000,000 $ 892,500
Dresser, Inc.
9.375%, due 4/15/11......... 10,105,000 10,382,888
Mark IV Industries, Inc.
7.50%, due 9/1/07........... 36,175,000 30,748,750
Titan Wheel International,
Inc.
8.75%, due 4/1/07 (g)....... 3,375,000 1,991,250
--------------
44,015,388
--------------
MEDIA (6.0%)
@Entertainment, Inc.
Series B
14.50%, due 7/15/08
(d)(e)...................... 43,290,000 15,584,400
Adelphia Communications Corp.
Series B
9.25%, due 10/1/04 (e)...... 1,820,000 1,465,100
9.375%, due 11/15/09 (e).... 7,050,000 5,922,000
10.25%, due 11/1/06 (e)..... 9,285,000 7,474,425
10.25%, due 6/15/11 (e)..... 30,450,000 25,578,000
Emmis Communications Corp.
(zero coupon), due 3/15/11
12.50%, beginning 3/15/06... 4,303,000 3,948,003
FrontierVision Holdings, L.P.
11.00%, due 10/15/06 (e).... 25,535,000 26,332,969
11.875%, due 9/15/07 (e).... 10,605,000 10,618,256
Series B
11.875%, due 9/15/07 (e).... 4,495,000 4,500,619
Garden State Newspapers, Inc.
8.625%, due 7/1/11.......... 1,095,000 1,159,331
Series B
8.75%, due 10/1/09.......... 1,695,000 1,747,969
General Media, Inc.
15.00%, due 3/29/04
(d)(e)(l2).................. 20,958 9,221,520
Hollinger Participation Trust
12.125%, due 11/15/10
(c)(i)...................... 29,672,275 34,419,839
Houghton Mifflin Co.
7.20%, due 3/15/11.......... 9,495,000 10,017,225
Morris Publishing Group, Inc.
7.00%, due 8/1/13 (c)....... 19,745,000 20,139,900
Paxson Communications Corp.
(zero coupon), due 1/15/09
12.25%, beginning 1/15/06... 52,775,000 44,331,000
Radio One, Inc.
Series B
8.875%, due 7/1/11.......... 1,505,000 1,655,500
Radio Unica Corp.
11.75%, due 8/1/06 (e)...... 24,123,000 15,860,873
Vertis, Inc.
9.75%, due 4/1/09 (c)....... 15,005,000 15,942,813
</Table>
12
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
CORPORATE BONDS (CONTINUED)
MEDIA (CONTINUED)
Young Broadcasting, Inc.
8.50%, due 12/15/08 (g)..... $ 2,000,000 $ 2,155,000
Ziff Davis Media, Inc.
Series B
13.00%, due 8/12/09......... 15,229,575 13,706,617
--------------
271,781,359
--------------
METALS & MINING (1.3%)
AK Steel Corp.
7.75%, due 6/15/12 (g)...... 27,965,000 19,016,200
Allegheny Ludlum Corp.
6.95%, due 12/15/25......... 14,125,000 11,300,000
8.375%, due 12/15/11........ 3,320,000 2,722,400
Commonwealth Industries, Inc.
10.75%, due 10/1/06......... 4,250,000 4,292,500
Ormet Corp.
11.00%, due 8/15/08
(c)(e)...................... 12,885,000 2,963,550
United States Steel LLC
9.75%, due 5/15/10.......... 5,220,000 5,507,100
10.75%, due 8/1/08.......... 14,440,000 15,847,900
--------------
61,649,650
--------------
MULTI-UTILITIES & UNREGULATED POWER (3.0%)
AES Corp. (The)
9.00%, due 5/15/15 (c)...... 18,515,000 19,811,050
10.00%, due 7/15/05
(c)(g)...................... 23,105,933 23,799,111
Calpine Corp.
7.625%, due 4/15/06 (g)..... 8,060,000 6,528,600
7.75%, due 4/15/09 (g)...... 9,020,000 6,268,900
8.25%, due 8/15/05 (g)...... 3,440,000 3,096,000
8.50%, due 7/15/10 (c)(g)... 22,170,000 20,285,550
8.50%, due 2/15/11 (g)...... 10,180,000 7,278,700
8.75%, due 7/15/07 (g)...... 10,325,000 8,001,875
PG&E National Energy Group,
Inc.
10.375%, due 5/16/11 (e).... 35,810,000 22,918,400
Reliant Resources, Inc.
9.25%, due 7/15/10 (c)...... 6,365,000 5,696,675
Westar Energy, Inc.
6.875%, due 8/1/04.......... 8,540,000 8,828,225
7.875%, due 5/1/07.......... 2,170,000 2,443,962
--------------
134,957,048
--------------
OFFICE ELECTRONICS (0.1%)
Xerox Corp.
7.20%, due 4/1/16........... 1,800,000 1,755,000
10.25%, due 1/15/09 (g)..... 4,345,000 4,920,713
--------------
6,675,713
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
OIL & GAS (4.3%)
Chesapeake Energy Corp.
7.75%, due 1/15/15.......... $ 3,480,000 $ 3,758,400
Comstock Resources, Inc.
11.25%, due 5/1/07.......... 13,145,000 14,262,325
Dynegy Holdings, Inc.
9.875%, due 7/15/10
(c)(g)...................... 21,535,000 23,150,125
10.125%, due 7/15/13 (c).... 3,420,000 3,710,700
El Paso Corp.
6.95%, due 12/15/07 (g)..... 1,870,000 1,673,650
El Paso Production Holding
Co.
7.75%, due 6/1/13 (c)....... 34,110,000 32,745,600
Energy Corp. of America
Series A
9.50%, due 5/15/07.......... 17,432,000 12,420,300
Gemstone Investors Ltd.
7.71%, due 10/31/04 (c)..... 5,175,000 5,181,469
Gulfterra Energy Partners
L.P.
Series B
8.50%, due 6/1/11........... 1,000,000 1,090,000
Newfield Exploration Co.
7.625%, due 3/1/11.......... 1,780,000 1,949,100
8.375%, due 8/15/12......... 1,660,000 1,834,300
Petro Stopping Centers
Holdings L.P.
Series B
(zero coupon), due 8/1/08
15.00%, beginning 8/1/04.... 22,805,000 15,963,500
Plains Exploration &
Production Co.
Series B
8.75%, due 7/1/12........... 6,000,000 6,540,000
Tennessee Gas Pipeline Co.
7.00%, due 3/15/27.......... 10,180,000 10,332,700
7.00%, due 10/15/28......... 6,555,000 5,850,338
7.50%, due 4/1/17........... 7,330,000 7,293,350
7.625%, due 4/1/37.......... 150,000 140,250
8.375%, due 6/15/32......... 9,470,000 9,588,375
Vintage Petroleum, Inc.
8.25%, due 5/1/12........... 25,510,000 27,933,450
Westport Resources Corp.
8.25%, due 11/1/11.......... 8,780,000 9,679,950
--------------
195,097,882
--------------
PAPER & FOREST PRODUCTS (2.2%)
Bowater, Inc.
9.00%, due 8/1/09 (g)....... 5,790,000 6,263,199
</Table>
13
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
CORPORATE BONDS (CONTINUED)
PAPER & FOREST PRODUCTS (CONTINUED)
Georgia-Pacific Corp.
7.25%, due 6/1/28........... $ 8,060,000 $ 7,334,600
7.375%, due 12/1/25......... 5,835,000 5,324,438
7.75%, due 11/15/29......... 15,243,000 14,404,635
8.25%, due 3/1/23........... 3,245,000 3,180,100
8.875%, due 2/1/10.......... 15,290,000 17,468,825
8.875%, due 5/15/31......... 25,535,000 27,130,938
9.125%, due 7/1/22.......... 2,760,000 2,829,000
9.375%, due 2/1/13.......... 7,630,000 8,774,500
Louisiana-Pacific Corp.
10.875%, due 11/15/08....... 800,000 940,000
Pope & Talbot, Inc.
8.375%, due 6/1/13.......... 7,240,000 7,059,000
--------------
100,709,235
--------------
PERSONAL PRODUCTS (0.3%)
Herbalife International, Inc.
11.75%, due 7/15/10......... 11,475,000 13,196,250
--------------
REAL ESTATE (2.3%)
CB Richard Ellis Services,
Inc.
11.25%, due 6/15/11......... 25,180,000 28,233,075
CBRE Escrow, Inc.
9.75%, due 5/15/10 (c)...... 12,245,000 13,224,600
Crescent Real Estate Equities
L.P.
7.50%, due 9/15/07.......... 41,002,000 42,027,050
OMEGA Healthcare Investors,
Inc.
6.95%, due 8/1/07........... 15,015,000 14,489,475
Senior Housing Properties
Trust
8.625%, due 1/15/12......... 5,910,000 6,441,900
--------------
104,416,100
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.3%)
Micron Technology, Inc.
6.50%, due 9/30/05
(c)(d)(j)................... 15,000,000 14,850,000
--------------
SPECIALTY RETAIL (0.5%)
Gap, Inc. (The)
6.90%, due 9/15/07 (g)...... 4,096,000 4,454,400
Rent-Way, Inc.
11.875%, due 6/15/10 (c).... 15,305,000 16,395,481
--------------
20,849,881
--------------
TOBACCO (0.4%)
Commonwealth Brands, Inc.
9.75%, due 4/15/08 (c)...... 13,035,000 14,338,500
10.625%, due 9/1/08 (c)..... 2,300,000 2,507,000
--------------
16,845,500
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
WIRELESS TELECOMMUNICATION SERVICES (1.8%)
Alamosa (Delaware), Inc.
12.50%, due 2/1/11.......... $ 6,925,000 $ 6,648,000
Alamosa Holdings, Inc.
(zero coupon), due 2/15/10
12.875%, beginning
2/15/05..................... 44,085,000 34,386,300
Loral CyberStar, Inc.
10.00%, due 7/15/06 (e)..... 34,610,000 26,130,550
US Unwired, Inc.
Series B
(zero coupon), due 11/1/09
13.375%, beginning
11/1/04..................... 23,800,000 15,470,000
--------------
82,634,850
--------------
Total Corporate Bonds
(Cost $2,452,164,749)....... 2,496,600,639
--------------
FOREIGN CORPORATE BONDS (10.1%)
CHEMICALS (0.1%)
Acetex Corp.
10.875%, due 8/1/09......... 3,745,000 4,194,400
--------------
COMMERCIAL SERVICES & SUPPLIES (1.1%)
IFCO Systems N.V.
10.375%, due 10/15/10 (c)... E 7,760,000 9,291,631
Quebecor Media, Inc.
(zero coupon), due 7/15/11
13.75%, beginning 7/15/06... $ 37,150,000 32,134,750
11.125%, due 7/15/11........ 9,230,000 10,614,500
--------------
52,040,881
--------------
COMMUNICATIONS EQUIPMENT (0.8%)
Marconi Corp. PLC
8.00%, due 4/30/08.......... 9,998,244 9,748,288
10.00%, due 10/31/08........ 1,716,091 1,844,797
Nortel Networks Ltd.
6.125%, due 2/15/06 (g)..... 22,240,000 22,768,200
--------------
34,361,285
--------------
CONTAINERS & PACKAGING (1.4%)
Crown Euro Holdings S.A.
9.50%, due 3/1/11........... 26,050,000 28,915,500
10.875%, due 3/1/13......... 30,030,000 34,234,200
--------------
63,149,700
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.5%)
Mobifon Holdings B.V.
12.50%, due 7/31/10 (c)..... 20,340,000 22,424,850
--------------
</Table>
14
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
FOREIGN CORPORATE BONDS (CONTINUED)
FOOD PRODUCTS (0.6%)
Burns Philp Capital Property
Ltd.
9.50%, due 11/15/10 (c)..... $ 6,120,000 $ 6,426,000
10.75%, due 2/15/11 (c)..... 18,805,000 19,839,275
--------------
26,265,275
--------------
MARINE (0.3%)
Navigator Gas Transport PLC
10.50%, due 6/30/07
(c)(d)(e)................... 10,425,000 3,648,750
Stena AB
9.625%, due 12/1/12......... 10,150,000 11,063,500
--------------
14,712,250
--------------
MEDIA (2.3%)
CanWest Media, Inc.
Series B
7.625%, due 4/15/13......... 25,871,000 28,264,068
Hollinger, Inc.
11.875%, due 3/1/11 (c)..... 6,935,000 7,628,500
TDL Infomedia Group Ltd.
12.125%, due 10/15/09....... L 505,000 938,370
12.125%, due 10/15/09....... 12,250,000 22,970,322
Vivendi Universal S.A.
6.25%, due 7/15/08 (c)(g)... $ 20,630,000 21,558,350
9.25%, due 4/15/10 (c)...... 19,110,000 22,215,375
--------------
103,574,985
--------------
MULTI-UTILITIES & UNREGULATED POWER (0.6%)
Calpine Canada Energy Finance
ULC
8.50%, due 5/1/08 (g)....... 37,250,000 27,378,750
--------------
OIL & GAS (0.3%)
Baytex Energy Ltd.
9.625%, due 7/15/10......... 14,606,000 15,263,270
--------------
PERSONAL PRODUCTS (0.4%)
Jafra Cosmetics
International, Inc.
10.75%, due 5/15/11......... 17,990,000 19,789,000
--------------
ROAD & RAIL (0.4%)
Grupo Transportacion
Ferroviaria Mexicana, S.A.
de C.V.
12.50%, due 6/15/12......... 16,240,000 17,864,000
--------------
WIRELESS TELECOMMUNICATION SERVICES (1.3%)
Millicom International
Cellular S.A.
11.00%, due 6/1/06 (c)...... 37,490,000 38,333,525
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
WIRELESS TELECOMMUNICATION SERVICES (CONTINUED)
Nextel International, Inc.
(zero coupon), due 11/1/09
13.00%, beginning 11/1/04
(d)......................... $ 19,398,225 $ 19,980,172
--------------
58,313,697
--------------
Total Foreign Corporate Bonds
(Cost $430,243,361)......... 459,332,343
--------------
LOAN ASSIGNMENTS & PARTICIPATIONS (2.5%)
AUTO COMPONENTS (0.2%)
Goodyear Tire & Rubber Co.
(The) Bank debt, Term Loan
5.13%, due 4/30/05
(d)(j)(k)................... 11,717,247 11,493,892
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.5%)
GT Group Telecom Services
Corp.
Bank debt, Term Loan A
6.5625%, due 6/30/08
(d)(e)(j)(k)(m)............. 16,936,744 1,694
Bank debt, Term Loan B
6.625%, due 6/30/08
(d)(e)(j)(k)(m)............. 12,103,256 1,210
Qwest Corp.
Bank debt, Term Loan
6.95%, due 6/30/10
(d)(j)(k)................... 18,000,000 17,905,500
Qwest Services Corp.
Bank debt, Revolver
4.62%, due 5/3/05
(d)(j)(k)(p)................ 3,847,671 3,804,385
--------------
21,712,789
--------------
HEALTH CARE PROVIDERS & SERVICES (0.0%) (b)
Supercanal Holdings, S.A.
Bank debt
6.50%, due 11/12/04
(d)(e)(j)(k)(n)............. 1,433,218 186,318
--------------
INSURANCE (0.4%)
Conseco, Inc.
Bank debt, Term Loan A
7.25%, due 9/10/10
(d)(j)(k)................... 13,076,923 12,946,154
Bank debt, Term Loan B
9.50%, due 9/10/10
(d)(j)(k)................... 3,923,077 3,896,922
--------------
16,843,076
--------------
MACHINERY (0.2%)
Thermadyne Holdings Corp.
Bank debt, Term Loan
6.23%, due 3/31/08
(d)(j)(k)................... 8,675,336 8,485,563
--------------
</Table>
15
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED)
MEDIA (0.2%)
Maxwell Communications Corp.
PLC
Facility A
(d)(e)(j)(k)(m)(n).......... $ 9,973,584 $ 129,657
Facility B
(d)(e)(j)(k)(m)(n).......... L 1,131,066 24,952
United Pan-Europe
Communications N.V.
Bank debt, Term Loan
5.5778%, due 6/30/08
(d)(j)(k)................... E 6,750,000 7,310,675
--------------
7,465,284
--------------
MULTI-UTILITIES & UNREGULATED POWER (1.0%)
Pacific Gas & Electric Co.
Bank debt, Revolver
8.375%, due 12/30/06
(d)(j)(k)................... $ 45,528,440 45,983,724
--------------
Total Loan Assignments &
Participations (Cost
$122,281,288)............... 112,170,646
--------------
MORTGAGE-BACKED SECURITIES (0.2%)
COMMERCIAL MORTGAGE LOANS (COLLATERALIZED MORTGAGE OBLIGATIONS)
(0.2%)
Commercial Trust I
Series 1993-KA Class A2
7.625%, due 12/15/13 (e).... 6,311,763 1,262,353
Debit Securitized Lease Trust
Series 1993-K1 Class A1
6.66%, due 8/15/10.......... 2,436,585 1,218,292
Series 1994-K1 Class A1
7.60%, due 8/15/07.......... 3,775,610 2,001,073
Series 1994-K1 Class A2
8.375%, due 8/15/15......... 8,106,503 4,296,447
Series 1994-K1 Class A3
8.55%, due 8/15/19.......... 134,756 71,421
--------------
Total Mortgage-Backed
Securities
(Cost $12,640,681).......... 8,849,586
--------------
MUNICIPAL BONDS (0.5%)
NEW JERSEY (0.3%)
Tobacco Settlement Financing
Corp.
6.00%, due 6/1/37........... 7,390,000 6,062,904
6.25%, due 6/1/43........... 2,405,000 2,016,617
6.375%, due 6/1/32.......... 1,060,000 950,438
6.75%, due 6/1/39........... 2,685,000 2,440,397
--------------
11,470,356
--------------
IOWA (0.2%)
Tobacco Settlement Authority
5.30%, due 6/1/25........... 3,470,000 2,751,432
5.60%, due 6/1/35........... 7,835,000 6,055,045
--------------
8,806,477
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
RHODE ISLAND (0.0%) (b)
Tobacco Settlement Financing
Corp.
6.25%, due 6/1/42........... $ 2,425,000 $ 2,035,084
--------------
Total Municipal Bonds
(Cost $21,540,364).......... 22,311,917
--------------
YANKEE BONDS (4.0%) (h)
COMMERCIAL SERVICES & SUPPLIES (0.1%)
Marsulex, Inc.
9.625%, due 7/1/08.......... 6,355,000 6,355,000
--------------
COMMUNICATIONS EQUIPMENT (0.1%)
Nortel Networks Corp.
6.875%, due 9/1/23 (g)...... 3,000,000 2,842,500
--------------
CONTAINERS & PACKAGING (0.5%)
Crown Cork & Seal Finance PLC
7.00%, due 12/15/06 (g)..... 24,245,000 24,366,225
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.3%)
Call-Net Enterprises, Inc.
10.625%, due 12/31/08....... 15,084,605 14,443,509
--------------
ENERGY EQUIPMENT & SERVICES (0.8%)
Petroleum Geo-Services ASA
6.25%, due 11/19/03 (e)..... 6,640,000 5,179,200
6.625%, due 3/30/08 (e)..... 495,000 386,100
7.125%, due 3/30/28 (e)..... 36,130,000 28,181,400
7.50%, due 3/31/07 (e)...... 3,150,000 2,457,000
8.15%, due 7/15/29 (e)...... 1,760,000 1,372,800
--------------
37,576,500
--------------
INSURANCE (0.2%)
Fairfax Financial Holdings
Ltd.
7.375%, due 4/15/18 (g)..... 3,437,000 3,076,115
7.75%, due 7/15/37.......... 4,810,000 4,136,600
8.25%, due 10/1/15 (g)...... 2,000,000 1,920,000
--------------
9,132,715
--------------
MARINE (0.4%)
Sea Containers Ltd., Series B
7.875%, due 2/15/08......... 13,941,000 12,825,720
10.75%, due 10/15/06 (g).... 6,830,000 6,949,525
--------------
19,775,245
--------------
MEDIA (0.2%)
Rogers Cablesystem, Ltd.
11.00%, due 12/1/15......... 7,185,000 8,190,900
--------------
METALS & MINING (0.5%)
Algoma Steel, Inc.
11.00%, due 12/31/09
(d)(e)...................... 23,265,000 21,752,775
--------------
</Table>
16
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
YANKEE BONDS (CONTINUED)
PAPER & FOREST PRODUCTS (0.7%)
Abitibi-Consolidated, Inc.
8.85%, due 8/1/30........... $ 5,500,000 $ 5,674,092
Doman Industries Ltd.
12.00%, due 7/1/04 (e)...... 22,875,000 24,018,750
--------------
29,692,842
--------------
ROAD & RAIL (0.1%)
Grupo Transportacion
Ferroviaria Mexicana, S.A.
de C.V.
11.75%, due 6/15/09......... 4,065,000 4,095,488
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.1%)
Rogers Cantel, Inc.
9.75%, due 6/1/16........... 3,660,000 4,300,500
--------------
Total Yankee Bonds
(Cost $154,355,282)......... 182,524,199
--------------
Total Long-Term Bonds
(Cost $3,529,998,875)....... 3,670,252,461
--------------
<Caption>
SHARES
------------
COMMON STOCKS (4.2%)
COMMERCIAL SERVICES & SUPPLIES (0.0%) (b)
Colorado Prime Corp.
(a)(d)(j)(m)................ 332,373 3,324
--------------
COMMUNICATIONS EQUIPMENT (0.2%)
Marconi Corp. PLC
(a)(r)(s)................... 591,506 10,824,560
--------------
CONTAINERS & PACKAGING (0.2%)
Owens-Illinois, Inc. (a)..... 630,150 7,750,845
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (1.4%)
Call-Net Enterprises, Inc.
(a)(g)...................... 724,948 3,059,281
Call-Net Enterprises, Inc.
Series B (a)(q)............. 117,849 496,235
ICO Global Communications
Holdings Ltd. (a)(d)........ 3,920,467 2,842,339
UGC Europe, Inc. (a)......... 823,772 55,192,724
--------------
61,590,579
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
--------------------------------
FOOD & STAPLES RETAILING (0.0%) (b)
TLC Beatrice International
Holdings, Inc. (a)(m)....... 25,000 $ 25,000
--------------
HEALTH CARE PROVIDERS & SERVICES (0.7%)
Apria Healthcare Group, Inc.
(a)(g)...................... 1,117,540 32,408,660
Fountain View, Inc.
(a)(d)(j)(m)................ 11,689 117
--------------
32,408,777
--------------
INTERNET SOFTWARE & SERVICES (0.1%)
Globix Corp.
(a)(d)(j)(m)(u)............. 1,037,277 3,189,627
--------------
MACHINERY (0.4%)
Joy Global, Inc. (a)(g)...... 201,171 3,834,319
Morris Material Handling,
Inc. (a)(d)(j)(m)........... 69,236 366,951
Thermadyne Holdings Corp.
(a)(d)(g)................... 1,237,718 16,189,351
--------------
20,390,621
--------------
MEDIA (0.0%) (B)
Alliance Entertainment Corp.
(a)(d)(j)(m)................ 1,095,395 10,954
--------------
METALS & MINING (0.2%)
Algoma Steel, Inc.
(a)(g)(q)................... 2,114,640 5,904,082
Neenah Foundry Co.
(a)(c)(d)................... 3,925,317 1,962,659
--------------
7,866,741
--------------
PAPER & FOREST PRODUCTS (0.2%)
Abitibi-Consolidated, Inc.
(q)......................... 1,465,965 9,836,625
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.8%)
Minorplanet Systems USA, Inc.
(a)......................... 5,784,123 3,065,585
NEON Communications, Inc.
(a)(d)(j)(m)................ 1,842,941 2,303,676
NII Holdings, Inc. (a)(d).... 427,361 32,945,259
--------------
38,314,520
--------------
Total Common Stocks
(Cost $265,108,595)......... 192,212,173
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
SHARES VALUE
--------------------------------
CONVERTIBLE PREFERRED STOCK (0.1%)
WIRELESS TELECOMMUNICATION SERVICES (0.1%)
NEON Communications, Inc.
12.00% (a)(d)(i)(j)(m)...... 212,404 $ 2,389,545
--------------
Total Convertible Preferred
Stock
(Cost $2,366,169)........... 2,389,545
--------------
PREFERRED STOCKS (1.6%)
COMMERCIAL SERVICES & SUPPLIES (0.1%)
Colorado Prime Corp.
(a)(d)(j)(m)................ 7,820 2,041,145
--------------
MEDIA (0.1%)
Alliance Entertainment Corp.
Series A1 (a)(d)(j)(m)...... 447 63,474
Series A2 (a)(d)(j)(m)...... 503 71,426
Paxson Communications Corp.
13.25% (i).................. 524 4,925,600
Ziff Davis Media, Inc.
10.00% Series E-1
(a)(d)(m)................... 4,240 36,040
--------------
5,096,540
--------------
REAL ESTATE (1.1%)
Sovereign Real Estate
Investment Corp.
12.00%, Class A (c)......... 34,758 51,789,420
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.3%)
Rural Cellular Corp.
11.375%, Class B (i)........ 19,109 15,382,745
--------------
Total Preferred Stocks (Cost
$75,501,667)................ 74,309,850
--------------
WARRANTS (0.2%)
DIVERSIFIED FINANCIAL SERVICES (0.0%) (b)
ASAT Finance LLC
Strike Price $18.60
Expire 11/1/06 (a)(c)(d).... 8,680 13,020
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.0%) (b)
ICO Global Communications
Holdings Ltd.
Strike Price $60.00
Expire 5/16/06 (a)(d)....... 587,902 5,879
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
--------------------------------
HEALTH CARE PROVIDERS & SERVICES (0.1%)
Harborside Healthcare Corp.
Class A
Strike Price $0.01
Expire 8/1/09 (a)(d)(j)..... 1,461,802 $ 14,618
QuadraMed Corp.
Strike Price $0.01
Expire 4/1/08 (a)(c)........ 1,575,374 3,891,174
--------------
3,905,792
--------------
MACHINERY (0.0%) (b)
Thermadyne Holdings Corp.
Class A
Strike Price $13.85
Expire 5/23/04 (a)(d)(m).... 3,633 36
Class B
Strike Price $13.85
Expire 5/23/06 (a)(d)(m).... 2,198 22
--------------
58
--------------
MEDIA (0.0%) (b)
Ono Finance PLC
Strike Price $0.01
Expire 2/15/11 (a)(c)(d).... 40,495 405
Ziff Davis Media, Inc.
Strike Price $0.001
Expire 8/12/12 (a)(c)....... 777,370 7,774
--------------
8,179
--------------
METALS & MINING (0.1%)
Neenah Foundry Co.
Strike Price $0.01
Expire 10/7/13 (a)(c)(d).... 3,871,279 1,896,927
--------------
TOBACCO (0.0%) (b)
North Atlantic Trading Co.
Strike Price $0.01
Expire 6/15/07
(a)(c)(d)(m)................ 66 1
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.0%) (b)
NEON Communications, Inc.
Strike Price $0.01
Expire 12/2/12
(a)(d)(j)(m)................ 1,842,941 18,429
Class A
Strike Price $0.01
Expire 12/2/12
(a)(d)(j)(m)................ 1,062,401 1,328,001
Redeemable Preferred
Strike Price $0.01
Expire 12/2/12
(a)(d)(j)(m)................ 1,274,805 12,748
Occidente y Caribe Celular,
S.A.
Strike Price $1.00
Expire 3/15/04
(a)(c)(d)(m)................ 28,380 284
</Table>
18
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003 (continued)
<Table>
<Caption>
SHARES VALUE
--------------------------------
WARRANTS (CONTINUED)
WIRELESS TELECOMMUNICATION SERVICES (CONTINUED)
Ubiquitel Operating Co.
Strike Price $22.74
Expire 4/15/10 (a)(c)(d).... 14,230 $ 142
--------------
1,359,604
--------------
Total Warrants
(Cost $12,273,374).......... 7,189,460
--------------
<Caption>
PRINCIPAL
AMOUNT
------------
SHORT-TERM INVESTMENTS (18.8%)
COMMERCIAL PAPER (6.6%)
American Express Credit Corp.
1.03%, due 11/3/03.......... $ 30,000,000 29,998,283
General Electric Capital
Corp.
1.04%, due 11/4/03.......... 106,155,000 106,145,792
1.04%, due 12/16/03......... 25,840,000 25,806,397
1.05%, due 11/17/03......... 32,260,000 32,244,939
1.05%, due 12/18/03......... 12,000,000 11,983,544
Morgan Stanley & Co.
1.03%, due 11/7/03.......... 33,795,000.. 33,789,198
UBS Finance Delaware LLC
1.03%, due 11/3/03.......... 28,910,000 28,908,346
1.03%, due 11/5/03.......... 33,555,000 33,551,160
--------------
Total Commercial Paper
(Cost $302,427,659)......... 302,427,659
--------------
<Caption>
SHARES
------------
INVESTMENT COMPANIES (4.7%)
AIM Institutional Funds Group
(t)......................... 168,395 168,395
Merrill Lynch Premier
Institutional Fund.......... 212,691,893 212,691,893
--------------
Total Investment Companies
(Cost $212,860,288)......... 212,860,288
--------------
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
MASTER NOTE (1.1%)
Bank of America Securities
LLC
1.1874%, due 11/30/30 (t)... $ 50,904,000 $ 50,904,000
--------------
Total Master Note
(Cost $50,904,000).......... 50,904,000
--------------
REPURCHASE AGREEMENTS (5.9%)
Banc One Capital Markets,
Inc.
1.1799%, dated 10/31/03
due 11/3/03 (t)
Proceeds at Maturity
$42,004,073
(Collateralized by Various
Bonds with a Principal
Amount of $49,330,088 and a
Market Value of
$44,100,000)................ 42,000,000 42,000,000
Countywide Securities Corp.
1.1424%, dated 10/31/03
due 11/3/03 (t)
Proceeds at Maturity
$158,151,848
(Collateralized by Various
Bonds with a Principal
Amount of $186,675,084 and a
Market Value of
$162,051,853)............... 158,137,000 158,137,000
Credit Suisse First Boston
LLC
1.1124%, dated 10/31/03
due 11/3/03 (t)
Proceeds at Maturity
$491,045
(Collateralized by Various
Bonds with a Principal
Amount of $456,245 and a
Market Value of $497,169)... 491,000 491,000
Lehman Brothers, Inc.
1.1124%, dated 10/31/03
due 11/3/03 (t)
Proceeds at Maturity
$7,282,666
(Collateralized by Various
Bonds with a Principal
Amount of $7,500,085 and a
Market Value of
$7,413,830)................. 7,282,000 7,282,000
</Table>
19
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
SHORT-TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENTS (CONTINUED)
Merrill Lynch & Co.
1.1424%, dated 10/31/03
due 11/3/03 (t)
Proceeds at Maturity
$54,005,070
(Collateralized by Various
Bonds with a Principal
Amount of $52,101,718 and a
Market Value of
$56,045,251)................ $ 54,000,000 $ 54,000,000
Morgan Stanley & Co.
1.0624%, dated 10/31/03
due 11/3/03 (t)
Proceeds at Maturity
$6,583,575
(Collateralized by Various
Bonds with a Principal
Amount of $6,933,218 and a
Market Value of
$6,912,550)................. 6,583,000 6,583,000
--------------
Total Repurchase Agreements
(Cost $268,493,000)......... 268,493,000
--------------
SHORT-TERM LOAN ASSIGNMENTS & PARTICIPATIONS (0.4%)
BUILDING PRODUCTS (0.3%)
Owens Corning, Inc.
Bank debt, Revolver
3.62%, due 1/1/04
(d)(e)(j)(k)................ 22,006,692 14,451,068
--------------
MEDIA (0.0%) (b)
General Media, Inc.
Bank debt, Revolver
13.00%, due 2/11/04
(d)(j)(m)(p)................ 1,323,432 1,323,432
--------------
MULTI-UTILITIES & UNREGULATED POWER (0.1%)
Mirant Corp.
Bank debt, Revolver
4.75%, due 1/15/04
(d)(e)(j)(k)................ 7,020,000 3,685,500
--------------
Total Short-Term Loan
Assignments & Participations
(Cost $22,029,356).......... 19,460,000
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
--------------------------------
SHORT-TERM YANKEE BOND (0.1%) (h)
CONTAINERS & PACKAGING (0.1%)
Crown Cork & Seal S.A.
6.75%, due 12/15/03......... $ 3,550,000 $ 3,567,750
--------------
Total Short-Term Yankee Bond
(Cost $3,535,758)........... 3,567,750
--------------
Total Short-Term Investments
(Cost $860,250,061)......... 857,712,697
--------------
Total Investments
(Cost $4,745,498,741) (v)... 105.3% 4,804,066,186(w)
Liabilities in Excess of
Cash and Other Assets....... (5.3) (239,683,845)
------------ --------------
Net Assets................... 100.0% $4,564,382,341
============ ==============
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Illiquid security.
(e) Issue in default.
(f) Partially segregated for unfunded loan commitments.
(g) Represents a security, or a portion thereof, which is
out on loan.
(h) Yankee bond -- Dollar-denominated bonds issued in the
United States by foreign banks and corporations.
(i) PIK ("Payment in Kind")--Interest or dividend payment is
made with additional securities.
(j) Restricted security.
(k) Floating rate. Rate shown is the rate in effect at
October 31, 2003.
(l1) 15,895 Units--Each unit reflects $1,000 principal amount
of 13.875% Senior Notes plus 1 warrant to acquire
19.9718 shares of common stock at $0.01 per share at a
future date.
(l2) 20,958 Units--Each unit reflects $1,000 principal amount
of 15.00% Senior Secured Notes plus 0.1923 shares of
Series A preferred stock.
(m) Fair valued security.
(n) Issuer in bankruptcy.
(o) CIK ("Cash in Kind")--Interest payment is made with cash
or additional securities.
(p) Multiple tranche facilities.
(q) Canadian security.
(r) British security.
(s) ADR--American Depositary Receipt.
(t) Represents a security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(u) An affiliate.
(v) The cost for federal income tax purposes is
$4,823,869,315.
(w) At October 31, 2003, net unrealized depreciation was
$19,803,129 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 $388,772,747 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $408,575,876.
The following abbreviations are used in the above
portfolio:
E--Euro.
L--Pound Sterling.
</Table>
20
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$4,745,498,741)--including $304,248,002 market value of
securities loaned......................................... $4,804,066,186
Deposit with broker for securities loaned................... 3,686
Cash denominated in foreign currencies (identified cost
$5,684,460)............................................... 5,696,602
Cash........................................................ 2,408
Receivables:
Dividends and interest.................................... 79,164,878
Fund shares sold.......................................... 20,068,141
Investment securities sold................................ 4,892,680
Other assets................................................ 94,409
--------------
Total assets........................................ 4,913,988,990
--------------
LIABILITIES:
Securities lending collateral............................... 319,569,081
Payables:
Investment securities purchased........................... 7,769,579
Fund shares redeemed...................................... 6,125,628
NYLIFE Distributors....................................... 3,002,187
Manager................................................... 2,136,329
Transfer agent............................................ 984,860
Trustees.................................................. 50,543
Custodian................................................. 39,359
Accrued expenses............................................ 641,907
Dividend payable............................................ 9,287,176
--------------
Total liabilities................................... 349,606,649
--------------
Net assets.................................................. $4,564,382,341
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 2,091,813
Class B................................................... 4,759,337
Class C................................................... 698,968
Additional paid-in capital.................................. 5,395,739,625
Accumulated distributions in excess of net investment
income.................................................... (38,057,670)
Accumulated net realized loss on investments................ (859,465,764)
Net unrealized appreciation on investments.................. 58,567,445
Net unrealized appreciation on translation of other assets
and liabilities in foreign currencies..................... 48,587
--------------
Net assets.................................................. $4,564,382,341
==============
CLASS A
Net assets applicable to outstanding shares................. $1,265,856,073
==============
Shares of beneficial interest outstanding................... 209,181,268
==============
Net asset value per share outstanding....................... $ 6.05
Maximum sales charge (4.50% of offering price).............. 0.29
--------------
Maximum offering price per share outstanding................ $ 6.34
==============
CLASS B
Net assets applicable to outstanding shares................. $2,876,133,969
==============
Shares of beneficial interest outstanding................... 475,933,668
==============
Net asset value and offering price per share outstanding.... $ 6.04
==============
CLASS C
Net assets applicable to outstanding shares................. $ 422,392,299
==============
Shares of beneficial interest outstanding................... 69,896,776
==============
Net asset value and offering price per share outstanding.... $ 6.04
==============
</Table>
21
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
-------------- -------------
INVESTMENT INCOME:
Income:
Interest.................................................. $ 303,536,699 $ 340,487,060
Income from securities loaned--net........................ 523,960 --
Dividends (a)............................................. 8,218,469 11,794,545
-------------- -------------
Total income............................................ 312,279,128 352,281,605
-------------- -------------
Expenses:
Manager................................................... 18,391,630 18,638,403
Distribution--Class B..................................... 15,998,181 17,483,256
Distribution--Class C..................................... 2,091,057 1,625,609
Service--Class A.......................................... 2,235,100 1,859,907
Service--Class B.......................................... 5,332,009 5,827,749
Service--Class C.......................................... 698,078 541,873
Transfer agent............................................ 4,507,337 5,855,164
Professional.............................................. 579,180 968,189
Shareholder communication................................. 531,779 708,711
Custodian................................................. 377,048 369,712
Recordkeeping............................................. 352,819 355,849
Trustees.................................................. 170,736 106,457
Registration.............................................. 151,957 152,424
Miscellaneous............................................. 98,440 118,058
-------------- -------------
Total expenses before waiver............................ 51,515,351 54,611,361
-------------- -------------
Fees waived by Manager and Subadvisor....................... -- (283,439)
-------------- -------------
Net expenses.............................................. 51,515,351 54,327,922
-------------- -------------
Net investment income....................................... 260,763,777 297,953,683
-------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions..................................... (288,455,687) (241,887,241)
Foreign currency transactions............................. 717,646 (7,560,063)
-------------- -------------
Net realized loss on investments and foreign currency
transactions.............................................. (287,738,041) (249,447,304)
-------------- -------------
Net change in unrealized appreciation (depreciation) on:
Security transactions..................................... 1,095,589,372 (84,262,377)
Translation of other assets and liabilities in foreign
currencies and foreign currency forward contracts....... 958,956 (3,006,951)
-------------- -------------
Net unrealized gain (loss) on investments and foreign
currency transactions..................................... 1,096,548,328 (87,269,328)
-------------- -------------
Net realized and unrealized gain (loss) on investments and
foreign currency transactions............................. 808,810,287 (336,716,632)
-------------- -------------
Net increase (decrease) in net assets resulting from
operations................................................ $1,069,574,064 $ (38,762,949)
============== =============
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
(a) Dividends recorded net of foreign withholding taxes of $57,694 and $88,847
for 2003 and 2002, respectively.
22
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
--------------- --------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 260,763,777 $ 297,953,683 $ 344,248,294
Net realized loss on investments and foreign currency
transactions............................................ (287,738,041) (249,447,304) (245,072,570)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency transactions........... 1,096,548,328 (87,269,328) (42,344,482)
--------------- --------------- --------------
Net increase (decrease) in net assets resulting from
operations.............................................. 1,069,574,064 (38,762,949) 56,831,242
--------------- --------------- --------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (78,354,579) (74,335,867) (67,322,739)
Class B................................................. (171,286,516) (214,539,114) (266,278,087)
Class C................................................. (22,517,628) (20,249,937) (15,595,388)
Return of capital:
Class A................................................. (987,660) (6,742,285) (4,620,721)
Class B................................................. (2,159,069) (19,458,762) (18,276,093)
Class C................................................. (283,835) (1,836,675) (1,070,395)
--------------- --------------- --------------
Total dividends and distributions to shareholders..... (275,589,287) (337,162,640) (373,163,423)
--------------- --------------- --------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 1,302,380,040 1,409,215,356 738,375,706
Class B................................................. 428,352,766 430,111,828 459,704,381
Class C................................................. 241,748,257 175,254,924 144,653,972
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 49,609,674 42,735,569 38,570,525
Class B................................................. 107,720,153 142,980,666 176,786,334
Class C................................................. 11,150,967 9,763,262 7,822,129
--------------- --------------- --------------
2,140,961,857 2,210,061,605 1,565,913,047
Cost of shares redeemed:
Class A................................................. (1,155,824,260) (1,241,244,596) (463,262,854)
Class B................................................. (381,101,499) (557,477,978) (530,124,371)
Class C................................................. (132,580,904) (95,917,677) (69,544,882)
--------------- --------------- --------------
Increase in net assets derived from capital share
transactions........................................ 471,455,194 315,421,354 502,980,940
--------------- --------------- --------------
Net increase (decrease) in net assets................. 1,265,439,971 (60,504,235) 186,648,759
NET ASSETS:
Beginning of period......................................... 3,298,942,370 3,359,446,605 3,172,797,846
--------------- --------------- --------------
End of period............................................... $ 4,564,382,341 $ 3,298,942,370 $3,359,446,605
=============== =============== ==============
Accumulated distributions in excess of net investment income
at end of period.......................................... $ (38,057,670) $ (27,634,616) $ (25,658,807)
=============== =============== ==============
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
23
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
-------------------------------------------------------------------------------------------
January 1,
2003
through Year ended December 31,
October 31, --------------------------------------------------------------------------
2003* 2002 2001 2000 1999 1998
----------- ---------- ---------- ---------- ---------- ----------
Net asset value at beginning of
period............................. $ 4.95 $ 5.56 $ 6.10 $ 7.41 $ 7.54 $ 8.16
---------- ---------- ---------- ---------- ---------- ----------
Net investment income............... 0.39 0.51 0.65(c) 0.80 0.79 0.75
Net realized and unrealized gain
(loss) on investments.............. 1.12 (0.54) (0.50)(c) (1.25) (0.06) (0.57)
Net realized and unrealized gain
(loss) on foreign currency
transactions....................... 0.00(b) (0.02) 0.00(b) 0.02 0.02 (0.01)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations.... 1.51 (0.05) 0.15 (0.43) 0.75 0.17
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and distributions:
From net investment income......... (0.40) (0.51) (0.65) (0.83) (0.85) (0.75)
From net realized gain on
investments...................... -- -- -- (0.05) (0.03) (0.04)
Return of capital.................. (0.01) (0.05) (0.04) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and distributions... (0.41) (0.56) (0.69) (0.88) (0.88) (0.79)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end of period.... $ 6.05 $ 4.95 $ 5.56 $ 6.10 $ 7.41 $ 7.54
========== ========== ========== ========== ========== ==========
Total investment return (a)......... 31.57% (0.78%) 2.49% (6.48%) 10.33% 2.07%
Ratios (to average net assets)/
Supplemental Data:
Net investment income............ 8.43%+ 9.63% 10.84%(c) 11.35% 10.36% 9.40%
Net expenses..................... 1.01%+ 1.07% 1.04% 1.03% 1.00% 1.00%
Expenses (before waiver)......... 1.01%+ 1.08% 1.08% 1.07% 1.04% 1.04%
Portfolio turnover rate............. 47% 50% 51% 54% 83% 128%
Net assets at end of period (in
000's)............................. $1,265,856 $ 850,899 $ 710,205 $ 456,770 $ 369,275 $ 278,181
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
(b) Less than one cent per share.
(c) As required, effective January 1, 2001, the Fund has adopted
the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt
securities. The effect of this change for the year ended
December 31, 2001 is shown below. Per share ratios and
supplemental data for periods prior to January 1, 2001 have
not been restated to reflect this change in presentation.
</Table>
<Table>
<Caption>
CLASS A CLASS B CLASS C
------- ------- -------
Decrease net investment income.............................. ($0.00)(b) ($0.00)(b) ($0.00)(b)
Increase net realized and unrealized gains and losses....... 0.00(b) 0.00(b) 0.00(b)
Decrease ratio of net investment income..................... (0.04%) (0.04%) (0.04%)
</Table>
24
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
<Table>
<Caption>
Class B Class C
---------------------------------------------------------------------------- -----------
January 1, January 1,
2003 2003
through Year ended December 31, through
October 31, -------------------------------------------------------------- October 31,
2003* 2002 2001 2000 1999 1998 2003*
----------- ---------- ---------- ---------- ---------- ---------- -----------
$ 4.94 $ 5.55 $ 6.09 $ 7.40 $ 7.53 $ 8.15 $ 4.94
---------- ---------- ---------- ---------- ---------- ---------- ----------
0.36 0.46 0.61(c) 0.74 0.73 0.69 0.36
1.12 (0.53) (0.50)(c) (1.25) (0.06) (0.57) 1.12
0.00(b) (0.02) 0.00(b) 0.02 0.02 (0.01) 0.00(b)
---------- ---------- ---------- ---------- ---------- ---------- ----------
1.48 (0.09) 0.11 (0.49) 0.69 0.11 1.48
---------- ---------- ---------- ---------- ---------- ---------- ----------
(0.38) (0.48) (0.61) (0.77) (0.79) (0.69) (0.38)
-- -- -- (0.05) (0.03) (0.04) --
(0.00)(b) (0.04) (0.04) -- -- -- (0.00)(b)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(0.38) (0.52) (0.65) (0.82) (0.82) (0.73) (0.38)
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 6.04 $ 4.94 $ 5.55 $ 6.09 $ 7.40 $ 7.53 $ 6.04
========== ========== ========== ========== ========== ========== ==========
30.82% (1.53%) 1.72% (7.20%) 9.51% 1.31% 30.82%
7.68%+ 8.88% 10.09%(c) 10.60% 9.61% 8.65% 7.68%+
1.76%+ 1.82% 1.79% 1.78% 1.75% 1.75% 1.76%+
1.76%+ 1.83% 1.83% 1.82% 1.79% 1.79% 1.76%+
47% 50% 51% 54% 83% 128% 47%
$2,876,134 $2,211,253 $2,475,037 $2,609,320 $3,294,427 $3,309,389 $ 422,392
<Caption>
Class C
-----------------------------------------------------------------
September 1**
Year ended December 31, through
------------------------------------------------- December 31
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- -------------
$ 5.55 $ 6.09 $ 7.40 $ 7.53 $ 7.43
---------- ---------- ---------- ---------- ----------
0.46 0.61(c) 0.74 0.73 0.27
(0.53) (0.50)(c) (1.25) (0.06) 0.15
(0.02) 0.00(b) 0.02 0.02 (0.01)
---------- ---------- ---------- ---------- ----------
(0.09) 0.11 (0.49) 0.69 0.41
---------- ---------- ---------- ---------- ----------
(0.48) (0.61) (0.77) (0.79) (0.27)
-- -- (0.05) (0.03) (0.04)
(0.04) (0.04) -- -- --
---------- ---------- ---------- ---------- ----------
(0.52) (0.65) (0.82) (0.82) (0.31)
---------- ---------- ---------- ---------- ----------
$ 4.94 $ 5.55 $ 6.09 $ 7.40 $ 7.53
========== ========== ========== ========== ==========
(1.53%) 1.72% (7.20%) 9.51% 5.58%i
8.88% 10.09%(c) 10.60% 9.61% 8.65%+
1.82% 1.79% 1.78% 1.75% 1.75%+
1.83% 1.83% 1.82% 1.79% 1.79%+
50% 51% 54% 83% 128%
$ 236,791 $ 174,205 $ 106,709 $ 67,181 $ 10,025
</Table>
25
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay High Yield Corporate Bond Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay High
Yield Corporate Bond Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and within one year of purchase of Class C
shares. Distribution of Class B shares and Class C shares commenced on May 1,
1986 and September 1, 1998, respectively. Class A shares, Class B shares and
Class C shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares and Class C shares are subject to higher distribution fee rates.
Each class of shares bears distribution and/or service fee payments under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek maximum income through investment in
a diversified portfolio of high yield debt securities. Capital appreciation is a
secondary objective.
The Fund principally invests in high yield securities (sometimes called "junk
bonds"), which are generally considered speculative because they present a
greater risk of loss, including default, than higher quality debt securities.
These securities pay a premium--a high interest rate or yield--because of the
increased risk of loss. These securities can also be subject to greater price
volatility.
The Fund also invests in foreign securities which carry certain risks in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
26
Notes to Financial Statements
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Debt securities are valued at prices supplied by a pricing agent or
brokers selected by the Fund's Manager, whose prices reflect broker/dealer
supplied valuations and electronic data processing techniques if such prices are
deemed by the Fund's Manager to be representative of market values at the
regular close of business of the Exchange. Temporary cash investments acquired
over 60 days to maturity are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and ratings), both as furnished by independent
pricing services. Other temporary cash investments are valued at amortized cost,
which approximates market value. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. Should the Manager or Subadvisor conclude that such events
may have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund, adjust the value of the local price to reflect the impact on the price of
such securities as a result of such events.
(B) REPURCHASE AGREEMENTS. The Fund's custodian and other banks acting in a
sub-custodian capacity take possession of the collateral pledged for investments
in repurchase agreements. The underlying collateral is valued daily on a
mark-to-market basis to determine that the value, including accrued interest,
exceeds the repurchase price. In the event of the seller's default of the
obligation to repurchase, the Fund has the right to liquidate the collateral and
apply the proceeds in satisfaction of the obligation. Under certain
circumstances, in the event of default or bankruptcy by the other party to the
agreement, realization and/or retention of the collateral may be subject to
legal proceedings.
(C) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward 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
27
MainStay High Yield Corporate Bond Fund
Fund's basis in the contract. The Fund enters into foreign currency forward
contracts primarily to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates.
The use of foreign currency 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
period end to credit loss in the event of a counterparty's failure to perform
its obligations.
(D) SECURITIES LENDING. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are collateralized by cash or securities at
least equal at all times to the market value of the securities loaned. The Fund
may bear the risk of delay in recovery of, or loss of rights in, the securities
loaned should the borrower of the securities experience financial difficulty.
The Fund receives compensation for lending its securities in the form of fees or
it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(E) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933 (the "1933 Act").
The Fund does not have the right to demand that such securities be registered.
Disposal of these securities may involve time-consuming negotiations and
expense, and prompt sale at an acceptable price may be difficult.
Restricted securities held at October 31, 2003:
<Table>
<Caption>
PRINCIPAL PERCENT OF
DATE(S) OF AMOUNT/ 10/31/03 NET
SECURITY ACQUISITION SHARES COST VALUE ASSETS
- -------- ----------------- -------------- ------------ ------------ ----------
Alliance Entertainment Corp.
Common Stock................... 12/2/99 1,095,395 $ 4,213,596 $ 10,954 0.0%(a)
Series A1, Preferred Stock..... 5/19/99-12/2/99 447 446,889 63,474 0.0(a)
Series A2, Preferred Stock..... 12/2/99 503 956,239 71,426 0.0(a)
Colorado Prime Corp.
Common Stock................... 5/6/97-11/10/99 332,373 3,324 3,324 0.0(a)
Preferred Stock................ 5/6/97-11/10/99 7,820 24,924,148 2,041,145 0.0(a)
Conseco, Inc.
Bank debt, Term Loan A
7.25%, due 9/10/10............. 10/22/03 $ 13,076,923 12,919,368 12,946,154 0.3
Bank debt, Term Loan B
9.50%, due 9/10/10............. 10/22/03 3,923,077 3,869,548 3,896,922 0.1
</Table>
28
Notes to Financial Statements (continued)
RESTRICTED SECURITIES (CONTINUED):
<Table>
<Caption>
PRINCIPAL PERCENT OF
DATE(S) OF AMOUNT/ 10/31/03 NET
SECURITY ACQUISITION SHARES COST VALUE ASSETS
- -------- ----------------- -------------- ------------ ------------ ----------
Fountain View, Inc.
Common Stock................... 9/4/03 11,689 $ 117 $ 117 0.0(a)%
FRI-MRD Corp.
12.00%, due 1/31/05............ 8/12/97-7/31/03 $ 46,852,794 46,723,924 19,678,173 0.4
General Media, Inc.
Bank debt, Revolver
13.00%, due 2/11/04............ 10/9/03 1,323,432 1,323,432 1,323,432 0.0(a)
Globix Corp.
Common Stock................... 10/15/02 1,037,277 245,760 3,189,627 0.1
Goodyear Tire & Rubber Co. (The)
Bank debt, Term Loan
5.13%, due 4/30/05............. 9/17/03-10/10/03 11,717,247 10,955,647 11,493,892 0.2
GT Group Telecom Services Corp.
Bank debt, Term Loan A
6.5625%, due 6/30/08........... 1/30/01 16,936,744 6,605,599 1,694 0.0(a)
Bank debt, Term Loan B
6.625%, due 6/30/08............ 1/30/01 12,103,256 4,753,863 1,210 0.0(a)
Harborside Healthcare Corp.
(zero coupon), due 8/1/07
12.00%, beginning 8/1/04....... 8/20/99-6/30/00 52,015,000 34,828,864 18,205,250 0.4
Class A, Warrants.............. 8/17/99-6/27/00 1,461,802 4,409,277 14,618 0.0(a)
Maxwell Communications Corp., PLC
Facility A..................... 4/29/94-11/22/94 9,973,584 0(b) 129,657 0.0(a)
Facility B..................... 4/29/94-11/22/94 L 1,131,066 0(b) 24,952 0.0(a)
Micron Technology, Inc.
Corporate Bond
6.50%, due 9/30/05............. 3/3/03-4/16/03 $ 15,000,000 13,541,587 14,850,000 0.3
Millicom International Celullar
S.A.
Convertible Bond
2.00%, due 6/1/06.............. 5/13/03 5,438,000 7,810,708 31,227,715 0.7
Mirant Corp.
Bank debt, Revolver
4.75%, due 1/15/04............. 4/21/03 7,020,000 6,045,027 3,685,500 0.1
Morris Material Handling, Inc.
Common Stock................... 3/11/99-10/30/01 69,236 36,341 366,951 0.0(a)
NEON Communications, Inc.
Common Stock................... 9/11/03 1,842,941 1,632,528 2,303,676 0.1
Convertible Preferred Stock
12.00%......................... 11/25/02 212,404 2,366,169 2,389,545 0.1
Warrants....................... 9/11/03 1,842,941 1,632,528 18,429 0.0(a)
Warrants, Class A.............. 11/25/02 1,062,401 10,624 1,328,001 0.0(a)
Warrants, Redeemable
Preferred...................... 11/25/02 1,274,805 12,748 12,748 0.0(a)
Owens Corning, Inc.
Bank debt, Revolver
3.62%, due 1/1/04.............. 9/26/01-10/15/02 22,006,692 14,660,897 14,451,068 0.3
</Table>
29
MainStay High Yield Corporate Bond Fund
RESTRICTED SECURITIES (CONTINUED):
<Table>
<Caption>
PRINCIPAL PERCENT OF
DATE(S) OF AMOUNT/ 10/31/03 NET
SECURITY ACQUISITION SHARES COST VALUE ASSETS
- -------- ----------------- -------------- ------------ ------------ ----------
Pacific Gas & Electric Co.
Bank debt, Revolver
8.375%, due 12/30/06........... 4/12/02-6/27/03 $ 45,528,440 $ 45,743,536 $ 45,983,724 1.0%
Qwest Corp.
Bank debt, Term Loan
6.95%, due 6/30/10............. 6/12/03 18,000,000 17,635,627 17,905,500 0.4
Qwest Services Corp.
Bank debt, Revolver
4.62%, due 5/3/05.............. 11/14/02 3,847,671 3,442,310 3,804,385 0.1
Supercanal Holdings, S.A.
Bank debt
6.50%, due 11/12/04............ 5/26/00 1,433,218 1,139,737 186,318 0.0(a)
Thermadyne Holdings Corp.
Bank debt, Term Loan
6.23%, due 3/31/08............. 6/10/03 8,675,336 8,776,491 8,485,563 0.2
United Pan-Europe Communications
N.V.
Bank debt, Term Loan
5.5778%, due 6/30/08........... 8/4/03 E 6,750,000 6,439,562 7,310,675 0.2
------------ ------------ ---
$288,106,015 $227,405,819 5.0%
============ ============ ===
</Table>
- -------
(a) Less than one tenth of a percent.
(b) Less than one dollar.
(F) LOAN PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan commitments
and loan participations. Loan commitments and loan participations are agreements
to make money available to a borrower in a specified amount, at a specified rate
and within a specified time. The Fund records an investment when the borrower
withdraws money and records interest as earned. The unfunded amounts are
recorded in memorandum accounts. 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"). As of October 31, 2003,
the Fund had unfunded loan commitments pursuant to the following loan
agreements:
<Table>
<Caption>
UNFUNDED
BORROWER COMMITMENT
- -------- -----------
General Media, Inc. ........................................ $ 1,676,568
Jafra Cosmetics, Inc. ...................................... 12,111,111
Mirant Corp. ............................................... 15,250,000
Owens Corning, Inc. ........................................ 1,448,379
Universal City, Inc. ....................................... 10,000,000
-----------
$40,486,058
===========
</Table>
These commitments are available until maturity date of the respective security.
30
Notes to Financial Statements (continued)
(G) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(H) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends monthly and capital gain distributions, if any. Income dividends and
capital gain distributions are determined in accordance with federal income tax
regulations, which may differ from generally accepted accounting principles.
These "book/tax differences" are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax basis
treatment; temporary differences do not require reclassification.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income, accumulated net
realized loss on investments and accumulated net realized loss on foreign
currency transactions arising from permanent differences; net assets at October
31, 2003, are not effected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
DISTRIBUTIONS IN ACCUMULATED NET REALIZED
EXCESS OF NET REALIZED LOSS ON
NET INVESTMENT LOSS ON FOREIGN CURRENCY
INCOME INVESTMENTS TRANSACTIONS
- ---------------- ------------ ----------------
$971,892 $(254,246) $(717,646)
</Table>
The reclassifications for the Fund are primarily due to premium amortization
adjustments, foreign currency gain (loss).
(I) 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 as earned.
Discounts and premiums on securities, other than short-term securities,
purchased for the Fund are accreted and amortized, respectively, on the constant
yield method over the life of the respective securities or, in the case of
callable securities, over the period to the first date of call. Discounts and
premiums on short-term securities are accreted and amortized, respectively, on
the straight line method. Income from payment-in-kind securities is recorded
daily based on the effective interest method of accrual.
31
MainStay High Yield Corporate Bond Fund
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred. Dividends on short positions are recorded as an expense of
the Fund on the ex-dividend date.
(J) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(K) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
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 are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented. Accordingly, gains and losses from foreign currency
transactions are included in the reported net realized gain (loss) on investment
transactions.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward 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, other than investments, at period end
exchange rates are reflected in unrealized foreign exchange gains or losses.
32
Notes to Financial Statements (continued)
Foreign currency held at October 31, 2003:
<Table>
<Caption>
CURRENCY COST VALUE
- ------------------------------- ----------- -----------
Canadian Dollar C$ 212 $ 154 $ 161
Euro E 3,771,388 4,384,552 4,384,238
Pound Sterling L 773,272 1,299,754 1,312,203
---------- ----------
$5,684,460 $5,696,602
========== ==========
</Table>
(L) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.60% of the Fund's
average daily net assets. Through March 11, 2002, the Manager had voluntarily
established a fee breakpoint of 0.55% on assets in excess of $500 million.
Effective March 12, 2002, the Manager established contractual fee breakpoints
for its management fee of 0.60% annually on assets up to $500 million and 0.55%
annually on assets in excess of $500 million. For the ten months ended October
31, 2003 and year ended December 31, 2002, the Manager earned from the Fund
$18,391,630 and $18,638,403, respectively.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor a monthly fee at an annual rate of
0.30% on assets up to $500 million and 0.275% on assets in excess of $500
million.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the
33
MainStay High Yield Corporate Bond Fund
Distributor receives a monthly fee from the Fund at an annual rate of 0.25% of
the average daily net assets of the Fund's Class A shares, which is an expense
of the Class A shares of the Fund for distribution or service activities as
designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The distribution plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $300,435 for the ten
months ended October 31, 2003. The Fund was also advised that the Distributor
retained contingent deferred sales charges for redemption of Class A, Class B
and Class C shares of $701,261, $2,018,676 and $137,679, respectively, for the
ten months ended October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and year ended December 31, 2002, amounted to $4,507,337
and $5,855,164, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the High Yield
Corporate Bond Fund only pays a portion of the fees identified above.
34
Notes to Financial Statements (continued)
(F) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $86,908 for the ten months ended
October 31, 2003 and $64,801 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $352,819 for the ten months ended October
31, 2003 and $355,849 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES DEPRECIATION LOSS
- ------------------- ------------ -----------------
$(781,174,655) $(48,445,030) $(829,619,685)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals, premium amortization adjustments, bond
reorganizations and interest write-offs.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $781,174,655 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains through the years
indicated. 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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
- ----------------- --------
2008................................................... $ 21,946
2009................................................... 284,075
2010................................................... 169,120
2011................................................... 306,034
--------
$781,175
========
</Table>
35
MainStay High Yield Corporate Bond Fund
The tax character of distributions paid during the ten months ended October 31,
2003, and years ended December 31, 2002, and December 31, 2001 shown in the
Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2003 2002 2001
------------- ------------- -------------
Distributions paid from:
Ordinary Income $272,158,723 $309,124,918 $349,196,214
Return of Capital 3,430,564 28,037,722 23,967,209
------------ ------------ ------------
$275,589,287 $337,162,640 $373,163,423
============ ============ ============
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of U.S.
Government securities were $64,322 and $78,113, respectively. Purchases and
sales of securities, other than U.S. Government and short-term securities, were
$1,728,205 and $1,579,490, respectively.
As of October 31, 2003, the Fund had securities on loan with an aggregate market
value of $304,248,002. The Fund received $319,569,081 in cash as collateral for
securities on loan which was used to purchase highly liquid short-term
investments in accordance with the Fund's securities lending procedures.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
36
Notes to Financial Statements (continued)
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
JANUARY 1 THROUGH -----------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
----------------------------- ----------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
-------- ------- -------- -------- -------- ------- ------- ------- -------
Shares sold............. 237,513 77,972 43,734 280,014 82,864 33,375 124,738 77,264 24,445
Shares issued in
reinvestment of
dividends and
distributions......... 8,908 19,447 1,999 8,345 27,828 1,909 6,600 30,203 1,339
-------- ------- ------- -------- -------- ------- ------- ------- -------
246,421 97,419 45,733 288,359 110,692 35,284 131,338 107,467 25,784
Shares redeemed......... (209,184) (69,036) (23,761) (244,150) (109,057) (18,744) (78,508) (90,191) (11,935)
-------- ------- ------- -------- -------- ------- ------- ------- -------
Net increase............ 37,237 28,383 21,972 44,209 1,635 16,540 52,830 17,276 13,849
======== ======= ======= ======== ======== ======= ======= ======= =======
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
37
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay High Yield Corporate Bond Fund
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 funds constituting The MainStay Funds, hereafter referred to as
the "Fund") at October 31, 2003, the results of its operations for the ten
months ended October 31, 2003 and the year ended December 31, 2002, the changes
in its net assets for the ten months ended October 31, 2003 and each of the two
years in the period ended December 31, 2002 and the financial highlights for
each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 22, 2003
38
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
39
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
40
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
41
THE MAINSTAY(R) FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MacKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
McMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
42
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. McGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSHY11-12/03
NYLIM-A04343 08
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R) High Yield
Corporate Bond Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY LOGO]
Table of Contents
<Table>
President's Letter 2
$10,000 Invested in MainStay Global High
Yield Fund versus J.P. Morgan EMBI Global
Diversified Composite--Class A, Class B, and
Class C Shares 3
Portfolio Management Discussion and Analysis 5
Year-by-Year and 10-Month Performance 6
Portfolio of Investments 9
Financial Statements 13
Notes to Financial Statements 18
Report of Independent Auditors 27
Trustees and Officers 28
The MainStay(R) Funds 31
</Table>
2
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
3
-
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
$10,000 Invested in MainStay Global
High Yield Fund versus J.P. Morgan
EMBI Global Diversified Composite
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 26.75%, 5 Years 15.79%, Since Inception
(6/1/98) 9.41%
[PERFORMANCE GRAPH]
<Table>
<Caption>
MAINSTAY GLOBAL HIGH YIELD J.P. MORGAN EMBI GLOBAL
FUND DIVERSIFIED COMPOSITE(1)
-------------------------- ------------------------
6/1/98 9550.00 10000.00
98 7473.00 8448.00
99 8831.00 10085.00
00 10016.00 11598.00
01 10825.00 12975.00
02 12269.00 14248.00
10/31/03 16283.00 17654.00
</Table>
CLASS B SHARES
Total Returns with Sales Charges: 1 Year 26.68%, 5 Years 15.75%, Since Inception
(6/1/98) 9.35%
[PERFORMANCE GRAPH]
<Table>
<Caption>
MAINSTAY GLOBAL HIGH YIELD J.P. MORGAN EMBI GLOBAL
FUND DIVERSIFIED COMPOSITE(1)
-------------------------- ------------------------
6/1/98 10000.00 10000.00
98 7789.00 8448.00
99 9120.00 10085.00
00 10271.00 11598.00
01 11018.00 12975.00
02 12406.00 14248.00
10/31/03 16236.00 17654.00
</Table>
CLASS C SHARES
Total Returns with Sales Charges: 1 Year 30.68%, 5 Years 15.97%, Since Inception
(6/1/98) 9.47%
[PERFORMANCE GRAPH]
<Table>
<Caption>
MAINSTAY GLOBAL HIGH YIELD J.P. MORGAN EMBI GLOBAL
FUND DIVERSIFIED COMPOSITE(1)
-------------------------- ------------------------
6/1/98 10000.00 10000.00
98 7789.00 8448.00
99 9120.00 10085.00
00 10271.00 11598.00
01 11018.00 12975.00
02 12406.00 14248.00
10/31/03 16336.00 17654.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT
WWW.MAINSTAYFUNDS.COM.
4
- -------
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total returns
reflect change in share price, reinvestment of dividend and capital gain
distributions, and maximum applicable sales charges explained in this paragraph.
The graphs assume an initial investment of $10,000 and reflect deduction of all
sales charges that would have applied for the period of investment. Class A
share performance reflects the effect of the maximum 4.5% initial sales charge.
Class B shares are subject to a contingent deferred sales charge (CDSC) of up to
5% if redeemed within the first six years of purchase. Class B share performance
reflects a CDSC of 1%, which would apply for the period shown. Class C share
performance includes the historical performance of the Class B shares for
periods from 6/1/98 through 8/31/98. Class C shares would be subject to a CDSC
of 1% if redeemed within one year of purchase.
1. The J.P. Morgan EMBI Global Diversified Composite is an unmanaged, uniquely
weighted version of The J.P. Morgan Emerging Markets Bond Index--the
EMBI--which, in turn, is an unmanaged, market-capitalization weighted,
total-return index tracking the traded market for U.S. dollar denominated
Brady bonds. The EMBI Global Diversified Composite limits the weights of
those index countries with larger total debt obligations by only including
specified portions of these countries' eligible current face amounts of
outstanding debt. Results assume reinvestment of all income and capital
gains. An investment cannot be made directly into an index or a composite.
5
-
- -------
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 5 for more information about the J.P. Morgan EMBI Global
Diversified Composite.
3. Percentages reflect total returns of the specified debt markets for the
10-month period ended October 31, 2003. Results assume reinvestment of all
income and capital gains. Due to the Fund's selective investments and its
purchases and sales, the performance of Fund holdings may differ from that of
the specified debt markets.
Portfolio Management Discussion and Analysis
Emerging debt markets generally provided excellent returns during the 10 months
ended October 31, 2003. While few investors believed that the performance of
recent years could be repeated, year-to-date progress suggests that 2003 may be
another strong year for emerging-market debt.
The advances came partly as a result of low interest rates around the world,
which made higher-yielding emerging-market debt more attractive to investors.
With no fiscal crises looming on the horizon, low issuance levels in most
markets, and wide premiums to U.S. Treasuries, emerging-market debt attracted
strong inflows during the first 10 months of 2003.
During that period, one rating agency advanced Russian debt to investment grade,
which came as a refreshing change from Russia's "selective default" status less
than five years ago. Turkish bonds saw considerable volatility when the nation
refused to provide a staging ground for coalition troops and a $30 billion aid
package was cancelled. Venezuelan debt felt the effects of a coup and a lengthy
labor strike. Even so, emerging markets generally advanced on signs that the
global economy was beginning to recover.
PERFORMANCE REVIEW
For the 10-month period ended October 31, 2003, MainStay Global High Yield Fund
returned 25.21% for Class A shares and 24.33% for Class B and Class C shares,
excluding all sales charges. All share classes outperformed the 23.81% return of
the average Lipper(1) emerging markets debt fund over the same period. All share
classes also outperformed the 17.71% return of the J.P. Morgan EMBI Global
Diversified Composite(2) for the 10 months ended October 31, 2003.
The Fund's outperformance stemmed from a number of strong investments, including
an overweighted position in Brazil, which has returned 57% for the 10-month
period.(3) The Fund was also overweighted in Ecuador, which returned 77% for the
reporting period.
STRATEGIES AND RESULTS
The Fund continued to employ the strategies that it has used in former years. We
believed that high-beta and oil plays would bring the best performance. Although
at times we found these types of investments overpriced and reduced our
positions accordingly, we tried to remain fully invested through most of the
first 10 months of 2003. Most emerging markets continued to benefit from
central-bank easing around the globe and from attractive spreads to Treasury
securities.
The Fund's investments in Russia, Nigeria, Venezuela, Brazil, and Ecuador were
particularly strong, and we overweighted most of these markets through much
6
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[BAR CHART]
<Table>
<Caption>
CLASS A SHARES
--------------
12/98 -16.38
12/99 18.15
12/00 9.30
12/01 13.59
12/02 11.01
10/03 25.21
</Table>
CLASS B AND CLASS C SHARES
[BAR CHART]
<Table>
<Caption>
CLASS B AND CLASS C SHARES
--------------------------
12/98 -16.82
12/99 17.01
12/00 8.58
12/01 12.69
12/02 10.33
10/03 24.33
</Table>
of the reporting period. In addition to benefiting from the demand for higher-
yielding assets, these countries also fit our strategy of emphasizing the debt
of oil-producing nations. We believed that oil prices would remain relatively
high because of geopolitical tensions and disruptions in Venezuelan output.
The Russian upgrade strengthened the Fund's performance. Russian bonds fit well
with the Fund's focus on oil, but we also like these securities for additional
reasons. We believe that upgrades from other rating agencies are likely to be
forthcoming after the country's elections next year, which should entice more
buyers into the Russian market. In our opinion, however, the nation's debt is
unlikely to move much higher on the rating scale until we see reforms in
Russia's land, banking, and bankruptcy policies.
7
-
We took a contrarian view of Turkish debt at times during the reporting period.
Most of the market did not like the inherent risk of Turkish bonds, particularly
when staging proposals for coalition troops were rejected. While that was not a
positive development, we tended to see the outlook as brighter than most. We
expected the United States and Turkey to resolve their differences over a loan
agreement and did not believe that the election of the Justice and Development
Party, or AKP (Adalet ve Kalkinma Partisi), would be bad for the country. We
also believed that inflation and interest rates would come down to the target
levels required by the International Monetary Fund. When the IMF completed its
fifth review of its stand-by agreement with Turkey, it approved disbursement of
$476 million, which dramatically improved the nation's financial picture. We
continue to view Turkey as a market with potential, particularly if Turkey
should begin to receive favorable consideration as a potential candidate for
admission into the European Union.
Brazil has been and--continues to be--the Fund's largest overweighted position.
At the end of October 2002, Brazil elected Luis Inacio Lula da Silva. Prior to
the election, we did not know what types of people and policies Lula would bring
to Brazil. It wasn't long, however, before we became more comfortable with his
appointments and policies, and the Fund began to take an overweighted position
in Brazilian bonds. The decision was one of the strongest contributors to the
Fund's performance for the 10-month period.
Ecuadorian bonds were also overweighted in the Fund's portfolio and had even
higher returns. At the beginning of 2003, the Fund was neutrally positioned in
Venezuela. When political and labor problems caused considerable volatility, we
added to the Fund's position, secure in the belief that Venezuela would handle
its debt obligations responsibly. Things calmed down with the resolution of the
Venezuelan oil strike and an agreement to conduct a recall referendum on
President Chavez. We continue to believe that the wide yield spread on
Venezuelan debt will attract yield buyers.
LOOKING AHEAD
We will continue to watch and wait on the financial situation of emerging-
market nations and will keep an eye on U.S. interest rates. Even if rates rise
quickly in the United States, we doubt that a rush-to-issuance in emerging
markets will be likely to occur in 2004. Since interest rates are still at
historical lows, a slow rise in rates will not set off an alarm. All spread
products--including investment-grade, high-yield, emerging-market, and
distressed debt--ended October 2003 at tighter levels because of low issuance
and high demand. This, combined with smart debt management by companies and
countries, has caused spreads to look artificially tight. In our opinion,
however, the appearance may be more than the reality. In the upcoming year, we
expect certain countries to issue new debt for prefinancing of 2004 and others
to come to market to retire their old Brady bonds and issue new replacement
debt.
8
While the road ahead may not be smooth and unforeseen events can occur at any
time, we feel that the bumps along the way may be small when we look back at
them a year from now. The Fund continues to earn attractive returns on its
current holdings, which may increase in the coming months if the markets remain
relatively stable.
Whatever the markets or the world economy may bring, the Fund will continue to
seek to provide maximum current income by investing primarily in high-yield debt
securities of non-U.S. issuers. Capital appreciation will remain a secondary
objective.
Joseph Portera
Portfolio Manager
MacKay Shields LLC
Foreign securities may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information, and changes in tax or currency laws or monetary policy. These risks
are likely to be greater in emerging markets than in developed markets.
High-yield securities ("junk bonds") are generally considered speculative
because they present a greater risk of loss than higher-quality debt securities
and may be subject to greater price volatility. The Fund may invest in
derivatives, which may increase the volatility of the Fund's net asset value and
may result in a loss to the Fund.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
Portfolio of Investments October 31, 2003
9
-
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
----------------------------
LONG-TERM BONDS (94.6%)+
BRADY BONDS (15.7%)
BRAZIL (8.6%)
Republic of Brazil
Series 18 Year
2.0625%, due 4/15/12 (b)....... $ 800,000 $ 672,000
Series RG
2.0625%, due 4/15/12 (b)....... 1,825,000 1,533,000
Series 20 Year
8.00%, due 4/15/14 (c)......... 4,340,720 4,039,474
-----------
6,244,474
-----------
NIGERIA (1.5%)
Central Bank of Nigeria
Series WW
6.25%, due 11/15/20............ 1,250,000 1,087,500
-----------
PERU (2.8%)
Republic of Peru
Series 20 Year
4.50%, due 3/7/17 (b)(d)....... 2,250,000 1,996,875
-----------
VENEZUELA (2.3%)
Republic of Venezuela
Series DL
1.875%, due 12/18/07 (b)....... 1,821,380 1,680,223
-----------
VIETNAM (0.5%)
Socialist Republic of Vietnam
Series 30 Year
3.50%, due 3/12/28............. 500,000 347,390
-----------
Total Brady Bonds
(Cost $8,807,365).............. 11,356,462
-----------
CORPORATE BONDS (11.3%)
BRAZIL (0.1%)
Globo Comunicacoes e
Participacoes S.A.
Series REGS
10.625%, due 12/5/08 (e)....... 224,000 88,577
-----------
LUXEMBURG (1.1%)
Mobile Telesystems Finance
9.75%, due 1/30/08 (a)......... 750,000 796,875
-----------
MEXICO (1.0%)
Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V.
12.50%, due 6/15/12............ 450,000 495,000
Vitro S.A. de C.V.
11.75%, due 11/1/13 (a)........ 250,000 241,875
-----------
736,875
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
----------------------------
PHILIPPINES (0.8%)
Philippine Long Distance
Telephone Co.
11.375%, due 5/15/12........... $ 550,000 $ 605,000
-----------
RUSSIA (4.6%)
AO Siberian Oil Co.
11.50%, due 2/13/07............ 725,000 779,375
Gazprom Oao
9.625%, due 3/1/13 (a)......... 760,000 824,600
Tyumen Oil Co.
11.00%, due 11/6/07 (a)........ 800,000 904,000
VimpelCom BV
10.45%, due 4/26/05 (a)........ 260,000 274,625
Wimm-Bill-Dann Foods OJSC
8.50%, due 5/21/08 (a)......... 500,000 511,250
-----------
3,293,850
-----------
UKRAINE (0.5%)
Kyivstar GSM Bonds
12.75%, due 11/21/05 (a)....... 300,000 333,750
-----------
UNITED STATES (3.2%)
Adelphia Communications Corp.
10.25%, due 6/15/11 (e)........ 100,000 84,000
FrontierVision Operating
Partners L.P.
11.00%, due 10/15/06 (e)....... 100,000 103,125
PEMEX Project Funding Master
Trust
7.375%, due 12/15/14 (c)....... 2,000,000 2,100,000
-----------
2,287,125
-----------
Total Corporate Bonds
(Cost $8,137,648).............. 8,142,052
-----------
GOVERNMENTS & FEDERAL AGENCIES (64.8%)
ARGENTINA (0.8%)
Republic of Argentina
1.162%, due 8/3/12 (b)......... 1,000,000 583,100
-----------
BRAZIL (14.8%)
Republic of Brazil
Series 11BR
4.75%, due 4/10/07 (f)......... Y45,000,000 386,324
9.25%, due 10/22/10............ $ 200,000 199,400
9.375%, due 4/7/08............. 1,250,000 1,295,000
10.125%, due 5/15/27........... 1,500,000 1,410,000
11.00%, due 1/11/12 (c)........ 1,650,000 1,765,500
11.00%, due 8/17/40 (c)........ 1,980,000 1,932,480
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Global High Yield Fund
10
- -
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
----------------------------
GOVERNMENTS & FEDERAL AGENCIES (CONTINUED)
BRAZIL (CONTINUED)
Republic of Brazil (Continued)
11.50%, due 3/12/08............ $ 850,000 $ 947,750
12.25%, due 3/6/30............. 500,000 545,000
14.50%, due 10/15/09 (c)....... 1,800,000 2,223,000
-----------
10,704,454
-----------
COLOMBIA (4.4%)
Republic of Colombia
7.625%, due 2/15/07............ 500,000 517,500
8.625%, due 4/1/08............. 250,000 262,500
10.00%, due 1/23/12............ 1,050,000 1,102,500
10.375%, due 1/28/33........... 500,000 502,500
10.50%, due 7/9/10............. 430,000 470,850
11.75%, due 2/25/20............ 300,000 342,600
-----------
3,198,450
-----------
DOMINICAN REPUBLIC (0.5%)
Dominican Republic
9.04%, due 1/23/13 (a)......... 500,000 385,000
-----------
ECUADOR (2.7%)
Republic of Ecuador
Series REGS
7.00%, due 8/15/30............. 2,100,000 1,393,350
Series REGS
12.00%, due 11/15/12........... 400,000 353,000
12.00%, due 11/15/12 (a)....... 225,000 200,813
-----------
1,947,163
-----------
EGYPT (1.0%)
Arab Republic of Egypt
Series REGS
8.75%, due 7/11/11............. 610,000 725,900
-----------
EL SALVADOR (0.3%)
Republic of El Salvador
8.25%, due 4/10/32 (a)......... 250,000 238,125
-----------
IVORY COAST (0.3%)
Republic of Ivory Coast
Series 20 Year
2.00%, due 3/29/18 (e)......... 1,400,000 245,000
-----------
MEXICO (3.8%)
United Mexican States
8.125%, due 12/30/19........... 2,450,000 2,707,250
-----------
PANAMA (2.4%)
Republic of Panama
8.25%, due 4/22/08............. 210,000 232,575
8.875%, due 9/30/27............ 400,000 417,000
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
----------------------------
PANAMA (CONTINUED)
9.375%, due 7/23/12............ $ 200,000 $ 228,000
9.625%, due 2/8/11............. 770,000 887,425
-----------
1,765,000
-----------
PERU (2.0%)
Republic of Peru
9.125%, due 2/21/12............ 1,300,000 1,452,750
-----------
PHILIPPINES (3.3%)
Republic of Philippines
9.375%, due 1/18/17............ 510,000 541,238
9.875%, due 1/15/19............ 750,000 778,125
10.625%, due 3/16/25........... 1,000,000 1,082,500
-----------
2,401,863
-----------
RUSSIA (13.6%)
Russian Federation
Series REGS
5.00%, due 3/31/30............. 7,884,750 7,360,414
5.00%, due 3/31/30 (a)......... 28,205 26,301
Series REGS
8.25%, due 3/31/10............. 816,251 911,752
8.25%, due 3/31/10 (a)......... 3,289 3,678
Series REGS
10.00%, due 6/26/07............ 742,000 873,334
Series REGS
11.00%, due 7/24/18............ 500,000 668,000
-----------
9,843,479
-----------
SOUTH AFRICA (1.5%)
Republic of South Africa
7.375%, due 4/25/12............ 950,000 1,064,000
-----------
TURKEY (6.3%)
Republic of Turkey
9.875%, due 3/19/08............ 500,000 560,000
10.50%, due 1/13/08............ 980,000 1,122,100
11.75%, due 6/15/10............ 400,000 485,000
11.875%, due 1/15/30........... 900,000 1,126,125
12.375%, due 6/15/09........... 1,000,000 1,237,500
-----------
4,530,725
-----------
UKRAINE (2.1%)
Ukraine Government
7.65%, due 6/11/13 (a)......... 700,000 693,875
Series REGS
11.00%, due 3/15/07............ 714,101 791,581
-----------
1,485,456
-----------
URUGUAY (0.5%)
Republic of Uruguay
7.875%, due 1/15/33 (g)........ 500,000 335,000
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003 (continued)
11
-
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
----------------------------
GOVERNMENTS & FEDERAL AGENCIES (CONTINUED)
VENEZUELA (4.5%)
Republic of Venezuela
9.25%, due 9/15/27............. $3,713,000 $ 2,988,965
10.75%, due 9/19/13 (a)........ 250,000 236,250
-----------
3,225,215
-----------
Total Governments & Federal
Agencies
(Cost $39,383,134)............. 46,837,930
-----------
LOAN PARTICIPATIONS (0.9%)
ALGERIA (0.4%)
Republic of Algeria
Tranche 1
2.0625%, due 9/4/06
(b)(h)(i)...................... 115,385 112,500
Tranche 3
2.0625%, due 3/4/10
(b)(h)(i)...................... 216,667 208,000
-----------
320,500
-----------
MOROCCO (0.2%)
Kingdom of Morocco
Tranche A
2.5625%, due 1/1/09
(b)(h)(i)...................... 119,006 115,138
-----------
THAILAND (0.3%)
Thai Oil Co. Ltd.
Tranche 1-3
2.3463%, due 3/31/10........... 246,334 211,847
-----------
Total Loan Participations
(Cost $587,113)................ 647,485
-----------
YANKEE BONDS (1.9%) (j)
ARGENTINA (1.2%)
Cablevision S.A.
Series 10, Tranche 1
13.75%, due 4/30/07 (e)........ 50,000 19,500
Series 5, Tranche 1
13.75%, due 5/1/09 (e)......... 200,000 78,000
Multicanal S.A.
13.125%, due 4/15/09 (e)....... 200,000 64,000
YPF Sociedad Anonima
9.125%, due 2/24/09............ 650,000 702,000
-----------
863,500
-----------
MEXICO (0.1%)
Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V.
11.75%, due 6/15/09............ 100,000 100,750
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
----------------------------
UNITED STATES (0.6%)
Hynix Semiconductor America
8.625%, due 5/15/07 (a)........ $ 450,000 $ 393,925
-----------
Total Yankee Bonds
(Cost $1,436,644).............. 1,358,175
-----------
Total Long-Term Bonds
(Cost $58,351,904)............. 68,342,104
-----------
SHORT-TERM INVESTMENTS (17.4%)
COMMERCIAL PAPER (3.6%)
Morgan Stanley & Co.
1.03%, due 11/7/03............. 1,005,000 1,004,828
UBS Finance Delaware LLC
1.03%, due 11/3/03............. 1,585,000 1,584,909
-----------
Total Commercial Paper
(Cost $2,589,737).............. 2,589,737
-----------
GOVERNMENT & FEDERAL AGENCY (0.4%)
VENEZUELA (0.4%)
Republic of Venezuela
Series C
2.25%, due 12/31/03 (b)........ 300,000 297,000
-----------
Total Government & Federal
Agency
(Cost $289,111)................ 297,000
-----------
<Caption>
SHARES
-----------
INVESTMENT COMPANY (0.1%)
AIM International Funds Group
(k)............................ 37,707 37,707
-----------
Total Investment Company
(Cost $37,707)................. 37,707
-----------
PRINCIPAL
AMOUNT
-----------
MASTER NOTE (4.1%)
Bank of America Securities LLC
1.1874%, due 11/3/03 (k)....... $3,000,000 3,000,000
-----------
Total Master Note
(Cost $3,000,000).............. 3,000,000
-----------
REPURCHASE AGREEMENTS (9.2%)
Countrywide Securities Corp.
1.1424%, dated 10/31/03
due 11/3/03 (k)
Proceeds at Maturity $2,000,188
(Collateralized by various
Bonds with a Principal Amount
of $2,360,929 and a Market
Value of $2,049,512............ 2,000,000 2,000,000
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Global High Yield Fund
12
- -
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
----------------------------
SHORT-TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENTS (CONTINUED)
Merrill Lynch & Co.
1.1424%, dated 10/31/03
due 11/3/03 (k)
Proceeds at Maturity
$2,146,202
(Collateralized by various
Bonds
with a Principal Amount of
$2,147,483 and a Market Value
of $2,226,748.................. $2,146,000 $ 2,146,000
Morgan Stanley & Co.
1.1124%, dated 10/31/03
due 11/3/03 (k)
Proceeds at Maturity
$2,523,233
(Collateralized by various
Bonds
with a Principal Amount of
$2,657,224 and a Market Value
of $2,649,303.................. 2,523,000 2,523,000
-----------
Total Repurchase Agreements
(Cost $6,669,000).............. 6,669,000
-----------
Total Short-Term Investments
(Cost $12,585,555)............. 12,593,444
-----------
Total Investments
(Cost $70,937,459) (l)......... 112.0% 80,935,548(m)
Liabilities in Excess of
Cash and Other Assets.......... (12.0) (8,652,699)
----------- -----------
100.0% $72,282,849
=========== ===========
</Table>
<Table>
- -------
(a) May be sold to institutional investors only.
(b) Floating rate. Rate shown is the rate in effect at
October 31, 2003.
(c) Represents a security of which a portion is out on loan.
(d) FLIRB (Floating Loaded Interest Rate Bond) carries a
fixed, below market interest rate which rises
incrementally over the initial 5 to 7 years of the life
of the bond, and is then replaced by a floating rate
coupon for the remaining life of the bond.
(e) Issue in default.
(f) Partially segregated as collateral for foreign currency
forward contracts.
(g) CIK ("Cash in Kind")--Interest payment is made with cash
or additional securities.
(h) Restricted security.
(i) Illiquid security.
(j) Yankee bond-Dollar-denominated bonds issued in the United
States by foreign banks and corporations.
(k) Represents a security, or portion thereof, purchased with
cash collateral received for securities on loan.
(l) The cost for federal income tax purposes is $71,208,321.
(m) At October 31, 2003 net unrealized appreciation for
securities was $9,727,227, 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
$10,591,970 and aggregate gross unrealized depreciation
for all investments on which there was an excess of cost
over market value of $864,743.
The following abbreviation is used in the above portfolio:
Y--Japanese Yen.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
-
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$70,937,459)--including $9,240,230 market value of
securities loaned......................................... $80,935,548
Cash........................................................ 272,789
Receivables:
Dividends and interest.................................... 1,248,564
Fund shares sold.......................................... 267,875
Unrealized appreciation on foreign currency forward
contracts................................................. 934
Other assets................................................ 12,755
-----------
Total assets.............................................. 82,738,465
-----------
LIABILITIES:
Securities lending collateral............................... 9,706,707
Payables:
Investment securities purchased........................... 272,191
Fund shares redeemed...................................... 111,082
Manager................................................... 44,803
NYLIFE Distributors....................................... 38,949
Transfer agent............................................ 35,449
Custodian................................................. 5,135
Trustees.................................................. 814
Accrued expenses............................................ 65,597
Dividend payable............................................ 174,889
-----------
Total liabilities......................................... 10,455,616
-----------
Net assets.................................................. $72,282,849
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 32,780
Class B................................................... 25,753
Class C................................................... 10,568
Additional paid-in capital.................................. 62,278,387
Accumulated undistributed net investment income............. 265,005
Accumulated net realized loss on investments................ (328,653)
Net unrealized appreciation on investments.................. 9,998,089
Net unrealized appreciation on translation of other assets
and liabilities in foreign currencies and foreign currency
forward contracts......................................... 920
-----------
Net assets.................................................. $72,282,849
===========
CLASS A
Net assets applicable to outstanding shares................. $34,370,874
===========
Shares of beneficial interest outstanding................... 3,277,971
===========
Net asset value per share outstanding....................... $ 10.49
Maximum sales charge (4.50% of offering price).............. 0.49
-----------
Maximum offering price per share outstanding................ $ 10.98
===========
CLASS B
Net assets applicable to outstanding shares................. $26,880,917
===========
Shares of beneficial interest outstanding................... 2,575,281
===========
Net asset value and offering price per share outstanding.... $ 10.44
===========
CLASS C
Net assets applicable to outstanding shares................. $11,031,058
===========
Shares of beneficial interest outstanding................... 1,056,835
===========
Net asset value and offering price per share outstanding.... $ 10.44
===========
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
Statement of Operations period January 1, 2003 through October 31, 2003* and the
year ended December 31, 2002
<Table>
<Caption>
2003* 2002
------------ -----------
INVESTMENT INCOME:
Income:
Dividends................................................. $ 3,492 $ 12,749
Interest.................................................. 5,046,819 3,102,177
Income from securities loaned--net........................ 19,898 10,881
----------- ----------
Total income............................................ 5,070,209 3,125,807
----------- ----------
Expenses:
Manager................................................... 378,560 214,804
Transfer agent............................................ 168,515 129,400
Distribution--Class B..................................... 143,450 86,371
Distribution--Class C..................................... 64,768 34,401
Service--Class A.......................................... 65,743 36,459
Service--Class B.......................................... 47,866 28,790
Service--Class C.......................................... 21,591 11,467
Professional.............................................. 40,894 35,389
Registration.............................................. 37,110 33,448
Shareholder communication................................. 32,538 21,217
Custodian................................................. 26,660 16,568
Recordkeeping............................................. 20,802 14,111
Amortization of organization expense...................... 5,633 13,490
Trustees.................................................. 5,185 5,157
Miscellaneous............................................. 28,339 27,278
----------- ----------
Total expenses before waiver and reimbursement.......... 1,087,654 708,350
----------- ----------
Fees waived and reimbursed by Manager and Subadvisor........ -- (65,911)
----------- ----------
Net expenses............................................ 1,087,654 642,439
----------- ----------
Net investment income....................................... 3,982,555 2,483,368
----------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions................................... 1,666,975 (160,278)
Foreign currency transactions........................... 1,254 (31,016)
----------- ----------
Net realized gain (loss) on investments and foreign currency
transactions.............................................. 1,668,229 (191,294)
----------- ----------
Net change in unrealized appreciation (depreciation) on:
Security transactions................................... 8,286,848 908,840
Translation of other assets and liabilities in foreign
currencies and foreign currency forward contracts...... 27,042 (26,122)
----------- ----------
Net unrealized gain on investments and foreign currency
transactions.............................................. 8,313,890 882,718
----------- ----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 9,982,119 691,424
----------- ----------
Net increase in net assets resulting from operations........ $13,964,674 $3,174,792
=========== ==========
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ------------ ------------
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 3,982,555 $ 2,483,368 $ 1,522,013
Net realized gain (loss) on investments and foreign
currency transactions................................... 1,668,229 (191,294) (294,199)
Net change in unrealized appreciation (depreciation) on
investments and foreign currency transactions........... 8,313,890 882,718 748,497
------------ ------------ ------------
Net increase in net assets resulting from operations...... 13,964,674 3,174,792 1,976,311
------------ ------------ ------------
Dividends to shareholders:
From net investment income:
Class A................................................. (1,883,678) (1,251,113) (922,042)
Class B................................................. (1,250,907) (915,778) (548,666)
Class C................................................. (559,113) (365,897) (64,692)
------------ ------------ ------------
Total dividends to shareholders....................... (3,693,698) (2,532,788) (1,535,400)
------------ ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 32,475,502 28,308,395 1,260,763
Class B................................................. 12,605,060 12,560,634 2,718,483
Class C................................................. 7,431,989 8,031,949 906,505
Net asset value of shares issued to shareholders in
reinvestment of dividends:
Class A................................................. 813,923 347,107 113,433
Class B................................................. 779,370 559,957 323,707
Class C................................................. 340,130 261,504 18,398
------------ ------------ ------------
54,445,974 50,069,546 5,341,289
Cost of shares redeemed:
Class A................................................. (26,755,569) (16,260,403) (563,382)
Class B................................................. (6,760,518) (3,289,731) (1,986,993)
Class C................................................. (6,439,999) (1,205,832) (449,978)
------------ ------------ ------------
Increase in net assets derived from capital share
transactions........................................ 14,489,888 29,313,580 2,340,936
------------ ------------ ------------
Net increase in net assets............................ 24,760,864 29,955,584 2,781,847
NET ASSETS:
Beginning of period......................................... 47,521,985 17,566,401 14,784,554
------------ ------------ ------------
End of period............................................... $ 72,282,849 $ 47,521,985 $ 17,566,401
============ ============ ============
Accumulated undistributed (distributions in excess of) net
investment income at end of period........................ $ 265,005 $ (25,106) $ 1,800
============ ============ ============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
---------------------------------------------------------------------------------
January 1, 2003 June 1**
through Year ended December 31, through
October 31, ---------------------------------------------- December 31,
2003* 2002 2001 2000 1999 1998
--------------- ------- ------- ------- ---- ------------
Net asset value at beginning of period...... $ 8.89 $ 8.72 $ 8.49 $ 8.58 $ 8.00 $ 10.00
------- ------- ------- ------- ------- -------
Net investment income....................... 0.63 0.73 0.85(f) 0.85 0.78 0.34(a)
Net realized and unrealized gain (loss) on
investments................................ 1.56 0.19 0.24(f) (0.08) 0.58 (1.99)
Net realized and unrealized gain (loss) on
foreign currency transactions.............. 0.00(b) (0.01) -- (0.00)(b) 0.01 (0.01)
------- ------- ------- ------- ------- -------
Total from investment operations............ 2.19 0.91 1.09 0.77 1.37 (1.66)
------- ------- ------- ------- ------- -------
Less dividends from net investment income... (0.59) (0.74) (0.86) (0.86) (0.79) (0.34)
------- ------- ------- ------- ------- -------
Net asset value at end of period............ $ 10.49 $ 8.89 $ 8.72 $ 8.49 $ 8.58 $ 8.00
======= ======= ======= ======= ======= =======
Total investment return (c)................. 25.21% 11.01% 13.59% 9.30% 18.15% (16.38%)
Ratios (to average net assets)/
Supplemental Data:
Net investment income.................... 7.75%+ 8.49% 10.11%(f) 10.05% 9.57% 7.40%+
Net expenses............................. 1.63%+ 1.70% 1.70% 1.71%(d) 1.70% 3.39%+
Expenses (before waiver and
reimbursement).......................... 1.63%+ 1.91% 2.27% 2.53% 2.78% 3.59%+
Portfolio turnover rate..................... 34% 92% 111% 96% 104% 96%
Net assets at end of period (in 000's)...... $34,371 $22,754 $ 9,894 $ 8,827 $ 8,186 $ 7,548
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Commencement of Operations.
*** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges and is
not annualized.
(d) The effect of non-reimbursable interest expense on the
expense ratio was 0.01%.
(e) Less than one thousand dollars.
(f) As required, effective January 1, 2001, the Fund has adopted
the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt
securities. The effect of this change for the year ended
December 31, 2001 is shown below. Per share ratios and
supplemental data for periods prior to January 1, 2001 have
not been restated to reflect this change in presentation.
</Table>
<Table>
<Caption>
Class A Class B Class C
------- ------- -------
Decrease net investment income.............................. ($0.00)(b) ($0.00)(b) ($0.00)(b)
Increase net realized and unrealized gains and losses....... 0.00(b) (0.00)(b) (0.00)(b)
Decrease ratio of net investment income..................... (0.04%) (0.04%) (0.04%)
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
-
<Table>
<Caption>
Class B
--------------------------------------------------------------------------------------------------------------
January 1, 2003 June 1**
through Year ended December 31, through
October 31, ------------------------------------------------------------- December 31,
2003* 2002 2001 2000 1999 1998
--------------- ------- ------- ------- ---- ------------
$ 8.86 $ 8.68 $ 8.46 $ 8.54 $ 7.98 $ 10.00
------- ------- ------- ------- ------- -------
0.57 0.67 0.79(f) 0.79 0.71 0.32(a)
1.54 0.20 0.23(f) (0.08) 0.56 (2.01)
0.00(b) (0.01) -- (0.00)(b) 0.01 (0.01)
------- ------- ------- ------- ------- -------
2.11 0.86 1.02 0.71 1.28 (1.70)
------- ------- ------- ------- ------- -------
(0.53) (0.68) (0.80) (0.79) (0.72) (0.32)
------- ------- ------- ------- ------- -------
$ 10.44 $ 8.86 $ 8.68 $ 8.46 $ 8.54 $ 7.98
======= ======= ======= ======= ======= =======
24.33% 10.33% 12.69% 8.58% 17.01% (16.82%)
7.00%+ 7.74% 9.36%(f) 9.30% 8.82% 6.65%+
2.38%+ 2.45% 2.45% 2.46%(d) 2.45% 4.14%+
2.38%+ 2.66% 3.02% 3.28% 3.53% 4.34%+
34% 92% 111% 96% 104% 96%
$26,881 $16,708 $ 6,715 $ 5,498 $ 3,756 $ 2,532
<Caption>
Class C
----------------------------------------------------------------------------------------------------------------
January 1, 2003 September 1***
through Year ended December 31, through
October 31, ------------------------------------------------------------- December 31,
2003* 2002 2001 2000 1999 1998
--------------- ------- ------- ------- ---- --------------
$ 8.86 $ 8.68 $ 8.46 $ 8.54 $ 7.98 $ 7.18
------- ------- ------- ------- ------- -------
0.57 0.67 0.79(f) 0.79 0.71 0.27(a)
1.54 0.20 0.23(f) (0.08) 0.56 0.81
0.00(b) (0.01) -- (0.00)(b) 0.01 (0.01)
------- ------- ------- ------- ------- -------
2.11 0.86 1.02 0.71 1.28 1.07
------- ------- ------- ------- ------- -------
(0.53) (0.68) (0.80) (0.79) (0.72) (0.27)
------- ------- ------- ------- ------- -------
$ 10.44 $ 8.86 $ 8.68 $ 8.46 $ 8.54 $ 7.98
======= ======= ======= ======= ======= =======
24.33% 10.33% 12.69% 8.58% 17.01% 14.99%
7.00%+ 7.74% 9.36%(f) 9.30% 8.82% 6.65%+
2.38%+ 2.45% 2.45% 2.46%(d) 2.45% 4.14%+
2.38%+ 2.66% 3.02% 3.28% 3.53% 4.34%+
34% 92% 111% 96% 104% 96%
$11,031 $ 8,060 $ 957 $ 460 $ 79 $ --(e)
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
- -
MainStay Global High Yield Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
Global High Yield Fund (the "Fund").
The Fund currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and within one year of purchase
of Class C shares. Class A shares, Class B shares and Class C shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions except that the Class B shares and
Class C shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek to provide maximum current income by
investing primarily in high yield debt securities of non-U.S. issuers. Capital
appreciation is a secondary objective. MainStay Global High Yield Fund is
"non-diversified," which means that it may invest a greater percentage of its
assets than diversified funds in a particular issuer. This may make it more
susceptible than diversified funds to risks associated with an individual
issuer, and to single economic, political or regulatory occurrences.
The Fund principally invests in high yield securities (sometimes called "junk
bonds"), which are generally considered speculative because they present a
greater risk of loss, including default, than higher quality debt securities.
These securities pay a premium--a high interest rate or yield--because of the
increased risk of loss. These securities can also be subject to greater price
volatility.
The Fund invests in foreign securities which carry certain risks in addition to
the usual risks inherent in domestic instruments. These risks include those
resulting from currency fluctuations, future adverse political and economic
developments and possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions. These risks are likely to be greater
in emerging markets than in developed markets. The ability of issuers of debt
securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
Notes to Financial Statements
19
-
Effective January 1, 2004, the Fund will change its name to MainStay Global High
Income Fund.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent selected by the Fund's Manager, whose prices reflect broker/dealer
supplied valuations and electronic data processing techniques if those prices
are deemed by the Fund's Manager to be representative of market values at the
regular close of business of the New York Stock Exchange. Temporary cash
investments acquired over 60 days to maturity are valued using the latest bid
prices or using valuations based on a matrix system (which considers such
factors as security prices, yields, maturities, and ratings), both as furnished
by independent pricing services. Other temporary cash investments are valued at
amortized cost, which approximates market value. Securities for which market
quotations are not readily available are valued by methods deemed by the Board
of Trustees to represent fair value. Foreign currency forward contracts are
valued at their fair market values determined on the basis of the mean between
the last current bid and asked prices based on dealer or exchange quotations.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. Should the Manager or Subadvisor conclude that such events
may have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund, adjust the value of the local price to reflect the impact on the price of
such securities as a result of such events.
(B) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward 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 may enter into foreign currency
forward contracts primarily to hedge its foreign currency denominated
investments and receivables and payables against adverse movements in future
foreign exchange rates or to try to enhance the Fund's returns.
The use of foreign currency 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
MainStay Global High Yield Fund
20
- -
appreciation on forward contracts reflects the Fund's exposure at period end to
credit loss in the event of a counterparty's failure to perform its obligations.
Foreign currency forward contract open at October 31, 2003:
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT UNREALIZED
SOLD PURCHASED APPRECIATION
----------- --------- ------------
FOREIGN CURRENCY SALE CONTRACT
Japanese Yen vs. U.S. Dollar, expiring 1/23/04.............. Y42,685,000 $390,281 $934
----
</Table>
(C) SECURITIES LENDING. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are collateralized by cash or securities at
least equal at all times to the market value of the securities loaned. The Fund
may bear the risk of delay in recovery of, or loss of rights in, the securities
loaned should the borrower of the securities experience financial difficulty.
The Fund receives compensation for lending its securities in the form of fees or
it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(D) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933 (the "1933 Act").
The Fund does not have the right to demand that such securities be registered.
Disposal of these securities may involve time-consuming negotiations and
expense, and prompt sale at an acceptable price may be difficult.
Restricted securities held at October 31, 2003:
<Table>
<Caption>
PERCENT
DATE(S) OF PRINCIPAL 10/31/03 OF
SECURITY ACQUISITION AMOUNT COST VALUE NET ASSETS
-------- --------------- --------- -------- -------- ----------
Kingdom of Morocco
Tranche A
2.5625%, due 1/1/09.............. 11/30/99-1/6/00 $119,006 $112,063 $115,138 0.2%
Republic of Algeria
Tranche 1
2.0625%, due 9/4/06.............. 8/13/99-1/6/00 115,385 103,032 112,500 0.1
Tranche 3
2.0625%, due 3/4/10.............. 10/3/02 216,667 194,472 208,000 0.3
Thai Oil Ltd.
Tranche 1-3
2.3463%, due 3/31/10............. 3/7/03 246,334 177,546 211,847 0.3
-------- -------- ---
$587,113 $647,485 0.9%
======== ======== ===
</Table>
(E) LOAN PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan commitments
and loan participations. Loan commitments and loan participations are agreements
to make money available to a
Notes to Financial Statements (continued)
21
-
borrower in a specified amount, at a specified rate and within a specified time.
The Fund records an investment when the borrower withdraws money and records
interest as earned. The unfunded amounts are recorded in memorandum accounts.
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").
(F) ORGANIZATION COSTS. Costs incurred in connection with the Fund's initial
organization and registration totalled $67,460 and were amortized over 60 months
beginning at the commencement of operations.
(G) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(H) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends monthly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and net realized gain on foreign
currency transactions arising from a permanent difference; net assets at October
31, 2003, are not effected.
<Table>
<Caption>
ACCUMULATED NET REALIZED
UNDISTRIBUTED GAIN ON
NET INVESTMENT FOREIGN CURRENCY
INCOME TRANSACTIONS
- -------------- ----------------
$1,254 $(1,254)
</Table>
The reclassification for the Fund is primarily due to foreign currency gain
(loss).
(I) 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 as earned. Discounts and premiums on securities, other than short-term
securities, purchased for the Fund are accreted and amortized, respectively, on
the constant yield method over the life of the respective securities, or, if
applicable, over the period to the first date of
MainStay Global High Yield Fund
22
- -
call. Discounts and premiums on short-term securities are accreted and
amortized, respectively, on the straight line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(J) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(K) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
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 are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented. Accordingly, gains and losses from foreign currency
transactions are included in the reported net realized gain (loss) on investment
transactions.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward 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 foreign currency denominated
assets and liabilities, other than investments, at period end exchange rates are
reflected in unrealized foreign exchange gains or losses.
(L) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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.
Certain amounts have been reclassified to conform to current year presentation.
Such reclassifications had no effect on the Fund's net income or capital.
Notes to Financial Statements (continued)
23
-
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's Manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.70% of the Fund's
average daily net assets. Through March 11, 2002 the Manager had voluntarily
agreed to reduce its fee payable to an annual percentage of 0.50% of the Fund's
average daily net assets. In addition, the Manager had voluntarily agreed to
reimburse the expenses of the Fund through March 11, 2002, to the extent that
operating expenses would exceed on an annualized basis 1.70%, 2.45% and 2.45% of
the average daily net assets of the Class A, Class B and Class C shares,
respectively. Effective March 12, 2002, the Manager voluntarily agreed to
reimburse the expenses of the Fund to the extent that operating expenses would
exceed on an annualized basis 1.70%, 2.45% and 2.45% of the average daily net
assets of the Class A, Class B and Class C shares, respectively. For the ten
months ended October 31, 2003 and the year ended December 31, 2002, the Manager
earned from the Fund $378,560 and $214,804, respectively. It was not necessary
for the Manager to reimburse the Fund for expenses for the ten months ended
October 31, 2003. For the year ended December 31, 2002, the Manager reimbursed
the Fund $65,911.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor a monthly fee at an annual rate of
0.35% of the average daily net assets of the Fund. To the extent that the
Manager has agreed to voluntarily reduce its fee, the Subadvisor has voluntarily
agreed to do so proportionately.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The distribution plans provide
that the Class B and Class C shares of the Fund also
MainStay Global High Yield Fund
24
- -
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B or Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $19,790 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $14,394, $54,359 and $7,629 respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of New York Life Investment
Management LLC, is the Fund's transfer, dividend disbursing and shareholder
servicing agent. NYLIM Service has entered into an agreement with Boston
Financial Data Services ("BFDS") pursuant to which BFDS will perform certain of
the services for which NYLIM Service is responsible. Transfer agent expenses
accrued to NYLIM Service for the ten months ended October 31, 2003 and the year
ended December 31, 2002, amounted to $168,515 and $129,400, respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the Global High
Yield Fund only pays a portion of the fees identified above.
(F) CAPITAL. At October 31, 2003, New York Life held shares of Class A with a
value of $9,441,000. This represents 27.5% of the Class A net assets and 13.1%
of the Fund's net assets at period end.
(G) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of New York Life amounted to $1,403 for the ten months ended
October 31, 2003 and $655 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30
Notes to Financial Statements (continued)
25
-
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
recordkeeping services provided to the Fund by the Manager amounted to $20,802
for the ten months ended October 31, 2003 and $14,111 for the year ended
December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
The Fund has maintained its year end of December 31 for federal income tax
purposes.
At December 31, 2002, the components of accumulated loss on a tax basis were as
follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSSES
- ------------------- ------------ -----------------
$(1,707,429) $1,419,934 $(287,495)
</Table>
The difference between book-basis and tax-basis unrealized appreciation
(depreciation) is primarily due to wash sales deferrals, interest written off
and mark-to-market of foreign currency forward transactions.
At December 31, 2002, for federal income tax purposes, capital loss
carryforwards of $1,707,429 were available as shown in the table below, to the
extent provided by the regulations, to offset future realized gains through the
years indicated. 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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
----------------- -------
2006................................................... $ 377
2007................................................... 1,059
2009................................................... 271
------
$1,707
======
</Table>
In addition, the Fund intends to elect to treat for federal income tax purposes
$17,538 of qualifying capital losses and $30,582 of qualifying foreign exchange
losses that arose after October 31, 2002 as if they arose on January 1, 2003.
The Fund utilized $145,793 of capital loss carryforward during the year ended
December 31, 2002.
The tax character of distributions paid during the ten months ended October 31,
2003, and years ended December 31, 2002 and December 31, 2001, shown in the
Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2003 2002 2001
---------- ---------- ----------
Distributions paid from ordinary income: $3,693,698 $2,532,788 $1,535,400
</Table>
MainStay Global High Yield Fund
26
- -
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $35,315 and $20,839, respectively.
As of October 31, 2003, the Fund had securities on loan with an aggregate market
value of $9,240,230. The Fund received $9,706,707 in cash as collateral for
securities on loan which was used to purchase highly liquid short-term
investments in accordance with the Fund's securities lending procedures.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on this line of
credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
JANUARY 1 YEAR ENDED DECEMBER 31,
THROUGH -----------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- -----------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- ---------
Shares sold.......... 3,379 1,288 768 3,271 1,436 909 147 322 106
Shares issued in
reinvestment of
dividends.......... 82 78 35 40 65 31 13 37 2
------ ----- ---- ------ ----- ---- --- ---- ---
3,461 1,366 803 3,311 1,501 940 160 359 108
Shares redeemed...... (2,742) (678) (656) (1,887) (387) (140) (65) (236) (52)
------ ----- ---- ------ ----- ---- --- ---- ---
Net increase......... 719 688 147 1,424 1,114 800 95 123 56
====== ===== ==== ====== ===== ==== === ==== ===
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
27
-
Report of Independent Auditors
To the Trustees of the MainStay Funds and Shareholders of
MainStay Global High Yield Fund
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 Global High Yield Fund
(one of the funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 22, 2003
28
- -
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
29
-
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
30
- -
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
31
-
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MacKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
D/B/A MERCURY ADVISORS
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
McMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. McGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY.LOGO]
MainStay is a division of New York Life Investment
Management LLC, the investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSGH11-12/03
NYLIM-A04225 20
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R) Global
High Yield Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY.LOGO]
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay Equity
Index Fund versus S&P 500(R) Index and
Inflation 4
Portfolio Management Discussion and Analysis 5
Year-by-Year and 10-Month Performance 6
Portfolio of Investments 9
Financial Statements 16
Notes to Financial Statements 20
Report of Independent Auditors 26
Trustees and Officers 27
The MainStay(R) Funds 30
</Table>
2
This page intentionally left blank
3
-
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
4
$10,000 Invested in MainStay
Equity Index Fund versus
S&P 500(R) Index and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 16.06%, 5 Years -0.87%, 10 Years 9.17%
[LINE GRAPH]
<Table>
<Caption>
MAINSTAY EQUITY INDEX
FUND S&P 500 INDEX(1) INFLATION (CPI)(2)
--------------------- ---------------- ------------------
10/31/93 9700.00 10000.00 10000.00
94 9998.00 10387.00 10261.00
95 12499.00 13133.00 10543.00
96 15381.00 16297.00 10865.00
97 20162.00 21531.00 11092.00
98 24368.00 26266.00 11257.00
99 30403.00 33008.00 11545.00
00 31996.00 35018.00 11944.00
01 23855.00 26297.00 12198.00
02 20100.00 22325.00 12452.00
10/31/03 24049.00 26968.00 12706.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION, PLEASE VISIT WWW.MAINSTAYFUNDS.COM. Performance tables and
graphs do not reflect the deduction of taxes that a shareholder would pay on
distributions or Fund-share redemptions. Total returns reflect change in
share price, reinvestment of dividend and capital gain distributions, and
maximum sales charges. Performance figures reflect certain historical fee
waivers and/or expense limitations, without which total return figures may
have been lower. The graph assumes an initial investment of $10,000 and
reflects the effect of the maximum 3.0% initial sales charge.
1. "S&P 500(R)" and "S&P(R)" are trademarks of The McGraw-Hill Companies,
Inc. and have been licensed for use. Standard & Poor's does not sponsor,
endorse, sell, or promote the Fund or represent the advisability of
investing in the Fund. The S&P 500 is an unmanaged index and is widely
regarded as the standard for measuring large-cap U.S. stock-market
performance. Results assume reinvestment of all income and capital gains.
An investment cannot be made directly into an index.
2. Inflation is measured 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. The rate of inflation does not represent an
investment return.
5
-
- -------
1. See footnote on page 4 for more information about the S&P 500 Index.
2. The Dow Jones Industrial Average is an unmanaged, price-weighted average of
30 actively traded blue-chip stocks, primarily industrials, but also
including financial, leisure, and other service-oriented firms. An investment
cannot be made directly into an index or an average.
3. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
Portfolio Management Discussion and Analysis
The U.S. equity markets staged a dramatic comeback during the 10 months ended
October 31, 2003, with the S&P 500 Index(1) posting an impressive total return
of 21.21%. Such gains, however, were not achieved on a consistent basis, since
global turbulence resulted in significant equity-market volatility.
Investors cheered President Bush's aggressive tax-cut proposal, pushing the Dow
Jones Industrial Average(2) up 5% in the first three trading days of the new
year, but this record-setting pace could not be sustained with the threat of
conflict in Iraq looming on the horizon.
In mid-March, the stock market finally began to recover, but market dynamics
appeared to be largely disconnected from economic fundamentals. Any significant
advances by coalition forces translated into major surges for the broad equity
indices. Coalition setbacks, on the other hand, resulted in steep declines for
U.S. stocks. Through much of March 2003, investors essentially ignored the
disappointing economic data on the labor and manufacturing fronts and the fact
that consumer confidence had fallen to a near-10-year low.
Early in the second quarter, a successful and reasonably quick end to major
combat operations in Iraq confirmed that high energy prices were unlikely to
derail an economic recovery. The U.S. equity markets responded favorably.
Corporate profitability also improved, although cost-cutting may have played a
bigger role than any pickup in demand. Still, economic indicators remained
mixed. Consumer confidence was higher than expected in June, and the hous-
ing sector continued to post record sales. Manufacturing remained sluggish,
however, and the unemployment rate reached an eight-year high of 6.4% that same
month.
Volatility continued during the third quarter, with the equity market advancing
in July and August but losing some ground in September. The decline stemmed
primarily from concerns about the falling U.S. dollar, rising oil prices, and
uncertain third-quarter corporate earnings. Optimism returned to the equity
markets in October with the release of positive economic data, including job
growth and lower initial unemployment claims. The manufacturing sector showed
evidence of expansion, and according to preliminary estimates from the Bureau of
Economic Analysis, real gross domestic product grew at a seasonally adjusted
annual rate of 8.2% in the third quarter, the fastest growth since early 1984.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Equity Index Fund returned
20.23% for Class A shares, excluding all sales charges. The Fund underperformed
the 20.51% return of the average Lipper(3) S&P 500 Index objective fund over the
6
- -------
4. The Global Industry Classification Standard categorizes companies by sector,
industry group, industry, and subindustry. Results in this section of the
annual report reflect subindustry and company performance. In the Portfolio
of Investments that follows, companies are listed by industry.
5. Percentages reflect total return performance of the subindustries or
securities mentioned for the 10
months ended October 31, 2003. Due to purchases and sales, the performance of
Fund holdings may differ from that of the securities or subindustries
themselves.
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[PERFORMANCE BAR GRAPH]
<Table>
<Caption>
CLASS A SHARES
--------------
12/94 0.50
12/95 35.91
12/96 22.04
12/97 32.26
12/98 27.69
12/99 19.99
12/00 -9.71
12/01 -12.65
12/02 -22.70
10/03 20.23
</Table>
See footnote 1 on page 9 for more information on performance.
same period. The Fund also underperformed the 21.21% return of the S&P 500(R)
Index for the first 10 months of 2003. Since the Fund incurs actual expenses
that a hypothetical index does not, there will be times when the Fund lags the
Index.
STRONG PERFORMERS
Based on total returns alone, the best-performing subindustries(4) in the S&P
500 Index for the 10-month reporting period were Internet software & services
(+167.27%),(5) diversified metals & mining (+111.55%), computers & electronics
(+106.79%), semiconductors (+96.94%), and computer storage & peripherals
(+95.95%). Because of their higher weightings in the Index, however, several
subindustries with lower total returns were among the top-five contributors to
the overall performance of the S&P 500 Index. Taking both weightings and total
returns into consideration, the subindustry that made the greatest positive
contribution to the Index was semiconductors (+96.94%), followed by
communication equipment (+50.74%), industrial conglomerates (+20.65%), computer
hardware (+24.69%), and home improvement retail (+53.86%).
For the 10 months ended October 31, 2003, the best-performing company in the S&P
500 Index based on total returns alone was Avaya (+428.16%), followed by
Williams (+277.78%), Dynegy Holdings (+239.83%), Corning (+231.72%), and
PMC-Sierra (+226.80%). Multi-utilities Williams and Dynegy had seen depressed
valuations in the second half of 2002 in the wake of the Enron scandal. As
impressive as these returns may be, the five stocks with the greatest positive
impact on the performance of the S&P 500 Index all had higher weightings and
lower total returns. Taking both weightings and total returns into account, the
company with the greatest positive impact on the Index for the 10-month period
7
-
was Intel (+112.27%), followed by Citigroup (+34.70%), Cisco Systems (+60.15%),
General Electric (+19.14%), and Wal-Mart Stores (+16.71%).
WEAK PERFORMERS
Based solely on total returns, the worst-performing subindustries in the Index
for the reporting period were photo products (-30.29%), trading companies &
distributors (-11.19%), integrated telecommunication services (-9.83%), home
furniture (-6.90%), and health care facilities (-5.90%). Due to a higher Index
weighting, integrated telecommunications services (-9.83%) had the greatest
negative impact on the total return of the Index for the reporting period when
weightings and total returns were taken into account. This subindustry was
followed by pharmaceuticals (-1.02%), photo products (-30.29%), health care
facilities (-5.90%), and insurance brokers (-2.99%).
Surprisingly perhaps, based solely on total returns, the worst-performing
security in the S&P 500 Index for the reporting period was not a member of one
of the worst-performing subindustries. That company was food retailer Winn-Dixie
Stores (-47.05%). The second-worst performing stock in the Index was Concord EFS
(-32.08%), followed by Schering-Plough (-31.22%), Eastman Kodak (-30.28%), and
Qwest Communications International (-29.40%). Taking both weightings and total
returns into account, Merck (-17.41%) made the greatest negative contribution to
the performance of the Index, followed by Verizon Communications (-13.29%), SBC
Communications (-11.55%), Schering-Plough (-31.22%), and Johnson & Johnson
(-6.29%).
INDEX ADJUSTMENTS
The Fund seeks to track the performance and weightings of stocks in the S&P 500
Index. The Index itself, however, may change from time to time as companies
merge, divest units, add to their market capitalization or face financial
difficulties. Standard & Poor's may also occasionally adjust the Index to better
reflect the companies that it believes are most representative of the makeup of
our economy. During the 10 months ended October 31, 2003, there were eight
companies deleted from the Index and eight companies added to it.
The additions included AutoNation, Apartment Investment & Management, McCormick,
Symantec, Federated Investors, ProLogis, Medco Health Solutions, and Express
Scripts. Deletions from the Index included Rational Software, AMR, HealthSouth,
Household International, Pharmacia, Mirant, McDermott International, and
Quintiles Transnational.
HealthSouth was deleted from the Index when the company was investigated for a
massive accounting scandal and allegations of fraud. The government has accused
HealthSouth and a group of its former officers of deliberately overstating
earnings by $2.5 billion over several years. AMR, the parent company of American
8
Airlines, was deleted from the Index when AMR faced the threat of bankruptcy.
The company's difficulties stemmed from the sluggish economy, the war in Iraq,
and the SARS outbreak, all of which took a toll on air travel. Recent labor
concessions have helped AMR avoid bankruptcy.
LOOKING AHEAD
Evidence shows that business expenditures, long thought to be the key to a
sustainable economic turnaround, have risen by an impressive 11% in the third
quarter of 2003, with investment in equipment and software increasing by 15%.
Going forward, this rise in business investment may strengthen labor markets,
stimulate demand, and improve corporate profitability. With positive economic
data emerging while the Federal Open Market Committee is suggesting that "policy
accommodation can be maintained for a considerable period," U.S. equity
investors may have good reason to remain bullish.
As index investors, we do not evaluate or respond to changing economic and
market conditions or concern ourselves with market psychology. Whatever the
markets or the economy may bring, the Fund will continue to seek to provide
investment results that correspond to the total return performance (reflecting
reinvestment of dividends) of publicly traded common stocks in the aggregate, as
represented by the S&P 500 Index.
Jefferson C. Boyce
Stephen B. Killian
Portfolio Managers
New York Life Investment Management LLC
MainStay Equity Index Fund was closed to new purchases as of January 1, 2002.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
9
-
Portfolio of Investments October 31, 2003
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (100.1%)+
AEROSPACE & DEFENSE (1.8%)
Boeing Co. (The)............... 55,910 $ 2,151,976
General Dynamics Corp. ........ 13,105 1,096,889
Goodrich Corp. ................ 7,949 219,551
Honeywell International,
Inc. ......................... 57,111 1,748,167
Lockheed Martin Corp. ......... 29,931 1,387,601
Northrop Grumman Corp. ........ 12,197 1,090,412
Raytheon Co. .................. 27,678 732,913
Rockwell Collins, Inc. ........ 12,007 329,592
United Technologies Corp. ..... 31,136 2,636,908
------------
11,394,009
------------
AIR FREIGHT & LOGISTICS (1.1%)
FedEx Corp. ................... 19,934 1,510,199
Ryder System, Inc. ............ 4,537 136,110
United Parcel Service, Inc.
Class B....................... 74,975 5,437,187
------------
7,083,496
------------
AIRLINES (0.2%)
Delta Air Lines, Inc. ......... 8,343 108,626
Southwest Airlines Co. ........ 52,156 1,011,826
------------
1,120,452
------------
AUTO COMPONENTS (0.2%)
Cooper Tire & Rubber Co. ...... 4,992 98,142
Dana Corp. .................... 10,037 163,402
Delphi Corp. .................. 37,649 335,076
Goodyear Tire & Rubber Co.
(The) (a)..................... 11,791 80,886
Johnson Controls, Inc. ........ 5,930 637,653
Visteon Corp. ................. 9,920 64,083
------------
1,379,242
------------
AUTOMOBILES (0.6%)
Ford Motor Co. ................ 121,796 1,477,386
General Motors Corp. .......... 37,290 1,591,164
Harley-Davidson, Inc. ......... 20,069 951,471
------------
4,020,021
------------
BEVERAGES (2.7%)
Anheuser-Busch Cos., Inc. ..... 54,951 2,706,886
Brown-Forman Corp. Class B..... 4,024 339,545
Coca-Cola Co. (The)............ 163,636 7,592,710
Coca-Cola Enterprises, Inc. ... 30,482 614,517
Coors (Adolph) Co. Class B..... 2,412 135,193
Pepsi Bottling Group, Inc.
(The)......................... 17,793 396,606
PepsiCo, Inc. ................. 114,907 5,494,853
------------
17,280,310
------------
BIOTECHNOLOGY (1.2%)
Amgen, Inc. (a)................ 85,820 5,300,243
Biogen, Inc. (a)............... 9,950 402,676
Chiron Corp. (a)............... 12,534 684,732
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------------
BIOTECHNOLOGY (CONTINUED)
Genzyme Corp. (a).............. 14,729 $ 676,061
MedImmune, Inc. (a)............ 16,796 447,781
------------
7,511,493
------------
BUILDING PRODUCTS (0.2%)
American Standard Cos., Inc.
(a)........................... 4,805 459,839
Masco Corp. ................... 31,483 865,783
------------
1,325,622
------------
CAPITAL MARKETS (3.7%)
Bank of New York Co., Inc.
(The)......................... 51,241 1,598,207
Bear Stearns Cos., Inc.
(The)......................... 6,584 502,030
Charles Schwab Corp. (The)..... 90,440 1,226,366
Federated Investors, Inc. Class
B............................. 7,200 199,080
Franklin Resources, Inc. ...... 16,837 798,411
Goldman Sachs Group, Inc.
(The)......................... 31,638 2,970,808
J.P. Morgan Chase & Co. ....... 135,633 4,869,225
Janus Capital Group, Inc. ..... 16,061 227,103
Lehman Brothers Holdings,
Inc. ......................... 16,056 1,156,032
Mellon Financial Corp. ........ 28,611 854,611
Merrill Lynch & Co., Inc. ..... 62,119 3,677,445
Morgan Stanley................. 72,285 3,966,278
Northern Trust Corp. .......... 14,807 687,785
State Street Corp. ............ 22,157 1,160,140
T.Rowe Price Group, Inc. ...... 8,203 337,553
------------
24,231,074
------------
CHEMICALS (1.5%)
Air Products & Chemicals,
Inc. ......................... 15,148 687,871
Dow Chemical Co. (The)......... 61,077 2,301,992
E.I. du Pont de Nemours &
Co. .......................... 66,258 2,676,823
Eastman Chemical Co. .......... 5,219 169,409
Ecolab, Inc. .................. 17,248 463,798
Engelhard Corp. ............... 8,643 247,017
Great Lakes Chemical Corp. .... 3,664 78,776
Hercules, Inc. (a)............. 7,578 79,190
International Flavors &
Fragrances, Inc. ............. 6,364 210,649
Monsanto Co. .................. 17,426 436,521
PPG Industries, Inc. .......... 11,332 653,290
Praxair, Inc. ................. 10,933 760,718
Rohm & Haas Co. ............... 14,808 581,954
Sigma-Aldrich Corp. ........... 4,805 252,022
------------
9,600,030
------------
COMMERCIAL BANKS (6.4%)
AmSouth Bancorporation......... 23,735 560,621
Bank of America Corp. ......... 99,504 7,535,438
Bank One Corp. ................ 75,125 3,189,056
BB&T Corp. .................... 35,920 1,389,026
Charter One Financial, Inc. ... 15,203 485,888
Comerica, Inc. ................ 11,728 603,757
Fifth Third Bancorp............ 37,877 2,195,351
First Tennessee National
Corp. ........................ 8,476 384,471
FleetBoston Financial Corp. ... 69,982 2,826,573
Huntington Bancshares, Inc. ... 15,416 333,911
KeyCorp........................ 27,955 789,729
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Equity Index Fund
10
- -
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (CONTINUED)
COMMERCIAL BANKS (CONTINUED)
Marshall & Ilsley Corp. ....... 15,227 $ 545,431
National City Corp. ........... 40,858 1,334,422
North Fork Bancorporation,
Inc. ......................... 10,100 393,698
PNC Financial Services Group,
Inc. (The).................... 18,642 998,652
Regions Financial Corp. ....... 14,780 543,165
SouthTrust Corp. .............. 22,467 715,574
SunTrust Banks, Inc. .......... 18,683 1,253,069
Synovus Financial Corp. ....... 19,995 551,862
U.S. Bancorp................... 128,057 3,485,711
Union Planters Corp. .......... 13,207 439,397
Wachovia Corp. ................ 88,545 4,061,559
Wells Fargo & Co. ............. 111,833 6,298,435
Zions Bancorp.................. 5,918 362,714
------------
41,277,510
------------
COMMERCIAL SERVICES & SUPPLIES (1.0%)
Allied Waste Industries, Inc.
(a)........................... 14,200 160,176
Apollo Group, Inc. Class A
(a)........................... 11,728 745,080
Avery Dennison Corp. .......... 7,338 385,832
Cendant Corp. (a).............. 67,335 1,375,654
Cintas Corp. .................. 11,467 489,182
Deluxe Corp. .................. 3,761 151,832
Donnelley (R.R.) & Sons Co. ... 7,623 198,198
Equifax, Inc. ................. 9,462 231,251
H&R Block, Inc. ............... 11,977 563,997
Monster Worldwide, Inc. (a).... 7,479 190,490
Pitney Bowes, Inc. ............ 15,586 640,585
Robert Half International, Inc.
(a)........................... 11,428 269,815
Waste Management, Inc. ........ 39,384 1,020,833
------------
6,422,925
------------
COMMUNICATIONS EQUIPMENT (2.9%)
ADC Telecommunications, Inc.
(a)........................... 53,471 136,351
Andrew Corp. (a)............... 10,262 134,227
Avaya, Inc. (a)................ 28,009 362,436
CIENA Corp. (a)................ 31,755 203,550
Cisco Systems, Inc. (a)........ 467,338 9,804,751
Comverse Technology, Inc.
(a)........................... 12,621 227,683
Corning, Inc. (a).............. 88,492 971,642
JDS Uniphase Corp. (a)......... 96,310 341,901
Lucent Technologies, Inc.
(a)........................... 278,466 891,091
Motorola, Inc. ................ 154,711 2,093,240
QLogic Corp. (a)............... 6,318 354,124
QUALCOMM, Inc. ................ 52,785 2,507,287
Scientific-Atlanta, Inc. ...... 10,019 296,562
Tellabs, Inc. (a).............. 27,685 208,468
------------
18,533,313
------------
COMPUTERS & PERIPHERALS (4.0%)
Apple Computer, Inc. (a)....... 24,089 551,397
Dell, Inc. (a)................. 171,000 6,176,520
EMC Corp. (a).................. 145,819 2,018,135
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMPUTERS & PERIPHERALS (CONTINUED)
Gateway, Inc. (a).............. 21,777 $ 109,756
Hewlett-Packard Co. ........... 202,879 4,526,231
International Business Machines
Corp. ........................ 115,202 10,308,275
Lexmark International, Inc.
(a)........................... 8,576 631,279
NCR Corp. (a).................. 6,376 229,153
Network Appliance, Inc. (a).... 22,799 562,679
Sun Microsystems, Inc. (a)..... 214,698 850,204
------------
25,963,629
------------
CONSTRUCTION & ENGINEERING (0.0%) (B)
Fluor Corp. ................... 5,675 210,429
------------
CONSTRUCTION MATERIALS (0.1%)
Vulcan Materials Co. .......... 6,788 300,776
------------
CONSUMER FINANCE (1.3%)
American Express Co. .......... 85,564 4,015,519
Capital One Financial Corp. ... 15,080 916,864
MBNA Corp. .................... 84,891 2,101,052
Providian Financial Corp.
(a)........................... 19,471 216,323
SLM Corp. ..................... 29,949 1,172,803
------------
8,422,561
------------
CONTAINERS & PACKAGING (0.2%)
Ball Corp. .................... 3,783 212,605
Bemis Co., Inc. ............... 3,520 162,765
Pactiv Corp. (a)............... 10,695 235,825
Sealed Air Corp. (a)........... 5,681 302,400
Temple-Inland, Inc. ........... 3,670 198,290
------------
1,111,885
------------
DISTRIBUTORS (0.1%)
Genuine Parts Co. ............. 11,779 374,808
------------
DIVERSIFIED FINANCIAL SERVICES (2.7%)
Citigroup, Inc. ............... 342,892 16,253,081
Moody's Corp. ................. 9,971 576,623
Principal Financial Group
(The)......................... 21,483 673,492
------------
17,503,196
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.9%)
ALLTEL Corp. .................. 20,836 984,918
AT&T Corp. .................... 52,337 972,945
BellSouth Corp. ............... 122,790 3,230,605
CenturyTel, Inc. .............. 9,514 340,126
Citizens Communications Co.
(a)........................... 19,440 242,028
Qwest Communications
International, Inc. (a)....... 114,104 402,787
SBC Communications, Inc. ...... 220,884 5,296,798
Sprint Corp. (FON Group)....... 60,481 967,696
Verizon Communications,
Inc. ......................... 183,468 6,164,525
------------
18,602,428
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003 (continued)
11
-
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (CONTINUED)
ELECTRIC UTILITIES (2.1%)
Allegheny Energy, Inc. (a)..... 9,059 $ 95,844
Ameren Corp. .................. 10,754 480,166
American Electric Power Co.,
Inc. ......................... 26,232 739,480
CenterPoint Energy, Inc. ...... 20,513 201,233
Cinergy Corp. ................. 11,884 431,508
CMS Energy Corp. (a)........... 9,720 78,926
Consolidated Edison, Inc. ..... 15,023 607,981
Dominion Resources, Inc. ...... 21,485 1,323,458
DTE Energy Co. ................ 11,158 411,507
Edison International, Inc.
(a)........................... 21,784 429,363
Entergy Corp. ................. 15,243 821,598
Exelon Corp. .................. 21,681 1,375,659
FirstEnergy Corp. ............. 21,613 743,271
FPL Group, Inc. ............... 12,264 781,707
PG&E Corp. (a)................. 27,211 665,309
Pinnacle West Capital Corp. ... 6,050 221,188
PPL Corp. ..................... 11,992 478,721
Progress Energy, Inc. ......... 16,186 697,617
Public Service Enterprise
Group, Inc. .................. 15,186 620,652
Southern Co. (The)............. 48,547 1,446,701
TECO Energy, Inc. ............. 12,448 163,442
TXU Corp. ..................... 21,516 490,995
Xcel Energy, Inc. ............. 26,606 436,338
------------
13,742,664
------------
ELECTRICAL EQUIPMENT (0.4%)
American Power Conversion
Corp. ........................ 13,222 267,481
Cooper Industries, Ltd. Class
A............................. 6,117 323,589
Emerson Electric Co. .......... 27,965 1,587,014
Power-One, Inc. (a)............ 5,398 48,906
Rockwell Automation, Inc. ..... 12,486 387,690
Thomas & Betts Corp. (a)....... 4,387 78,089
------------
2,692,769
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.5%)
Agilent Technologies, Inc.
(a)........................... 31,749 791,185
Jabil Circuit, Inc. (a)........ 13,331 371,268
Molex, Inc. ................... 12,838 402,985
PerkinElmer, Inc. ............. 8,409 151,446
Sanmina-SCI Corp. (a).......... 34,271 361,559
Solectron Corp. (a)............ 55,871 309,525
Symbol Technologies, Inc. ..... 15,509 193,707
Tektronix, Inc. ............... 5,708 146,524
Thermo Electron Corp. (a)...... 11,039 242,637
Waters Corp. (a)............... 8,360 262,755
------------
3,233,591
------------
ENERGY EQUIPMENT & SERVICES (0.7%)
Baker Hughes, Inc. ............ 22,200 627,372
BJ Services Co. (a)............ 10,585 347,294
Halliburton Co. ............... 29,166 696,484
Nabors Industries, Ltd. (a).... 9,767 369,193
Noble Corp. (a)................ 8,982 308,352
Rowan Cos., Inc. (a)........... 6,307 151,053
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------------
ENERGY EQUIPMENT & SERVICES (CONTINUED)
Schlumberger Ltd. ............. 38,689 $ 1,817,222
Transocean, Inc. (a)........... 21,353 409,764
------------
4,726,734
------------
FOOD & STAPLES RETAILING (3.9%)
Albertson's, Inc. ............. 24,662 500,392
Costco Wholesale Corp. (a)..... 30,467 1,077,618
CVS Corp. ..................... 26,439 930,124
Kroger Co. (The) (a)........... 49,928 873,241
Safeway, Inc. (a).............. 29,453 621,458
SUPERVALU, Inc. ............... 8,962 226,022
Sysco Corp. ................... 43,143 1,452,193
Walgreen Co. .................. 68,163 2,373,436
Wal-Mart Stores, Inc. ......... 290,921 17,149,793
Winn-Dixie Stores, Inc. ....... 9,978 80,722
------------
25,284,999
------------
FOOD PRODUCTS (1.2%)
Archer-Daniels-Midland Co. .... 43,428 623,192
Campbell Soup Co. ............. 27,443 711,323
ConAgra Foods, Inc. ........... 36,111 860,886
General Mills, Inc. ........... 24,848 1,114,433
H.J. Heinz Co. ................ 23,536 831,527
Hershey Foods Corp. ........... 8,659 667,609
Kellogg Co. ................... 27,336 905,642
McCormick & Co., Inc. ......... 9,300 275,652
Sara Lee Corp. ................ 51,699 1,030,361
Wm. Wrigley Jr. Co. ........... 14,995 845,718
------------
7,866,343
------------
GAS UTILITIES (0.3%)
KeySpan Corp. ................. 10,571 369,668
Kinder Morgan, Inc. ........... 8,170 437,504
Nicor, Inc. ................... 2,943 100,857
NiSource, Inc. ................ 17,752 367,644
Peoples Energy Corp. .......... 2,411 97,525
Sempra Energy.................. 14,880 413,664
------------
1,786,862
------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.9%)
Applera Corp. Applied
Biosystems Group.............. 14,062 324,551
Bausch & Lomb, Inc. ........... 3,623 174,484
Baxter International, Inc. .... 40,517 1,076,942
Becton, Dickinson & Co. ....... 17,085 624,628
Biomet, Inc. .................. 17,066 611,987
Boston Scientific Corp. (a).... 27,401 1,855,596
C.R. Bard, Inc. ............... 3,480 278,574
Guidant Corp. ................. 20,464 1,043,869
Medtronic, Inc. ............... 80,858 3,684,699
Millipore Corp. (a)............ 3,372 147,862
St. Jude Medical, Inc. (a)..... 11,476 667,444
Stryker Corp. ................. 13,292 1,078,114
Zimmer Holdings, Inc. (a)...... 15,219 971,124
------------
12,539,874
------------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Equity Index Fund
12
- -
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (CONTINUED)
HEALTH CARE PROVIDERS & SERVICES (1.8%)
Aetna, Inc. ................... 10,182 $ 584,549
AmerisourceBergen Corp. ....... 7,389 419,474
Anthem, Inc. (a)............... 9,351 639,889
Cardinal Health, Inc. ......... 29,688 1,761,686
CIGNA Corp. ................... 9,337 532,676
Express Scripts, Inc. (a)...... 5,200 285,584
HCA, Inc. ..................... 33,162 1,268,447
Health Management Associates,
Inc. Class A.................. 16,065 355,840
Humana, Inc. (a)............... 10,875 220,654
IMS Health, Inc. .............. 15,974 375,868
Manor Care, Inc. .............. 6,015 200,179
McKesson Corp. ................ 19,428 588,086
Medco Health Solutions, Inc.
(a)........................... 18,206 604,439
Quest Diagnostics, Inc. ....... 7,100 480,315
Tenet Healthcare Corp. (a)..... 31,077 428,863
UnitedHealth Group, Inc. ...... 39,638 2,016,781
WellPoint Health Networks, Inc.
(a)........................... 9,806 871,753
------------
11,635,083
------------
HOTELS, RESTAURANTS & LEISURE (1.3%)
Carnival Corp. ................ 41,886 1,462,240
Darden Restaurants, Inc. ...... 10,893 228,208
Harrah's Entertainment,
Inc. ......................... 7,390 321,465
Hilton Hotels Corp. ........... 25,367 401,806
International Game
Technology.................... 22,908 750,237
Marriott International, Inc.
Class A....................... 15,641 675,691
McDonald's Corp. .............. 84,616 2,116,246
Starbucks Corp. (a)............ 26,238 829,121
Starwood Hotels & Resorts
Worldwide, Inc. .............. 13,460 454,006
Wendy's International, Inc. ... 7,784 288,397
Yum! Brands, Inc. (a).......... 19,774 675,084
------------
8,202,501
------------
HOUSEHOLD DURABLES (0.5%)
American Greetings Corp. Class
A (a)......................... 4,430 94,492
Black & Decker Corp. (The)..... 5,245 250,763
Centex Corp. .................. 4,143 403,943
Fortune Brands, Inc. .......... 9,760 635,864
KB HOME........................ 3,172 217,250
Leggett & Platt, Inc. ......... 13,004 271,654
Maytag Corp. .................. 5,291 134,391
Newell Rubbermaid, Inc. ....... 18,448 420,614
Pulte Homes, Inc. ............. 4,073 352,355
Snap-on, Inc. ................. 3,902 114,485
Stanley Works (The)............ 5,684 189,505
Tupperware Corp. .............. 3,835 57,717
Whirlpool Corp. ............... 4,582 322,894
------------
3,465,927
------------
HOUSEHOLD PRODUCTS (2.0%)
Clorox Co. (The)............... 14,568 659,930
Colgate-Palmolive Co. ......... 35,717 1,899,787
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------------
HOUSEHOLD PRODUCTS (CONTINUED)
Kimberly-Clark Corp. .......... 33,629 $ 1,775,947
Procter & Gamble Co. (The)..... 86,282 8,480,658
------------
12,816,322
------------
INDUSTRIAL CONGLOMERATES (4.1%)
3M Co. ........................ 51,998 4,101,082
General Electric Co. .......... 667,023 19,350,337
Textron, Inc. ................. 9,136 453,968
Tyco International Ltd. ....... 132,755 2,771,924
------------
26,677,311
------------
INSURANCE (4.5%)
ACE, Ltd. ..................... 18,423 663,228
AFLAC, Inc. ................... 34,138 1,245,354
Allstate Corp. (The)........... 46,801 1,848,640
Ambac Financial Group, Inc. ... 7,049 498,646
American International Group,
Inc. ......................... 173,683 10,565,137
Aon Corp. ..................... 20,990 459,681
Chubb Corp. (The).............. 12,439 831,050
Cincinnati Financial Corp. .... 10,861 444,432
Hartford Financial Services
Group, Inc. (The)............. 18,814 1,032,889
Jefferson-Pilot Corp. ......... 9,643 460,357
John Hancock Financial
Services, Inc. ............... 19,372 684,800
Lincoln National Corp. ........ 11,802 471,254
Loews Corp. ................... 12,455 535,565
Marsh & McLennan Cos., Inc. ... 35,445 1,515,274
MBIA, Inc. .................... 9,693 577,800
MetLife, Inc. ................. 50,552 1,587,333
Progressive Corp. (The)........ 14,550 1,073,790
Prudential Financial, Inc. .... 36,236 1,400,159
SAFECO Corp. .................. 9,280 340,576
St. Paul Cos., Inc. (The)...... 15,142 577,364
Torchmark Corp. ............... 7,548 331,206
Travelers Property Casualty
Corp. Class B................. 67,252 1,100,915
UnumProvident Corp. ........... 19,750 323,307
XL Capital Ltd. Class A........ 9,099 632,381
------------
29,201,138
------------
INTERNET & CATALOG RETAIL (0.4%)
eBay, Inc. (a)................. 42,778 2,393,001
------------
INTERNET SOFTWARE & SERVICES (0.3%)
Yahoo!, Inc. (a)............... 43,223 1,888,845
------------
IT SERVICES (1.2%)
Automatic Data Processing,
Inc. ......................... 39,793 1,501,788
Computer Sciences Corp. (a).... 12,577 498,301
Concord EFS, Inc. (a).......... 32,736 349,948
Convergys Corp. (a)............ 9,867 158,464
Electronic Data Systems
Corp. ........................ 31,844 683,054
First Data Corp. .............. 49,199 1,756,404
Fiserv, Inc. (a)............... 13,048 460,855
Paychex, Inc. ................. 25,039 974,518
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003 (continued)
13
-
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (CONTINUED)
IT SERVICES (CONTINUED)
Sabre Holdings Corp. .......... 9,595 $ 210,226
SunGard Data Systems, Inc.
(a)........................... 18,979 532,361
Unisys Corp. (a)............... 22,058 338,811
------------
7,464,730
------------
LEISURE EQUIPMENT & PRODUCTS (0.2%)
Brunswick Corp. ............... 6,060 179,800
Eastman Kodak Co. ............. 19,287 471,181
Hasbro, Inc. .................. 11,681 254,646
Mattel, Inc. .................. 29,188 565,080
------------
1,470,707
------------
MACHINERY (1.4%)
Caterpillar, Inc. ............. 22,977 1,683,755
Crane Co. ..................... 4,014 112,793
Cummins, Inc. ................. 2,790 132,246
Danaher Corp. ................. 10,200 845,070
Deere & Co. ................... 16,037 972,163
Dover Corp. ................... 13,640 532,233
Eaton Corp. ................... 5,014 502,603
Illinois Tool Works, Inc. ..... 20,426 1,502,332
Ingersoll-Rand Co. Class A..... 11,363 686,325
ITT Industries, Inc. .......... 6,149 418,071
Navistar International Corp.
(a)........................... 4,748 191,962
PACCAR, Inc. .................. 7,700 607,992
Pall Corp. .................... 8,585 200,889
Parker-Hannifin Corp. ......... 7,924 403,886
------------
8,792,320
------------
MEDIA (4.0%)
Clear Channel Communications,
Inc. ......................... 40,853 1,667,619
Comcast Corp. Class A (a)...... 149,843 5,082,675
Dow Jones & Co., Inc. ......... 5,527 287,238
Gannett Co., Inc. ............. 17,955 1,510,195
Interpublic Group of Cos., Inc.
(The) (a)..................... 26,205 389,930
Knight-Ridder, Inc. ........... 5,382 394,608
McGraw-Hill Cos., Inc. (The)... 12,818 858,165
Meredith Corp. ................ 3,311 160,650
New York Times Co. (The) Class
A............................. 10,095 479,815
Omnicom Group, Inc. ........... 12,681 1,011,944
Time Warner, Inc. (a).......... 299,933 4,585,976
Tribune Co. ................... 20,870 1,023,673
Univision Communications, Inc.
Class A (a)................... 21,352 724,900
Viacom, Inc. Class B........... 116,696 4,652,670
Walt Disney Co. (The).......... 135,826 3,075,101
------------
25,905,159
------------
METALS & MINING (0.7%)
Alcoa, Inc. ................... 56,250 1,775,813
Allegheny Technologies,
Inc. ......................... 6,328 48,409
Freeport-McMoRan Copper & Gold,
Inc. Class B.................. 11,249 435,899
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------------
METALS & MINING (CONTINUED)
Newmont Mining Corp. .......... 27,084 $ 1,185,737
Nucor Corp. ................... 5,265 288,680
Phelps Dodge Corp. (a)......... 5,970 368,588
United States Steel Corp. ..... 6,975 164,959
Worthington Industries,
Inc. ......................... 5,735 83,616
------------
4,351,701
------------
MULTILINE RETAIL (1.2%)
Big Lots, Inc. (a)............. 7,753 116,371
Dillard's, Inc. Class A........ 5,540 89,582
Dollar General Corp. .......... 22,418 503,732
Family Dollar Stores, Inc. .... 11,591 505,484
Federated Department Stores,
Inc. ......................... 12,277 583,771
J.C. Penney Co., Inc. Holding
Co. .......................... 18,106 428,207
Kohl's Corp. (a)............... 22,586 1,266,397
May Department Stores Co.
(The)......................... 19,379 541,837
Nordstrom, Inc. ............... 9,125 278,221
Sears, Roebuck and Co. ........ 18,831 991,076
Target Corp. .................. 60,525 2,405,264
------------
7,709,942
------------
MULTI-UTILITIES & UNREGULATED POWER (0.4%)
AES Corp. (The) (a)............ 41,341 361,734
Calpine Corp. (a).............. 25,674 118,357
Constellation Energy Group,
Inc. ......................... 10,995 399,888
Duke Energy Corp. ............. 60,101 1,090,833
Dynegy, Inc. Class A (a)....... 25,979 104,176
El Paso Corp. ................. 40,299 295,794
Williams Cos., Inc. (The)...... 34,755 354,501
------------
2,725,283
------------
OFFICE ELECTRONICS (0.1%)
Xerox Corp. (a)................ 52,544 551,712
------------
OIL & GAS (4.7%)
Amerada Hess Corp. ............ 5,964 307,862
Anadarko Petroleum Corp. ...... 16,772 731,595
Apache Corp. .................. 10,729 748,026
Ashland, Inc. ................. 4,620 172,049
Burlington Resources, Inc. .... 13,442 653,819
ChevronTexaco Corp. ........... 71,142 5,285,851
ConocoPhillips................. 45,161 2,580,951
Devon Energy Corp. ............ 15,533 753,350
EOG Resources, Inc. ........... 7,742 326,248
ExxonMobil Corp. .............. 441,745 16,159,032
Kerr-McGee Corp. .............. 6,694 277,801
Marathon Oil Corp. ............ 20,906 618,190
Occidental Petroleum Corp. .... 25,397 895,498
Sunoco, Inc. .................. 5,187 226,983
Unocal Corp. .................. 17,274 547,240
------------
30,284,495
------------
PAPER & FOREST PRODUCTS (0.5%)
Boise Cascade Corp. ........... 4,204 117,922
Georgia-Pacific Corp. ......... 16,696 438,771
International Paper Co. ....... 32,039 1,260,735
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Equity Index Fund
14
- -
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (CONTINUED)
PAPER & FOREST PRODUCTS (CONTINUED)
Louisiana-Pacific Corp. (a).... 7,010 $ 133,330
MeadWestvaco Corp. ............ 13,445 348,494
Weyerhaeuser Co. .............. 14,691 884,839
------------
3,184,091
------------
PERSONAL PRODUCTS (0.5%)
Alberto-Culver Co. Class B..... 3,961 251,127
Avon Products, Inc. ........... 15,673 1,065,137
Gillette Co. (The)............. 67,803 2,162,916
------------
3,479,180
------------
PHARMACEUTICALS (8.3%)
Abbott Laboratories............ 103,828 4,425,149
Allergan, Inc. ................ 8,693 657,365
Bristol-Myers Squibb Co. ...... 128,803 3,267,732
Forest Laboratories, Inc.
(a)........................... 24,264 1,213,443
Johnson & Johnson.............. 197,588 9,944,604
King Pharmaceuticals, Inc.
(a)........................... 16,234 217,536
Lilly (Eli) & Co. ............. 74,652 4,973,316
Merck & Co., Inc. ............. 149,065 6,596,126
Pfizer, Inc. .................. 518,377 16,380,713
Schering-Plough Corp. ......... 97,650 1,491,116
Watson Pharmaceuticals, Inc.
(a)........................... 7,195 282,548
Wyeth.......................... 88,446 3,904,006
------------
53,353,654
------------
REAL ESTATE (0.4%)
Apartment Investment &
Management Co. Class A........ 6,300 257,670
Equity Office Properties
Trust......................... 26,488 741,929
Equity Residential............. 18,075 528,694
Plum Creek Timber Co., Inc. ... 12,397 326,661
ProLogis....................... 12,100 357,434
Simon Property Group, Inc. .... 12,804 577,204
------------
2,789,592
------------
ROAD & RAIL (0.4%)
Burlington Northern Santa Fe
Corp. ........................ 24,792 717,480
CSX Corp. ..................... 14,397 458,113
Norfolk Southern Corp. ........ 26,009 524,081
Union Pacific Corp. ........... 16,983 1,063,136
------------
2,762,810
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (4.4%)
Advanced Micro Devices, Inc.
(a)........................... 23,146 351,819
Altera Corp. (a)............... 25,737 520,660
Analog Devices, Inc. (a)....... 24,262 1,075,534
Applied Materials, Inc. (a).... 110,122 2,573,551
Applied Micro Circuits Corp.
(a)........................... 21,891 127,406
Broadcom Corp. Class A (a)..... 19,917 636,348
Intel Corp. ................... 433,381 14,323,242
KLA-Tencor Corp. (a)........... 12,735 730,098
Linear Technology Corp. ....... 20,949 892,637
LSI Logic Corp. (a)............ 25,274 233,532
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (CONTINUED)
Maxim Integrated Products,
Inc. ......................... 21,628 $ 1,075,128
Micron Technology, Inc. (a).... 40,622 582,519
National Semiconductor Corp.
(a)........................... 12,292 499,424
Novellus Systems, Inc. (a)..... 10,079 416,162
NVIDIA Corp. (a)............... 10,654 188,363
PMC-Sierra, Inc. (a)........... 11,331 205,884
Teradyne, Inc. (a)............. 12,496 284,659
Texas Instruments, Inc. ....... 115,053 3,327,333
Xilinx, Inc. (a)............... 22,600 716,420
------------
28,760,719
------------
SOFTWARE (4.6%)
Adobe Systems, Inc. ........... 15,490 679,082
Autodesk, Inc. ................ 7,414 142,720
BMC Software, Inc. (a)......... 15,676 272,449
Citrix Systems, Inc. (a)....... 10,953 276,892
Computer Associates
International, Inc. .......... 38,509 905,732
Compuware Corp. (a)............ 25,393 142,709
Electronic Arts, Inc. (a)...... 9,795 970,097
Intuit, Inc. (a)............... 13,708 685,126
Mercury Interactive Corp.
(a)........................... 5,691 264,290
Microsoft Corp. ............... 719,738 18,821,149
Novell, Inc. (a)............... 24,645 144,666
Oracle Corp. (a)............... 347,872 4,160,549
Parametric Technology Corp.
(a)........................... 17,772 55,271
PeopleSoft, Inc. (a)........... 24,164 501,645
Siebel Systems, Inc. (a)....... 32,667 411,278
Symantec Corp. (a)............. 10,100 673,165
VERITAS Software Corp. (a)..... 28,289 1,022,647
------------
30,129,467
------------
SPECIALTY RETAIL (2.6%)
AutoNation, Inc. (a)........... 18,240 341,088
AutoZone, Inc. (a)............. 5,979 574,582
Bed Bath & Beyond, Inc. (a).... 19,658 830,354
Best Buy Co., Inc. (a)......... 21,469 1,251,857
Circuit City Stores, Inc. ..... 13,973 133,302
Gap, Inc. (The)................ 59,332 1,132,055
Home Depot, Inc. (The)......... 153,059 5,673,897
Limited Brands................. 34,932 614,803
Lowe's Cos., Inc. ............. 52,088 3,069,546
Office Depot, Inc. (a)......... 20,829 310,977
RadioShack Corp. .............. 11,295 338,737
Sherwin-Williams Co. (The)..... 9,876 331,241
Staples, Inc. (a).............. 32,819 880,206
Tiffany & Co. ................. 9,818 465,864
TJX Cos., Inc. (The)........... 33,917 711,918
Toys "R" Us, Inc. (a).......... 14,578 189,514
------------
16,849,941
------------
TEXTILES, APPAREL & LUXURY GOODS (0.3%)
Jones Apparel Group, Inc. ..... 8,605 296,873
Liz Claiborne, Inc. ........... 7,166 264,354
NIKE, Inc. Class B............. 17,632 1,126,685
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003 (continued)
15
-
<Table>
<Caption>
SHARES VALUE
-----------------------------
COMMON STOCKS (CONTINUED)
TEXTILES, APPAREL & LUXURY GOODS (CONTINUED)
Reebok International Ltd. ..... 3,927 $ 152,957
V.F. Corp. .................... 7,240 307,338
------------
2,148,207
------------
THRIFTS & MORTGAGE FINANCE (1.9%)
Countrywide Financial Corp. ... 9,089 955,436
Fannie Mae..................... 64,696 4,638,056
Freddie Mac.................... 46,277 2,597,528
Golden West Financial Corp. ... 10,154 1,019,766
MGIC Investment Corp. ......... 6,543 335,721
Washington Mutual, Inc. ....... 61,348 2,683,975
------------
12,230,482
------------
TOBACCO (1.1%)
Altria Group, Inc. ............ 134,912 6,273,408
R.J. Reynolds Tobacco Holdings,
Inc. ......................... 5,700 273,771
UST, Inc. ..................... 11,184 380,480
------------
6,927,659
------------
TRADING COMPANIES & DISTRIBUTORS (0.0%) (B)
Grainger (W.W.), Inc. ......... 6,125 280,403
------------
WIRELESS TELECOMMUNICATION SERVICES (0.5%)
AT&T Wireless Services, Inc.
(a)........................... 180,347 1,307,516
Nextel Communications, Inc.
Class A (a)................... 69,169 1,673,890
Sprint Corp. (PCS Group) (a)... 69,073 300,467
------------
3,281,873
------------
Total Common Stocks
(Cost $557,163,112)........... 647,257,300
------------
<Caption>
PRINCIPAL
AMOUNT VALUE
-----------------------------
SHORT-TERM INVESTMENT (0.0%) (B)
U.S. GOVERNMENT (0.0%) (B)
UNITED STATES TREASURY BILL (0.0%) (B)
0.89%, due 12/4/03............ $ 100,000 $ 99,918
------------
Total U.S. Government
(Cost $99,918)................ 99,918
------------
Total Short-Term Investment
(Cost $99,918)................ 99,918
------------
Total Investments
(Cost $557,263,030) (c)....... 100.1% 647,357,218(d)
Liabilities in excess of
Cash and Other Assets,........ (0.1) (907,117)
----------- ------------
Net Assets..................... 100.0% $646,450,101
=========== ============
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) The cost for federal income tax purposes is $561,460,562.
(d) At October 31, 2003 net unrealized appreciation was
$85,896,656, 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 $175,586,989 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $89,690,333.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$557,263,030)............................................. $ 647,357,218
Cash........................................................ 20,948
Receivables:
Dividends................................................. 869,771
Investment securities sold................................ 10,007
Other assets................................................ 6,179
-------------
Total assets........................................ 648,264,123
-------------
LIABILITIES:
Payables:
Fund shares redeemed...................................... 637,311
Investment securities purchased........................... 390,246
Manager................................................... 279,712
Transfer agent............................................ 203,305
NYLIFE Distributors....................................... 136,003
Custodian................................................. 13,941
Trustees.................................................. 7,352
Accrued expenses............................................ 146,152
-------------
Total liabilities................................... 1,814,022
-------------
Net assets.................................................. $ 646,450,101
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized.......... $ 186,258
Additional paid-in capital.................................. 676,940,886
Accumulated undistributed net investment income............. 1,790,198
Accumulated net realized loss on investments................ (122,561,429)
Net unrealized appreciation on investments.................. 90,094,188
-------------
Net assets applicable to outstanding shares................. $ 646,450,101
=============
Shares of beneficial interest outstanding................... 18,625,758
=============
Net asset value per share outstanding....................... $ 34.71
Maximum sales charge (3.00% of offering price).............. 1.07
-------------
Maximum offering price per share outstanding................ $ 35.78
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
-
Statement of Operations for the period January 1, 2003 to
October 31, 2003* and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
------------ -------------
INVESTMENT INCOME:
Income:
Dividends(a).............................................. $ 8,826,099 $ 11,795,570
Interest.................................................. 46,736 263,994
------------ -------------
Total income............................................ 8,872,835 12,059,564
------------ -------------
Expenses:
Manager................................................... 2,510,779 3,750,311
Distribution.............................................. 1,255,390 1,875,155
Transfer agent............................................ 1,027,131 1,356,974
Shareholder communication................................. 121,798 202,599
Professional.............................................. 92,555 132,258
Custodian................................................. 80,147 108,150
Recordkeeping............................................. 72,426 101,674
Trustees.................................................. 26,396 37,331
Registration.............................................. 15,610 19,642
Miscellaneous............................................. 36,320 59,741
------------ -------------
Total expenses.......................................... 5,238,552 7,643,835
------------ -------------
Net investment income....................................... 3,634,283 4,415,729
------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions..................................... (25,713,063) (95,558,057)
Futures transactions...................................... 1,181,358 (1,749,009)
------------ -------------
Net realized loss on investments............................ (24,531,705) (97,307,066)
------------ -------------
Net change in unrealized appreciation (depreciation) on
investments:
Security transactions..................................... 132,733,165 (107,695,105)
Futures transactions...................................... 14,895 129,076
------------ -------------
Net unrealized gain (loss) on investments................... 132,748,060 (107,566,029)
------------ -------------
Net realized and unrealized gain (loss) on investments...... 108,216,355 (204,873,095)
------------ -------------
Net increase (decrease) in net assets resulting from
operations................................................ $111,850,638 $(200,457,366)
============ =============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
(a) Dividends recorded net of foreign withholding taxes of $0
and $48,360 for 2003 and 2002, respectively.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
- -
Statement of Changes in Net Assets for the period January 1, 2003 to October 31,
2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 3,634,283 $ 4,415,729 $ 3,907,673
Net realized gain (loss) on investments................... (24,531,705) (97,307,066) 32,930,154
Net change in unrealized appreciation (depreciation) on
investments and futures transactions.................... 132,748,060 (107,566,029) (183,942,572)
------------ ------------- --------------
Net increase (decrease) in net assets resulting from
operations.............................................. 111,850,638 (200,457,366) (147,104,745)
------------ ------------- --------------
Dividends and distributions to shareholders:
From net investment income................................ -- (6,252,221) (4,112,722)
From net realized gain on investments..................... -- (22,887,901) (29,560,108)
------------ ------------- --------------
Total dividends and distributions to shareholders....... -- (29,140,122) (33,672,830)
------------ ------------- --------------
Capital share transactions:
Net proceeds from sale of shares.......................... 178,876 2,705,651 217,166,770
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions............. -- 28,209,897 32,653,836
------------ ------------- --------------
178,876 30,915,548 249,820,606
Cost of shares redeemed................................... (54,613,066) (163,946,815) (254,008,155)
------------ ------------- --------------
Decrease in net assets derived from capital share
transactions.......................................... (54,434,190) (133,031,267) (4,187,549)
------------ ------------- --------------
Net increase (decrease) in net assets................... 57,416,448 (362,628,755) (184,965,124)
NET ASSETS:
Beginning of period......................................... 589,033,653 951,662,408 1,136,627,532
------------ ------------- --------------
End of period............................................... $646,450,101 $ 589,033,653 $ 951,662,408
============ ============= ==============
Accumulated undistributed (Distributions in excess of) net
investment income at end of period........................ $ 1,790,198 $ (1,845,752) $ 33,913
============ ============= ==============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
-
Financial Highlights selected per share data and ratios
<Table>
<Caption>
January 1, 2003
through Year ended December 31,
October 31, --------------------------------------------------------------------
2003* 2002 2001 2000 1999 1998
--------------- -------- -------- ---------- ---------- --------
Net asset value at beginning of
period............................ $ 28.87 $ 37.35 $ 42.76 $ 47.36 $ 39.47 $ 30.91
-------- -------- -------- ---------- ---------- --------
Net investment income............... 0.19 0.22 0.16 0.12 0.20 0.21
Net realized and unrealized gain
(loss) on investments............. 5.65 (8.70) (5.57) (4.72) 7.69 8.35
-------- -------- -------- ---------- ---------- --------
Total from investment operations.... 5.84 (8.48) (5.41) (4.60) 7.89 8.56
-------- -------- -------- ---------- ---------- --------
Less dividends and distributions:
From net investment income.......... -- (0.30) (0.16) (0.12) (0.20) (0.21)
From net realized gain on
investments....................... -- (1.12) (1.17) (1.44) (0.99) (0.43)
-------- -------- -------- ---------- ---------- --------
Total dividends and distributions... -- (1.42) (1.33) (1.56) (1.19) (0.64)
-------- -------- -------- ---------- ---------- --------
Reverse share split................. -- 1.42 1.33 1.56 1.19 0.64
-------- -------- -------- ---------- ---------- --------
Net asset value at end of period.... $ 34.71 $ 28.87 $ 37.35 $ 42.76 $ 47.36 $ 39.47
======== ======== ======== ========== ========== ========
Total investment return (a)......... 20.23% (22.70%) (12.65%) (9.71%) 19.99% 27.69%
Ratios (to average net assets)/
Supplemental Data:
Net investment income........... 0.72%+ 0.59% 0.38% 0.26% 0.50% 0.68%
Net expenses.................... 1.04%+ 1.02% 0.97% 0.92% 0.94% 0.96%
Expenses (before
reimbursement)................ 1.04%+ 1.02% 0.97% 0.92% 0.94% 0.99%
Portfolio turnover rate............. 2% 4% 4% 9% 3% 4%
Net assets at end of period (in
000's)............................ $646,450 $589,034 $951,662 $1,136,628 $1,254,018 $797,120
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charge and is
not annualized.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
- -
MainStay Equity Index Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
Equity Index Fund (the "Fund"). The Board of Trustees of the Trust approved the
closure of the Fund to new share purchases effective January 1, 2002. Existing
shareholders may continue to maintain share positions held in the Fund, elect or
continue to reinvest distributions, and NYLIFE LLC will continue to honor the
unconditional guarantee associated with the Fund (see Note 8).
The Fund's investment objective is to seek to provide investment results that
correspond to the total return performance (and reflect reinvestment of
dividends) of publicly traded common stocks represented by the Standard & Poor's
500 Composite Stock Price Index. MainStay Equity Index Fund is
"non-diversified," which means that it may invest a greater percentage of its
assets than diversified funds in a particular issuer. This may make it more
susceptible than diversified funds to risks associated with an individual
issuer, and to single economic, political or regulatory occurrences.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Futures contracts are valued at the last posted settlement price on the
market where such futures are principally traded. Temporary cash investments
acquired over 60 days to maturity are valued using the latest bid prices or
using valuations based on a matrix system (which considers such factors as
security prices, yields, maturities, and ratings), both as furnished by
independent pricing services. Other temporary cash investments are valued at
amortized cost, which approximates market value. Securities for which market
quotations are not readily available are valued by methods deemed by the Board
of Trustees to represent fair value.
(B) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date and
price, or to make or receive a cash payment based on the value of a securities
index. During the period the futures contract is open, changes in the value of
the contract are recognized as unrealized gains or losses by "marking to market"
such contract on a daily basis to reflect the market value of the contract at
the end of each day's trading. The Fund agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments are known as "variation margin". When the
futures contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or
Notes to Financial Statements
21
-
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 open 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.
(C) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends and capital gain distributions annually. Income dividends and capital
gain distributions are determined in accordance with federal income tax
regulations, which may differ from generally accepted accounting principles.
These "book/tax differences" are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax basis
treatment; temporary differences do not require reclassification.
The following table discloses the current period reclassification between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2003, are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT LOSS ON
INCOME INVESTMENTS
- -------------- ------------
$1,667 $(1,667)
</Table>
The reclassification for the Fund is due to real estate investment trust
distributions.
(E) 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 as
MainStay Equity Index Fund
22
- -
earned. Discounts and premiums on short-term securities are accreted and
amortized, respectively, on the straight line method.
(F) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds where the expenses are
incurred except when direct allocations of expenses can be made. Expenses (other
than expenses incurred under the distribution plans) are allocated to separate
classes of shares based upon their relative net asset value on the date the
expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(G) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER. New York Life Investment Management LLC ("NYLIM" or the
"Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. The Fund
is advised by the Manager directly, without a Subadviser.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.50% of the Fund's
average daily net assets. For the ten months ended October 31, 2003, the Manager
earned from the Fund $2,510,779. For the year ended December 31, 2002, the
Manager earned from the Fund $3,750,311.
(B) DISTRIBUTION FEES. The Trust, on behalf of the Fund, has a Distribution
Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect
wholly-owned subsidiary of New York Life. 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 Fund's average daily net assets, which is an expense
of the Fund for distribution or service activities as designated by the
Distributor.
The Plan provides that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder
Notes to Financial Statements (continued)
23
-
servicing agent. NYLIM Service has entered into an agreement with Boston
Financial Data Services ("BFDS") pursuant to which BFDS will perform certain of
the services for which NYLIM Service is responsible. Transfer agent expenses
accrued to NYLIM Service for the ten months ended October 31, 2003, and the year
ended December 31, 2002, amounted to $1,027,131 and $1,356,974, respectively.
(D) TRUSTEES FEES. Trustees, other than those affiliated with NYLIM, are paid
an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for each
Committee meeting and $500 for each Valuation Subcommittee telephonic meeting
attended plus reimbursement for travel and out-of-pocket expenses. The Lead
Non-Interested Trustee is also paid an annual fee of $20,000. Beginning January
1, 2003, the Audit Committee Chairman receives an additional $2,000 for each
meeting of the Audit Committee attended. Also, beginning January 1, 2003, the
Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the Equity Index
Fund only pays a portion of the fees identified above.
(E) OTHER. Fees for the cost of legal services, included in Professional fees
as shown in the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $12,586 for the ten months ended
October 31, 2003, and $14,199 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $72,426 for the ten months ended October
31, 2003, and $101,674 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
At November 30, 2002, the Fund's year end for federal income tax purposes, the
components of accumulated loss on a tax basis were as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT CAPITAL AND UNREALIZED TOTAL ACCUMULATED
INCOME OTHER LOSSES DEPRECIATION LOSS
- -------------- ------------ ------------ -----------------
$4,375,079 $(67,391,477) $(12,735,768) $(75,752,166)
</Table>
The difference between book-basis and tax-basis unrealized depreciation is due
to wash sale deferrals and real estate investment trust distributions.
At November 30, 2002, for federal income tax purposes, capital loss
carryforwards of $89,852,496 were available, to the extent provided by the
regulations, to offset future realized gains through 2010. 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.
MainStay Equity Index Fund
24
- -
The tax character of distributions paid during the years ended December 31, 2002
and December 31, 2001, shown in the Statement of Changes in Net Assets, were as
follows:
<Table>
<Caption>
2002 2001
----------- -----------
Distributions paid from:
Ordinary Income: $ 6,679,103 $ 4,112,722
Long-term Capital Gains 22,461,019 29,560,108
----------- -----------
$29,140,122 $33,672,830
=========== ===========
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the period ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $14,738 and $63,939, respectively.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
JANUARY 1 YEAR ENDED
THROUGH DECEMBER 31,
OCTOBER 31, -------------------
2003* 2002 2001
----------- ---- ----
Shares sold................................................. 6 75 5,689
Shares issued in reinvestment of dividends and
distributions............................................. -- 1,022 911
------ ------ ------
6 1,097 6,600
Shares redeemed............................................. (1,782) (5,120) (6,760)
Reduction of shares due to reverse share split.............. -- (1,056) (940)
------ ------ ------
Net decrease................................................ (1,776) (5,079) (1,100)
====== ====== ======
</Table>
- -------
* The Fund changed its fiscal year end from December 31 to October 31.
Notes to Financial Statements (continued)
25
-
NOTE 8--GUARANTEE:
NYLIFE LLC ("NYLIFE"), a wholly-owned subsidiary of New York Life, will
guarantee unconditionally and irrevocably pursuant to a Guaranty Agreement
between NYLIFE and the Equity Index Fund (the "Guarantee") that if, on the
business day immediately after ten years from the date of purchase (the
"Guarantee Date"), the net asset value ("NAV") of a Fund share plus the value of
all dividends and distributions paid, including cumulative reinvested dividends
and distributions attributable to such share paid during that ten-year period
("Guaranteed Share"), is less than the price initially paid for the Fund share
("Guaranteed Amount"), NYLIFE will pay shareholders an amount equal to the
difference between the Guaranteed Amount for each such share and the net asset
value of each such Guaranteed Share outstanding and held by shareholders as of
the close of business on the Guarantee Date. There is no charge to the Fund or
its shareholders for the Guarantee.
NOTE 9--SUBSEQUENT EVENT:
The Fund declared a dividend of $0.1277 per share which was paid on December 18,
2003, and also underwent a reverse share split on that day. The reverse share
split rate was 0.9965 per share outstanding calculated on fund shares
outstanding immediately after reinvestment of dividends.
NOTE 10--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
26
- -
Report of Independent Auditors
To the Board of Trustees of The MainStay Funds and Shareholders of
MainStay Equity Index Fund
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 funds constituting The MainStay Funds, hereafter referred to as the "Fund")
at October 31, 2003, the results of its operations for the ten months ended
October 31, 2003 and the year ended December 31, 2002, the changes in its net
assets for the ten months ended October 31, 2003 and each of the two years in
the period ended December 31, 2002 and the financial highlights for each of the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
27
-
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
28
- -
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
29
-
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
30
- -
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1 Closed to new purchases as of January 1, 2002.
2 Ceased operations as of November 28, 2003.
3 Closed to new investors as of December 1, 2001.
4 An affiliate of New York Life Investment Management LLC.
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSEI11- 12/03
NYLIM-A04432 06
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
Equity Index Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY LOGO]
Table of Contents
<Table>
President's Letter 2
$10,000 Invested in MainStay Equity Income
Fund versus Russell 1000(R) Value Index,
Russell Midcap(R) Value Index, and
Inflation--Class A, Class B, and Class C
Shares 3
Portfolio Management Discussion and Analysis 5
Year-by-Year and 10-Month Performance 6
Portfolio of Investments 9
Financial Statements 11
Notes to Financial Statements 16
Report of Independent Auditors 23
Trustees and Officers 24
The MainStay(R) Funds 27
</Table>
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
2
$10,000 Invested in MainStay Equity
Income Fund versus Russell 1000(R) Value
Index, Russell Midcap(R) Value Index, and Inflation
CLASS A SHARES Total Returns with Sales Charges: 1 Year 15.66%, 5 years 10.09%,
Since Inception (6/1/98) 9.14%
[PERFORMANCE GRAPH]
<Table>
<Caption>
MAINSTAY EQUITY RUSSELL 1000 VALUE RUSSELL MIDCAP VALUE
INCOME FUND INDEX (1) INDEX (2) INFLATION (CPI) (3)
--------------- ------------------ -------------------- -------------------
6/1/98 9450.00 10000.00 10000.00 10000.00
10/31/98 9389.00 9648.00 9223.00 10080.00
10/31/99 11932.00 11243.00 9748.00 10338.00
10/31/00 14743.00 11863.00 10903.00 10695.00
10/31/01 14406.00 10456.00 10753.00 10923.00
10/31/02 13128.00 9408.00 10434.00 11150.00
10/31/03 16067.00 11561.00 13927.00 11378.00
</Table>
CLASS B SHARES Total Returns with Sales Charges: 1 Year 16.52%, 5 Years 10.23%,
Since Inception (6/1/98) 9.34%
[PERFORMANCE GRAPH]
<Table>
<Caption>
MAINSTAY EQUITY RUSSELL 1000 VALUE RUSSELL MIDCAP VALUE
INCOME FUND INDEX (1) INDEX (2) INFLATION (CPI) (3)
--------------- ------------------ -------------------- -------------------
6/1/98 10000 10000 10000 10000
10/31/98 9908 9648 9223 10080
10/31/99 12488 11243 9748 10338
10/31/00 15309 11863 10903 10695
10/31/01 14863 10456 10753 10923
10/31/02 13433 9408 10434 11150
10/31/03 16224 11561 13927 11378
</Table>
CLASS C SHARES Total Returns with Sales Charges: 1 Year 20.52%, 5 Years 10.50%,
Since Inception (6/1/98) 9.46%
[PERFORMANCE GRAPH]
<Table>
<Caption>
MAINSTAY EQUITY RUSSELL 1000 VALUE RUSSELL MIDCAP VALUE
INCOME FUND INDEX (1) INDEX (2) INFLATION (CPI) (3)
--------------- ------------------ -------------------- -------------------
6/1/98 10000 10000 10000 10000
10/31/98 9908 9648 9223 10080
10/31/99 12488 11243 9748 10338
10/31/00 15309 11863 10903 10695
10/31/01 14863 10456 10753 10923
10/31/02 13433 9408 10434 11150
10/31/03 16324 11561 13927 11378
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION PLEASE VISIT WWW.MAINSTAYFUNDS.COM.
3
- -------
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect change in share price, reinvestment of dividend and capital
gain distributions, and maximum applicable sales charges explained in this
paragraph. The graphs assume an initial investment of $10,000 and reflect
deduction of all sales charges that would have applied for the period of
investment. Class A share performance reflects the effect of the maximum 5.5%
initial sales charge. Class B shares are subject to a contingent deferred
sales charge (CDSC) of up to 5% if shares are redeemed within the first six
years of purchase. Class B share performance reflects a CDSC of 1%, which
would apply for the period shown. Class C share performance includes the
historical performance of the Class B shares for periods from 6/1/98 through
8/31/98. Class C shares would be subject to a CDSC of 1% if redeemed within
one year of purchase.
1. The Russell 1000(R) Value Index is an unmanaged index that measures the
performance of those Russell 1000(R) companies with lower price-to-book
ratios and lower forecasted growth values. The Russell 1000(R) Index is an
unmanaged index that measures the performance of the 1,000 largest U.S.
companies based on total market capitalization. Results assume
reinvestment of all income and capital gains. An investment cannot be made
directly into an index.
2. The Russell Midcap(R) Value Index is an unmanaged index that measures the
performance of those Russell Midcap(R) companies with lower price-to-book
ratios and lower forecasted growth values. The Russell Midcap(R) Index is
an unmanaged index that measures the performance of the 800 smallest
companies in the Russell 1000(R) Index, which, in turn, is an unmanaged
index that measures the performance of the 1,000 largest U.S. companies
based on total market capitalization. Results assume reinvestment of all
income and capital gains. An investment cannot be made directly into an
index.
3. Inflation is measured 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. The rate of inflation does not represent an
investment return.
4
Portfolio Management Discussion and Analysis
The equity market was generally weak in the opening months of 2003, largely
because of the anemic economy and uncertainty regarding the possibility of a war
in Iraq. Since mid-March 2003, however, stocks have rebounded sharply. The stock
market is often a "leading indicator," meaning that people attempt to anticipate
the future direction of the economy and corporate profits and then invest
accordingly. In hindsight, the strong rally suggests that investors had
correctly anticipated the economic recovery that followed. According to
preliminary estimates from the Bureau of Economic analysis, real gross domestic
product rose 8.2% in the third quarter of 2003. The figure, which exceeded
expectations, was largely driven by robust consumer spending. Business spending
also increased after several years of weakness.
The stock market's rally was accompanied by a return to speculative activity at
a level that we have not seen since the run-up in information technology stocks
in the late 1990s. For the first 10 months of 2003, much of the best stock
performance has come from unprofitable businesses and companies with fewer
earnings.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay Equity Income Fund returned
17.53% for Class A shares and 16.81% for Class B and Class C shares, excluding
all sales charges. All share classes underperformed the 17.61% return of the
average Lipper(1) equity income fund over the same period. All share classes
also underperformed the 20.84% return of the Russell 1000(R) Value Index(2) and
the 28.63% return of the Russell Midcap(R) Value Index(3) for the 10-months
ended October 31, 2003.
While the Fund produced strong absolute results, it lagged its benchmarks during
the reporting period. Many of the Fund's largest holdings are in sectors whose
positive supply-and-demand characteristics are likely to become apparent during
an economic recovery. Unfortunately, the war in Iraq, higher energy prices, and
weak business spending delayed the economic rebound until the second half of
2003, which hurt the Fund's relative results.
In light of these trends, however, our conviction in the appropriateness of the
Fund's portfolio has grown. Exposure to the capital goods, basic materials, and
energy sectors continues to comprise a meaningful portion of Fund's portfolio.
Ironically, although we have the greatest confidence in the Fund's basic
materials and energy investments, Fund holdings in these sectors were among the
leading detractors from the Fund's performance during the reporting period.
Needless to say, we have methodically reviewed our commitment to these industry
groups. In doing so, we have concluded that the stocks the Fund holds in these
sectors not only have improving fundamentals and compelling
- ------- 5
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 4 for more information about the Russell 1000(R) Value
Index.
3. See footnote on page 4 for more information about the Russell Midcap(R) Value
Index.
YEAR-BY-YEAR AND 10-MONTH PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[BAR GRAPH]
<Table>
<Caption>
CLASS A SHARES
--------------
12/98 4.01
12/99 25.11
12/00 22.79
12/01 4.88
12/02 -13.67
10/03 17.53
</Table>
CLASS B AND C SHARES
[BAR GRAPH]
<Table>
<Caption>
CLASS B SHARES
--------------
12/98 3.56
12/99 24.16
12/00 21.83
12/01 4.17
12/02 -14.35
10/03 16.81
</Table>
valuations but also meet our guidelines for positive catalysts and our
margin-of-safety requirements.
STRONG AND WEAK PERFORMERS
During the reporting period, Navistar International was the Fund's top
contributor to performance. The stock of this commercial truck and diesel engine
maker appreciated by 66%,(4) as the outlook for equipment-replacement demand
remained favorable and the firm's aggressive internal restructuring drove
investor interest in the stock. Similar dynamics helped engine manufacturer
Cummins advance 73%. PG&E, a utility in the process of reorganization,
6
- -------
4. Percentages reflect the price performance of the securities mentioned for the
10 months ended October 31, 2003, or for the portion of the reporting period
shares were held in the Fund, if shorter. Percentages do not reflect the
impact of dividends received, if any. Due to purchases and sales, the
performance of Fund holdings may differ from that of the securities
themselves.
gained nearly 76%, as investors acknowledged the company's strong core earnings
power and valuable asset base. Oil refiner and chemical producer Sunoco
appreciated 32% as its profitability rebounded from low levels. Temple-Inland, a
manufacturer of corrugated packaging and building products, rose 21% on
improving demand.
The largest detractors from the Fund's performance included AGCO, a global
designer, manufacturer, and distributor of agricultural equipment and
replacement parts. AGCO's stock fell 18% because of a weak worldwide
agricultural environment and manufacturing inefficiencies that resulted from
AGCO's aggressive plant-rationalization efforts. While the stock's performance
was clearly disappointing, we believe that we're in the early stages of the farm
economy's emergence from a prolonged downturn. If the turnaround proceeds as we
anticipate, we feel strongly that AGCO will benefit accordingly.
Transocean, an offshore energy driller, declined 17%. We added to the Fund's
position on weakness, since we believe that the company's strong free cash flow
and long-term business prospects are favorable. Payless ShoeSource, the
country's largest family-footwear retailer, fell 23% on disappointing sales,
which continued to put pressure on the company's profit margins. ENSCO
International, an offshore oil and gas drilling contractor, declined 10% because
of weak demand for its services. We continue to hold ENSCO, since the company is
in the midst of contractual negotiations that could increase its rig-fleet
utilization.
PORTFOLIO WEIGHTINGS
During the reporting period, the Fund maintained an underweighted exposure to
several sectors where we found few attractive stocks and questionable
fundamentals. For example, in the consumer cyclical sector we continue to see
unattractive valuations and a lack of traditional pent-up demand relative to
typical post-recession periods. The consumer staples sector also appears to have
few stocks with attractive valuations. We expect that the financials sector will
continue to be troubled in the wake of the lending and expansion frenzy of the
late 1990s. Over the 10-month reporting period, the Fund's underexposure to most
of these sectors enhanced relative returns, although consumer cyclicals provided
an exception and had a slightly negative impact on the Fund's relative
performance.
The Fund also continues to maintain an underweighted position in the infor-
mation technology sector, where we believe valuations are high. We have had
difficulty identifying attractively priced information technology companies that
are experiencing fundamental business improvements. Indeed, we continue to see
little value--and little sign of a sustainable demand recovery--in most areas of
the sector. It would appear that company insiders share our concern, since they
have continued to liquidate private holdings at a very high rate.
7
Unfortunately, the Fund's underweighted position in information technology
stocks hurt relative results during the reporting period, as the sector
rebounded sharply. In this market environment, we have seen the best performance
generated by the riskier, more speculative information technology companies.
LOOKING AHEAD
We are optimistic regarding both the outlook for value-oriented stocks and the
opportunities we are finding in the marketplace. We are hopeful that the
combined effect of historical postrecessionary outperformance for value equities
and improving fundamentals will bear fruit on a timely basis. In the meantime,
we will remain focused on applying our disciplined investment process to
identify undervalued equities with numerous catalysts for appreciation.
Whatever the markets or the economy may bring, the Fund will continue to seek to
realize maximum long-term total return from a combination of capital
appreciation and income.
RICHARD A. ROSEN
MICHAEL C. SHERIDAN
Portfolio Managers
MacKay Shields LLC
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8
Portfolio of Investments October 31, 2003
<Table>
<Caption>
SHARES VALUE
----------------------------
COMMON STOCKS (91.9%)+
AEROSPACE & DEFENSE (1.1%)
Raytheon Co. .................. 120,242 $ 3,184,008
------------
AUTO COMPONENTS (1.2%)
Delphi Corp. .................. 380,200 3,383,780
------------
BUILDING PRODUCTS (1.8%)
American Standard Cos., Inc.
(a)........................... 53,683 5,137,463
------------
CHEMICALS (4.8%)
Air Products & Chemicals,
Inc. ......................... 74,003 3,360,476
Arch Chemicals, Inc. .......... 190,982 4,235,981
Crompton Corp. ................ 168,200 901,552
IMC Global, Inc. .............. 26,300 183,837
Imperial Chemicals Industries
PLC ADR (b)................... 236,500 3,088,690
Olin Corp. .................... 100,225 1,744,917
------------
13,515,453
------------
COMMERCIAL BANKS (6.2%)
BB&T Corp. .................... 40,400 1,562,268
Compass Bancshares, Inc. ...... 140,214 5,297,285
Hibernia Corp. Class A......... 72,057 1,627,768
Marshall & Ilsley Corp. ....... 49,443 1,771,048
PNC Financial Services Group,
Inc. ......................... 24,657 1,320,876
SouthTrust Corp. .............. 179,374 5,713,062
------------
17,292,307
------------
COMMERCIAL SERVICES & SUPPLIES (2.2%)
Imagistics International, Inc.
(a)........................... 10,196 327,802
Pitney Bowes, Inc. ............ 143,411 5,894,192
------------
6,221,994
------------
COMMUNICATIONS EQUIPMENT (0.3%)
Tellabs, Inc. (a).............. 105,136 791,674
------------
CONTAINERS & PACKAGING (7.1%)
Smurfit-Stone Container Corp.
(a)........................... 397,700 6,164,350
Temple-Inland, Inc. ........... 253,700 13,707,411
------------
19,871,761
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.9%)
ALLTEL Corp. .................. 53,113 2,510,652
------------
<Caption>
SHARES VALUE
----------------------------
ELECTRIC UTILITIES (5.4%)
DTE Energy Co. ................ 115,379 $ 4,255,178
Entergy Corp. ................. 56,987 3,071,599
FirstEnergy Corp. ............. 61,488 2,114,572
PG&E Corp. (a)................. 68,125 1,665,656
PPL Corp. ..................... 103,400 4,127,728
------------
15,234,733
------------
ENERGY EQUIPMENT & SERVICES (9.6%)
ENSCO International, Inc. ..... 273,722 7,212,575
Pride International, Inc.
(a)........................... 231,600 3,793,608
Rowan Cos., Inc. (a)........... 329,000 7,879,550
GlobalSantaFe Corp. ........... 112,156 2,524,632
Transocean, Inc. (a)........... 278,800 5,350,172
------------
26,760,537
------------
FOOD & STAPLES RETAILING (1.1%)
Safeway, Inc. (a).............. 143,900 3,036,290
------------
HEALTH CARE PROVIDERS & SERVICES (1.0%)
Apria Healthcare Group, Inc.
(a)........................... 101,700 2,949,300
------------
HOTELS, RESTAURANTS & LEISURE (1.5%)
Yum! Brands, Inc. (a).......... 123,064 4,201,405
------------
HOUSEHOLD DURABLES (1.2%)
Fortune Brands, Inc. .......... 49,439 3,220,951
------------
INSURANCE (2.8%)
Axis Capital Holdings, Ltd. ... 9,500 237,975
Hartford Financial Services
Group, Inc. .................. 104,947 5,761,590
St. Paul Cos., Inc. ........... 48,500 1,849,305
------------
7,848,870
------------
IT SERVICES (1.2%)
Computer Sciences Corp. (a).... 85,152 3,373,722
------------
LEISURE EQUIPMENT & PRODUCTS (1.4%)
Callaway Golf Co. ............. 238,741 3,879,541
------------
MACHINERY (12.2%)
AGCO Corp. (a)................. 364,183 6,555,294
Cummins, Inc. ................. 192,225 9,111,465
Ingersoll-Rand Co. Class A..... 35,793 2,161,897
Navistar International Corp.
(a)........................... 404,602 16,358,059
------------
34,186,715
------------
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
9
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Equity Income Fund
<Table>
<Caption>
SHARES VALUE
----------------------------
COMMON STOCKS (CONTINUED)
OIL & GAS (9.5%)
Burlington Resources, Inc. .... 80,900 $ 3,934,976
Kerr-McGee Corp. .............. 105,900 4,394,850
Premcor, Inc. (a).............. 203,800 4,809,680
Sunoco, Inc. .................. 86,859 3,800,950
Unocal Corp. .................. 114,276 3,620,264
Valero Energy Corp. ........... 140,600 6,003,620
------------
26,564,340
------------
PAPER & FOREST PRODUCTS (10.7%)
Boise Cascade Corp. ........... 287,900 8,075,595
Bowater, Inc. ................. 272,051 11,107,842
MeadWestvaco Corp. ............ 410,955 10,651,954
------------
29,835,391
------------
REAL ESTATE (3.0%)
Health Care Property Investors,
Inc. ......................... 76,121 3,549,522
Highwoods Properties, Inc. .... 112,363 2,786,602
Mack-Cali Realty Corp. ........ 54,220 2,043,552
------------
8,379,676
------------
ROAD & RAIL (2.3%)
Burlington Northern Santa Fe
Corp. ........................ 141,895 4,106,441
CSX Corp. ..................... 71,961 2,289,799
------------
6,396,240
------------
SPECIALTY RETAIL (0.7%)
Payless ShoeSource, Inc. (a)... 156,709 2,073,260
------------
THRIFTS & MORTGAGE FINANCE (2.7%)
PMI Group, Inc. (The).......... 80,600 3,081,338
Sovereign Bancorp, Inc. ....... 209,621 4,362,213
------------
7,443,551
------------
Total Common Stocks
(Cost $242,202,130)........... 257,293,614
------------
CONVERTIBLE PREFERRED STOCKS (0.4%)
PAPER & FOREST PRODUCTS (0.1%)
International Paper Capital
Trust
5.25%, due 7/20/25 Series..... 5,370 265,815
------------
REAL ESTATE (0.3%)
General Growth Properties, Inc.
7.25%, due 7/15/08 Series
(c)........................... 9,516 727,974
------------
Total Convertible Preferred
Stocks
(Cost $651,369)............... 993,789
------------
<Caption>
PRINCIPAL
AMOUNT VALUE
----------------------------
LONG-TERM BONDS (0.1%)
CORPORATE BONDS (0.1%)
DIVERSIFIED FINANCIAL SERVICES (0.1%)
Caithness Coso Funding Corp.
Series B
9.05%, due 12/15/09........... $ 392,297 $ 419,758
------------
Total Long-Term Bonds
(Cost $349,140)............... 419,758
------------
SHORT TERM INVESTMENTS (9.4%)
COMMERCIAL PAPER (5.0%)
Federal National Mortgage
Association
1.00%, due 11/5/03............ 4,805,000 4,804,466
Morgan Stanley Dean Witter &
Co.
1.03%, due 11/7/03............ 4,000,000 3,999,313
UBS Finance (Delaware) LLC
1.03%, due 11/3/03............ 5,170,000 5,169,704
------------
Total Commercial Paper
(Cost $13,973,483)............ 13,973,483
------------
<Caption>
SHARES
----------
INVESTMENT COMPANY (4.4%)
Merrill Lynch Premier
Institutional Fund............ 12,330,492 12,330,492
------------
Total Investment Company
(Cost $12,330,492)............ 12,330,492
------------
Total Short-Term Investments
(Cost $26,303,975)............ 26,303,975
------------
Total Investments
(Cost $269,506,614) (d)....... 101.8% 285,011,136(e)
Liabilities in Excess of
Cash and Other Assets......... (1.8) (5,044,818)
---------- ------------
Net Assets..................... 100.0% $279,966,318
========== ============
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) ADR--American Depositary Receipt.
(c) PIERS--Preferred Income Equity Redeemable Stock.
(d) The cost for federal income tax purposes is $269,949,970.
(e) At October 31, 2003 net unrealized appreciation was
$15,061,166, 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 $23,797,608, and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $8,736,442.
</Table>
10
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$269,506,614)............................................. $285,011,136
Cash........................................................ 4,169
Receivables:
Investment securities sold................................ 1,853,947
Fund shares sold.......................................... 1,064,980
Dividends and interest.................................... 187,550
Other assets................................................ 14,471
------------
Total assets........................................ 288,136,253
------------
LIABILITIES:
Payables:
Investment securities purchased........................... 6,962,631
Fund shares redeemed...................................... 565,444
Transfer agent............................................ 191,248
NYLIFE Distributors....................................... 177,018
Manager................................................... 167,845
Custodian................................................. 4,742
Trustees.................................................. 3,143
Accrued expenses............................................ 97,864
------------
Total liabilities................................... 8,169,935
------------
Net assets.................................................. $279,966,318
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 66,938
Class B................................................... 117,064
Class C................................................... 25,119
Additional paid-in capital.................................. 273,917,718
Accumulated net realized loss on investments................ (9,665,043)
Net unrealized appreciation on investments.................. 15,504,522
------------
Net assets.................................................. $279,966,318
============
CLASS A
Net assets applicable to outstanding shares................. $ 90,348,758
============
Shares of beneficial interest outstanding................... 6,693,799
============
Net asset value per share outstanding....................... $ 13.50
Maximum sales charge (5.50% of offering price).............. 0.78
------------
Maximum offering price per share outstanding................ $ 14.28
============
CLASS B
Net assets applicable to outstanding shares................. $156,116,137
============
Shares of beneficial interest outstanding................... 11,706,364
============
Net asset value and offering price per share outstanding.... $ 13.34
============
CLASS C
Net assets applicable to outstanding shares................. $ 33,501,423
============
Shares of beneficial interest outstanding................... 2,511,911
============
Net asset value and offering price per share outstanding.... $ 13.34
============
</Table>
11
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Statement of Operations for the period January 1, 2003 through October 31, 2003*
and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
----------- ------------
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 3,966,601 $ 4,494,566
Interest.................................................. 82,143 229,326
----------- ------------
Total income............................................ 4,048,744 4,723,892
----------- ------------
Expenses:
Manager................................................... 1,424,103 1,500,247
Transfer agent............................................ 919,706 854,117
Distribution--Class B..................................... 851,462 974,792
Distribution--Class C..................................... 181,424 159,337
Service--Class A.......................................... 164,313 157,760
Service--Class B.......................................... 283,821 324,931
Service--Class C.......................................... 60,475 53,112
Shareholder communication................................. 84,728 90,141
Professional.............................................. 57,521 54,857
Registration.............................................. 46,784 50,551
Recordkeeping............................................. 42,554 48,098
Custodian................................................. 24,214 47,515
Trustees.................................................. 12,439 13,805
Miscellaneous............................................. 21,215 24,108
----------- ------------
Total expenses.......................................... 4,174,759 4,353,371
----------- ------------
Net investment income (loss)................................ (126,015) 370,521
----------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments..................... 6,922,632 (16,417,265)
Net change in unrealized appreciation (depreciation) on
investments............................................... 31,657,415 (22,869,402)
----------- ------------
Net realized and unrealized gain (loss) on investments...... 38,580,047 (39,286,667)
----------- ------------
Net increase (decrease) in net assets resulting from
operations................................................ $38,454,032 $(38,916,146)
=========== ============
</Table>
- -------
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
Dividends recorded net of foreign withholding taxes of
(a) $6,756 and $3,516 for 2003 and 2002, respectively.
</Table>
12
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the years ended December 31, 2002 and December 31, 2001
<Table>
<Caption>
2003* 2002 2001
------------ ------------ ------------
INCREASE IN NET ASSETS:
Operations:
Net investment income (loss).............................. $ (126,015) $ 370,521 $ 520,904
Net realized gain (loss) on investments................... 6,922,632 (16,417,265) 6,274,177
Net change in unrealized appreciation (depreciation) on
investments............................................. 31,657,415 (22,869,402) (2,240,520)
------------ ------------ ------------
Net increase (decrease) in net assets resulting from
operations.............................................. 38,454,032 (38,916,146) 4,554,561
------------ ------------ ------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (144,291) (328,297) (345,009)
Class B................................................. -- -- (166,447)
Class C................................................. -- -- (12,543)
From net realized gain on investments:
Class A................................................. -- (446,252) (550,888)
Class B................................................. -- (729,043) (1,436,957)
Class C................................................. -- (157,334) (142,699)
------------ ------------ ------------
Total dividends and distributions to shareholders..... (144,291) (1,660,926) (2,654,543)
------------ ------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 34,317,491 79,196,510 31,563,044
Class B................................................. 28,908,125 88,864,443 69,126,492
Class C................................................. 7,734,088 27,200,106 9,528,951
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 119,561 628,017 699,740
Class B................................................. -- 646,444 1,394,741
Class C................................................. -- 120,713 129,388
------------ ------------ ------------
71,079,265 196,656,233 112,442,356
Cost of shares redeemed:
Class A................................................. (36,894,690) (28,346,039) (24,755,991)
Class B................................................. (24,289,812) (40,257,593) (16,884,222)
Class C................................................. (6,887,181) (5,251,703) (2,034,483)
------------ ------------ ------------
Increase in net assets derived from capital share
transactions........................................ 3,007,582 122,800,898 68,767,660
------------ ------------ ------------
Net increase in net assets............................ 41,317,323 82,223,826 70,667,678
NET ASSETS:
Beginning of period......................................... 238,648,995 156,425,169 85,757,491
------------ ------------ ------------
End of period............................................... $279,966,318 $238,648,995 $156,425,169
============ ============ ============
Distributions in excess of net investment income............ $ -- $ (125,073) $ --
============ ============ ============
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
13
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A
---------------------------------------------------------------------------------
January 1,
2003 June 1**
through Year ended December 31, through
October 31, ---------------------------------------------- December 31,
2003* 2002 2001 2000 1999 1998
----------- ------- ------- ------- ------- ------------
Net asset value at beginning of period........ $ 11.51 $ 13.47 $ 13.14 $ 11.81 $ 10.25 $ 10.00
------- ------- ------- ------- ------- -------
Net investment income (loss).................. 0.04 0.06 0.12 0.21 0.22 0.07
Net realized and unrealized gain (loss) on
investments.................................. 1.97 (1.90) 0.52 2.44 2.30 0.32
------- ------- ------- ------- ------- -------
Total from investment operations.............. 2.01 (1.84) 0.64 2.65 2.52 0.39
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income.................... (0.02) (0.06) (0.12) (0.21) (0.22) (0.07)
From net realized gain on investments......... -- (0.06) (0.19) (1.02) (0.74) (0.07)
In excess of net realized gain on
investments.................................. -- -- -- (0.09) -- --
------- ------- ------- ------- ------- -------
Total dividends and distributions............. (0.02) (0.12) (0.31) (1.32) (0.96) (0.14)
------- ------- ------- ------- ------- -------
Net asset value at end of period.............. $ 13.50 $ 11.51 $ 13.47 $ 13.14 $ 11.81 $ 10.25
======= ======= ======= ======= ======= =======
Total investment return (a)................... 17.53% (13.67%) 4.88% 22.79% 25.11% 4.01%
Ratios (to average net assets)
Supplemental Data:
Net investment income (loss)............... 0.45%+ 0.71% 0.95% 1.66% 1.94% 1.20%+
Net expenses............................... 1.54%+ 1.50% 1.53% 1.59% 1.65% 3.11%+
Expenses (before reimbursement)............ 1.54%+ 1.50% 1.53% 1.59% 1.82% 3.11%+
Portfolio turnover rate....................... 30% 46% 100% 148% 193% 270%
Net assets at end of period (in 000's)........ $90,349 $80,442 $40,692 $32,782 $18,764 $10,290
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Commencement of Operations.
*** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
(b) Less than one thousand.
</Table>
14
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
<Table>
<Caption>
Class B Class C
-------------------------------------------------------------------- --------------------------------------------------
January 1, January 1,
2003 June 1** 2003
through Year ended December 31, through through Year ended December 31,
October 31, --------------------------------------- December 31, October 31, ------------------------------------
2003* 2002 2001 2000 1999 1998 2003* 2002 2001 2000 1999
----------- -------- -------- ------- ------- ------------ ----------- -------- ------- ------ ------
$ 11.42 $ 13.41 $ 13.09 $ 11.78 $ 10.24 $10.00 $ 11.42 $ 13.41 $ 13.09 $11.78 $10.24
-------- -------- -------- ------- ------- ------ ------- -------- ------- ------ ------
(0.03) (0.01) 0.03 0.12 0.15 0.04 (0.03) (0.01) 0.03 0.12 0.15
1.95 (1.92) 0.51 2.42 2.28 0.31 1.95 (1.92) 0.51 2.42 2.28
-------- -------- -------- ------- ------- ------ ------- -------- ------- ------ ------
1.92 (1.93) 0.54 2.54 2.43 0.35 1.92 (1.93) 0.54 2.54 2.43
-------- -------- -------- ------- ------- ------ ------- -------- ------- ------ ------
-- -- (0.03) (0.12) (0.15) (0.04) -- -- (0.03) (0.12) (0.15)
-- (0.06) (0.19) (1.02) (0.74) (0.07) -- (0.06) (0.19) (1.02) (0.74)
-- -- -- (0.09) -- -- -- -- -- (0.09) --
-------- -------- -------- ------- ------- ------ ------- -------- ------- ------ ------
-- (0.06) (0.22) (1.23) (0.89) (0.11) -- (0.06) (0.22) (1.23) (0.89)
-------- -------- -------- ------- ------- ------ ------- -------- ------- ------ ------
$ 13.34 $ 11.42 $ 13.41 $ 13.09 $ 11.78 $10.24 $ 13.34 $ 11.42 $ 13.41 $13.09 $11.78
======== ======== ======== ======= ======= ====== ======= ======== ======= ====== ======
16.81% (14.35%) 4.17% 21.83% 24.16% 3.56% 16.81% (14.35%) 4.17% 21.83% 24.16%
(0.30%)+ (0.04%) 0.20% 0.91% 1.19% 0.45%+ (0.30%)+ (0.04%) 0.20% 0.91% 1.19%
2.29%+ 2.25% 2.28% 2.34% 2.40% 3.86%+ 2.29%+ 2.25% 2.28% 2.34% 2.40%
2.29%+ 2.25% 2.28% 2.34% 2.57% 3.86%+ 2.29%+ 2.25% 2.28% 2.34% 2.57%
30% 46% 100% 148% 193% 270% 30% 46% 100% 148% 193%
$156,116 $130,024 $105,146 $50,172 $23,803 $4,166 $33,501 $ 28,183 $10,586 $2,803 $ 824
<Caption>
Class C
--------------
September 1***
through
December 31,
1998
--------------
$ 9.06
------
0.04
1.25
------
1.29
------
(0.04)
(0.07)
--
------
(0.11)
------
$10.24
======
14.30%
0.45%+
3.86%+
3.86%+
270%
$ --(b)
</Table>
15
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay Equity Income Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
Equity Income Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and within one year of purchase
of Class C shares. Class A shares, Class B shares and Class C shares bear the
same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions except that the Class B shares and
Class C shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to realize maximum long-term total return
from a combination of capital appreciation and income.
Effective January 1, 2004, the Fund will change its name to MainStay Mid Cap
Value Fund.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades.
Debt securities are valued at prices supplied by a pricing agent selected by the
Fund's Manager, whose prices reflect broker/dealer supplied valuations and
electronic data processing techniques if those prices are deemed by the Fund's
Manager to be representative of market values at the regular close of business
of the New York Stock Exchange. Temporary cash investments acquired over 60 days
to
16
Notes to Financial Statements
maturity are valued using the latest bid prices or using valuations based on a
matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value.
(B) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay any
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and additional paid-in-capital
arising from permanent differences; net assets at October 31, 2003, are not
affected.
<Table>
<Caption>
DISTRIBUTIONS
IN EXCESS OF
NET INVESTMENT ADDITIONAL
INCOME PAID-IN CAPITAL
-------------- ---------------
$395,379 $(395,379)
</Table>
The reclassifications for the Fund are primarily due to a reclassification of
distributions and net operating losses.
(D) 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 as earned.
Discounts and premiums on securities, other than short-term securities,
purchased for the Fund are accreted and amortized, respectively to interest
income, on the constant yield method over the life
17
MainStay Equity Income Fund
of the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
(E) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(F) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor") a registered investment advisor and indirect
wholly-owned subsidiary of New York Life is responsible for the day-to-day
portfolio management of the Fund.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.70% of the Fund's
average daily net assets. The Manager has voluntarily agreed to reimburse the
expenses of the Fund to the extent that operating expenses would exceed on an
annualized basis 1.65%, 2.40% and 2.40% of the average daily net assets of the
Class A, Class B and Class C shares, respectively. For the ten months ended
October 31, 2003 and year ended December 31, 2002, the Manager earned from the
Fund $1,424,103 and $1,500,247, respectively. It was not necessary for the
Manager to reimburse the Fund for expenses for the ten months ended October 31,
2003 and the year ended December 31, 2002.
18
Notes to Financial Statements (continued)
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and the
Subadvisor, the Manager paid the Subadvisor a monthly fee at an annual rate of
0.35% of the average daily net assets of the Fund.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly fee from the Fund at an annual rate of
0.25% of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund for distribution or service activities
as designated by the Distributor. Pursuant to the Class B and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Distribution Plans provide
that the Class B and Class C shares of the Fund also incur a service fee at the
annual rate of 0.25% of the average daily net asset value of the Class B or
Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $15,582 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $66,953, $193,218 and $9,388, respectively, for the ten months ended
October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued to NYLIM Service for the ten months
ended October 31, 2003 and year ended December 31, 2002, amounted to $919,706
and $854,117, respectively.
(E) TRUSTEES FEES. Trustees, other than those affiliated with NYLIM, are paid
an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for each
Committee meeting and $500 for each Valuation Subcommittee telephonic meeting
attended plus reimbursement for travel and out-of-pocket expenses. The Lead
Non-Interested Trustee is also paid an annual fee of $20,000. Beginning January
1, 2003, the Audit Committee Chairman receives an additional $2,000 for each
meeting of the Audit Committee
19
MainStay Equity Income Fund
attended. Also, beginning January 1, 2003, the Chairpersons of the Brokerage
Committee and the Operations Committee each receive an additional $1,000 for
each meeting of the Brokerage Committee and Operations Committee attended,
respectively. The Trust allocates trustees fees in proportion to the net assets
of the respective Funds. Thus the Equity Income Fund only pays a portion of the
fees identified above.
(F) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $5,180 for the ten months ended October
31, 2003 and $4,558 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $42,554 for the ten months ended October
31, 2003 and $48,098 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
------------------- ------------ -----------------
$(9,221,687) $15,061,166 $5,839,479
</Table>
The differences between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals and real estate investment trust
distributions.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $9,221,687 were available, to the extent provided by regulations to offset
future realized gains of the Fund through 2010. To the extent that these
carryforwards are used to offset future capital gains, it is probable that the
capital gains so offset will not be distributed to shareholders.
The Fund utilized $1,761,366 of capital loss carryforwards during the ten months
ended October 31, 2003.
20
Notes to Financial Statements (continued)
The tax character of distributions paid during the period ended October 31, 2003
and the years ended December 31, 2002 and December 31, 2001, shown in the
Statement of Changes in Net Assets, are as follows:
<Table>
<Caption>
2003 2002 2001
--------- ----------- -----------
Distributions paid from:
Ordinary income $144,291 $ 328,297 $ 523,999
Long-term capital gain -- 1,332,629 2,130,544
-------- ---------- ----------
$144,291 $1,660,926 $2,654,543
======== ========== ==========
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $69,349 and $74,418, respectively.
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
JANUARY 1 THROUGH ---------------------------------------------------------
OCTOBER 31, 2003* 2002 2001
--------------------------- --------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
Shares sold........... 2,811 2,413 642 6,186 6,744 2,094 2,381 5,212 723
Shares issued in
reinvestment of
dividends and
distributions....... 11 -- -- 54 57 11 53 106 10
------ ------ ---- ------ ------ ------ ------ ------ -----
2,822 2,413 642 6,240 6,801 2,105 2,434 5,318 733
Shares redeemed....... (3,114) (2,089) (597) (2,275) (3,261) (428) (1,908) (1,307) (157)
------ ------ ---- ------ ------ ------ ------ ------ -----
Net increase
(decrease).......... (292) 324 45 3,965 3,540 1,677 526 4,011 576
====== ====== ==== ====== ====== ====== ====== ====== =====
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
21
MainStay Equity Income Fund
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
22
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay Equity Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Equity Income Fund (one of
the funds constituting The MainStay Funds, hereafter referred to as the "Fund")
at October 31, 2003, the results of its operations for the ten months ended
October 31, 2003 and the year ended December 31, 2002, the changes in its net
assets for the ten months ended October 31, 2003 and each of the two years in
the period ended December 31, 2002 and the financial highlights for each of the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
23
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
24
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
25
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
26
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
D/B/A MERCURY ADVISORS
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
McMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
27
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSEN11- 12/03
NYLIM-A04348 19
[RECYCLE LOGO]
[MAINSTAY FUNDS LOGO]
MainStay(R)
Equity Income Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY LOGO]
Table of Contents
<Table>
President's Letter 3
$10,000 Invested in MainStay U.S. Large Cap
Equity Fund versus S&P 500(R) Index and
Inflation--Class A, Class B, and Class C
Shares 4
Portfolio Management Discussion and Analysis 6
Performance 7
Portfolio of Investments 10
Financial Statements 12
Notes to Financial Statements 16
Report of Independent Auditors 22
Trustees and Officers 23
The MainStay(R) Funds 26
</Table>
2
This page intentionally left blank
3
-
President's Letter
The first 10 months of 2003 represented a positive period for most investors.
Although the stock market struggled from mid-January through early March, it
recovered strongly through the end of October. The rally began several days
before coalition forces entered Iraq and continued long after the conclusion of
major combat operations. Although difficulties in Iraq, the Middle East, and
North Korea continued to raise concerns, investors have tended to focus on
corporate earnings and the potential for an economic turnaround.
The Federal Reserve remained accommodative throughout the 10-month period, and
the Federal Open Market Committee lowered the targeted federal funds rate by 25
basis points on June 25, 2003, to a low 1.0%. Real gross domestic product, which
grew at a modest 1.4% in the first quarter of 2003, rose by 3.3% in the second
quarter. According to preliminary estimates by the Bureau of Economic Analysis,
real gross domestic product grew at a seasonally adjusted annual rate of 8.2% in
the third quarter. Much of this increase resulted from robust consumer spending.
Although unemployment rates remain high, the figures have declined from their
peak in June 2003, and the Federal Reserve recently observed that "the labor
market appears to be stabilizing."
Within the equity market, smaller companies generally outperformed larger ones
and growth stocks tended to appreciate more than value equities at all
capitalization levels. The bond markets benefited from anticipation of the
Federal Reserve's easing move, and while yields on short-term securities
continued to decline, yields on longer-term bonds rose to a peak in early
September and closed the reporting period higher than where they began. For the
10-month period, corporate bonds generally outpaced Treasury securities, and
high-yield bonds and emerging-market debt provided outstanding returns.
At MainStay, each of our Funds seeks to achieve its investment objective with an
established process that is consistently applied in all market environments.
While markets may shift and results may vary, we believe that our time-tested
investment strategies can help you pursue your long-range goals with confidence.
As you may have noted, the date of this report differs from the date of previous
annual reports. The MainStay Board of Trustees recently approved making October
31 the end of the fiscal year for most MainStay Funds. The report that follows
provides details about the specific market conditions and portfolio management
decisions that affected the performance of your MainStay Fund during the first
10 months of 2003. If you have any questions about this report or your MainStay
Fund investments, your Registered Representative will be pleased to assist you.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
November 2003
4
- -------
The disclosure and footnotes on the following page are an integral part of these
graphs and should be carefully read in conjunction with them.
$10,000 Invested in MainStay
U.S. Large Cap Equity Fund versus
S&P 500(R) Index and Inflation
CLASS A SHARES
Total Returns with Sales Charges: 1 Year 8.37%, Since Inception (1/2/02) -11.48%
[LINE GRAPH]
<Table>
<Caption>
MAINSTAY U.S. LARGE CAP
EQUITY FUND S+P 500 INDEX(1) INFLATION (CPI)(2)
----------------------- ---------------- ------------------
1/2/02 9450.00 10000.00 10000.00
02 6974.00 7816.00 10226.00
10/31/03 7998.00 9442.00 10434.00
</Table>
CLASS B SHARES
Total Returns with Sales Charges: 1 Year 8.79%, Since Inception (1/2/02) -11.35%
[LINE GRAPH]
<Table>
<Caption>
MAINSTAY U.S. LARGE CAP
EQUITY FUND S+P 500 INDEX(1) INFLATION (CPI)(2)
----------------------- ---------------- ------------------
1/2/02 10000.00 10000.00 10000.00
02 7340.00 7816.00 10226.00
10/31/03 8019.00 9442.00 10434.00
</Table>
CLASS C SHARES
Total Returns with Sales Charges: 1 Year 12.79%, Since Inception (1/2/02) -9.36%
[LINE GRAPH]
<Table>
<Caption>
MAINSTAY U.S. LARGE CAP
EQUITY FUND S+P 500 INDEX(1) INFLATION (CPI)(2)
----------------------- ---------------- ------------------
1/2/02 10000.00 10000.00 10000.00
02 7340.00 7816.00 10226.00
10/31/03 8352.00 9442.00 10434.00
</Table>
- -------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY,
CURRENT PERFORMANCE MAY BE LESS THAN THAT SHOWN. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, UPON REDEMPTION, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. FOR MORE CURRENT PERFORMANCE
INFORMATION, PLEASE VISIT WWW.MAINSTAYFUNDS.COM.
5
-
- -------
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect change in share price, reinvestment of dividend and capital
gain distributions, and maximum applicable sales charges explained in this
paragraph. The graphs assume an initial investment of $10,000 and reflect
deduction of all sales charges that would have applied for the period of
investment. Class A share performance reflects the effect of the maximum 5.5%
initial sales charge. Class B shares are subject to a contingent deferred
sales charge (CDSC) of up to 5% if shares are redeemed within the first six
years of purchase. Class B share performance reflects a CDSC of 4%, which
would apply for the period shown. Class C shares would be subject to a CDSC
of 1% if redeemed within one year of purchase.
1. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P
500 is an unmanaged index and is widely regarded as the standard for
measuring large-cap U.S. stock-market performance. Results assume
reinvestment of all income and capital gains. An investment cannot be
made directly into an index.
2. Inflation is measured 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. The rate of inflation does not represent an
investment return.
6
- -------
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital gain distributions reinvested.
2. See footnote on page 5 for more information about the S&P 500 Index.
Portfolio Management Discussion and Analysis
In the first two weeks of 2003, stocks rallied, but from mid-January through
early March, share prices dropped precipitously. In mid-March, the equity market
staged a turnaround that began eight days before coalition troops invaded Iraq
and lasted long after President Bush announced that major combat operations had
ended. The rally continued through most of the second and third quarters, before
losing some ground in September, primarily because of concerns about the falling
U.S. dollar, rising oil prices, and uncertain third-quarter corporate earnings.
Optimism returned to the equity markets in October with the release of positive
economic data, including job growth and lower initial unemployment claims. The
manufacturing sector showed evidence of expansion, and according to preliminary
estimates by the Bureau of Economic Analysis, real gross domestic product grew
at a seasonally adjusted annual rate of 8.2% in the third quarter, the fastest
growth since early 1984.
Interest rates remained low throughout the reporting period. Near the end of
June, the Federal Open Market committee lowered the targeted federal funds rate
by 25 basis points to 1.0%, the lowest level in several decades. Toward the end
of the 10-month period, the Federal Reserve suggested that its accommodative
policy could be maintained for a "considerable period." Fiscal policy also
helped stimulate the economy when Congress approved a tax bill that included tax
cuts on corporate dividends.
The equity market rally that began in mid-March has been led by higher-risk,
lower-quality companies. We believe that such a trend is unlikely to be
sustainable for long.
PERFORMANCE REVIEW
For the 10 months ended October 31, 2003, MainStay U.S. Large Cap Equity Fund
returned 14.89% for Class A shares and 14.09% for Class B and Class C shares,
excluding all sales charges. All share classes underperformed the 19.16% return
of the average Lipper(1) large-cap core fund over the same period. All share
classes also underperformed the 21.21% return of the S&P 500 Index(2) for the
first 10 months of 2003.
Much of the Fund's relative underperformance resulted from its single-minded
focus on higher-quality, lower-risk stocks in a period when investors appeared
to favor just the opposite. Investors continued to bid up lower-quality
companies with little if any earnings.
7
-
PERFORMANCE (WITHOUT SALES CHARGES)
CLASS A SHARES
[BAR CHART]
<Table>
<Caption>
CLASS A
-------
12/02 -26.34
10/03 14.89
</Table>
CLASS B AND CLASS C SHARES
[BAR CHART]
<Table>
<Caption>
CLASS B
-------
12/02 -26.79
10/03 14.09
</Table>
The Fund was also affected by its emphasis on larger-cap companies. Mid-cap and
small-cap companies significantly outperformed their large-cap counterparts
during the 10-month period.
STRATEGIC POSITIONING
In selecting Fund investments, we emphasized companies that we believed could
increase earnings in a slower-growth environment, since it was by no means
evident that robust economic growth could be sustained. In the first quarter, we
trimmed or eliminated Fund positions in lower-quality companies with
8
inconsistent or low earnings growth and focused on higher-quality companies with
consistent and sustainable earnings.
We reduced the number of stocks held in the Fund from about 100 to around 80. In
the process, we increased the Fund's weightings in the consumer staples and
consumer discretionary sectors and trimmed the Fund's commitment to stocks in
the financials and information technology sectors.
Overall, this positioning hurt the Fund's performance during the first 10 months
of 2003. In light of the significant valuation disparity between higher-quality
and low-quality companies at the end of the reporting period, however, we
believe that the Fund may be well-positioned going forward. While many low-
quality stocks were trading at high price/earnings ratios, the Fund's portfolio
of higher-quality companies was more reasonably valued.
We also made a decision during the reporting period to add Fund holdings among
companies with market capitalizations in the $5 billion to $30 billion range.
While the Fund still has a larger capitalization size than the S&P 500 Index, we
reduced positions in larger companies.
SIGNIFICANT PURCHASES AND SALES
During the reporting period, we added quality companies such as Nokia, The Gap,
MBNA, State Street, Nabors Industries, Best Buy, MedImmune, and Lexmark to the
Fund's portfolio. We expect each of these companies to post good earnings growth
over the next few years, even if economic growth does not maintain its recent
robust pace. At the same time, these companies appear to be positioned to
experience stronger-than-average earnings growth if the economy sustains its
accelerated growth rate.
During the reporting period, we continued to eliminate lower-quality companies
with relatively poor valuations and lower earnings-growth prospects.
WEIGHTING CHANGES
As we sought to maintain a high-quality bias in the Fund's portfolio, we
increased consumer staples from an underweighted to an overweighted position by
establishing or adding to positions in companies with a long history of stable
growth. These included PepsiCo, Anheuser Busch, Sysco, Costco Wholesale, Sara
Lee, and Procter & Gamble. Although the Fund remains underweighted in consumer
discretionary stocks, investments in Comcast, Viacom, Target, and Home Depot
brought the Fund closer to a market weighting.
As we trimmed the Fund's information technology holdings, we also shifted the
portfolio's focus within the sector. We added Accenture and Affiliated Computer
Services at more reasonable valuations than we saw in other technology
9
-
stocks, many of which had risen to relatively high levels. During the first 10
months of 2003, we increased the Fund's weighting in information technology
services and reduced positions in the communications equipment, computers &
peripherals, and semiconductors & semiconductor equipment industries.
We also trimmed financials from a slightly overweighted position at the
beginning of the reporting period to a slightly underweighted position at the
end of October 2003. We increased exposure to the insurance and capital markets
industries and trimmed exposure to commercial banks and companies in the thrifts
& mortgage finance industry.
LOOKING AHEAD
We believe that low interest rates will likely continue to make stocks
attractive relative to other investments. A weaker dollar may boost earnings for
multi-
national corporations and attract foreign investors to the U.S. equity markets.
Lower taxes on dividends and capital gains may also provide incentives for
investment.
Although investors now appear to view the investment glass as half full instead
of half empty, we believe that going forward, investors are more likely to focus
on valuations, earnings, dividends, and cash flows, and we have positioned the
Fund accordingly.
Whatever the markets or the economy may bring, the Fund will continue to seek to
realize above-average total return consistent with reasonable risk.
Portfolio Management Team
McMorgan & Company LLC
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
10
- -
MainStay U.S. Large Cap Equity Fund
<Table>
<Caption>
SHARES VALUE
-----------------------
COMMON STOCKS (97.4%)+
AEROSPACE & DEFENSE (1.7%)
General Dynamics Corp. ........... 2,000 $ 167,400
Honeywell International, Inc. .... 9,600 293,856
-----------
461,256
-----------
AIR FREIGHT & LOGISTICS (1.0%)
United Parcel Service, Inc. Class
B................................ 3,800 275,576
-----------
AUTOMOBILES (0.5%)
General Motors Corp. ............. 2,900 123,743
-----------
BEVERAGES (3.5%)
Anheuser-Busch Cos., Inc. ........ 9,150 450,729
PepsiCo, Inc. .................... 10,300 492,546
-----------
943,275
-----------
BIOTECHNOLOGY (1.5%)
Amgen, Inc. (a)................... 4,800 296,448
MedImmune, Inc. (a)............... 4,000 106,640
-----------
403,088
-----------
CAPITAL MARKETS (2.5%)
Merrill Lynch & Co., Inc. ........ 6,700 396,640
State Street Corp. ............... 5,300 277,508
-----------
674,148
-----------
CHEMICALS (2.9%)
Dow Chemical Co. (The)............ 5,500 207,295
E.I. du Pont de Nemours & Co. .... 6,500 262,600
PPG Industries, Inc. ............. 5,300 305,545
-----------
775,440
-----------
COMMERCIAL BANKS (4.7%)
Bank of America Corp. ............ 3,450 261,268
Bank One Corp. ................... 7,200 305,640
U.S. Bancorp...................... 12,000 326,640
Wachovia Corp. ................... 7,800 357,786
-----------
1,251,334
-----------
COMMUNICATIONS EQUIPMENT (3.4%)
Cisco Systems, Inc. (a)........... 27,000 566,460
Nokia Corp. ADR (b)............... 19,400 329,606
-----------
896,066
-----------
COMPUTERS & PERIPHERALS (4.9%)
Dell, Inc. (a).................... 5,600 202,272
Hewlett-Packard Co. .............. 23,638 527,364
International Business Machines
Corp. ........................... 4,050 362,394
Lexmark International, Inc. (a)... 2,900 213,469
-----------
1,305,499
-----------
CONSUMER FINANCE (1.0%)
MBNA Corp. ....................... 11,200 277,200
-----------
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------
DIVERSIFIED FINANCIALS (3.9%)
Citigroup, Inc. .................. 21,800 $ 1,033,320
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES (1.7%)
SBC Communications, Inc. ......... 8,700 208,626
Verizon Communications, Inc. ..... 7,250 243,600
-----------
452,226
-----------
ELECTRIC UTILITIES (2.0%)
Entergy Corp. .................... 4,400 237,160
Exelon Corp. ..................... 4,600 291,870
-----------
529,030
-----------
ELECTRICAL EQUIPMENT (1.0%)
Emerson Electric Co. ............. 4,850 275,238
-----------
ENERGY EQUIPMENT & SERVICES (1.9%)
Nabors Industries Ltd. (a)........ 7,500 283,500
Schlumberger Ltd. ................ 4,700 220,759
-----------
504,259
-----------
FOOD & STAPLES RETAILING (4.1%)
Costco Wholesale Corp. (a)........ 9,600 339,552
Sysco Corp. ...................... 3,600 121,176
Wal-Mart Stores, Inc. ............ 7,650 450,967
Walgreen Co. ..................... 5,400 188,028
-----------
1,099,723
-----------
FOOD PRODUCTS (1.2%)
Sara Lee Corp. ................... 15,800 314,894
-----------
HEALTH CARE EQUIPMENT & SUPPLIES (2.1%)
Medtronic, Inc. .................. 6,100 277,977
Zimmer Holdings, Inc. (a)......... 4,300 274,383
-----------
552,360
-----------
HEALTH CARE PROVIDERS & SERVICES (2.1%)
Cardinal Health, Inc. ............ 4,000 237,360
Medco Health Solutions, Inc.
(a).............................. 916 30,411
UnitedHealth Group, Inc. ......... 6,000 305,280
-----------
573,051
-----------
HOUSEHOLD PRODUCTS (1.9%)
Procter & Gamble Co. (The)........ 5,100 501,279
-----------
INDUSTRIAL CONGLOMERATES (5.3%)
3M Co. ........................... 4,100 323,367
General Electric Co. ............. 26,200 760,062
Tyco International Ltd. .......... 16,250 339,300
-----------
1,422,729
-----------
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
Portfolio of Investments October 31, 2003
11
-
<Table>
<Caption>
SHARES VALUE
-----------------------
COMMON STOCKS (CONTINUED)
INSURANCE (3.7%)
Allstate Corp. (The).............. 7,500 $ 296,250
American International Group,
Inc. ............................ 7,400 450,142
Marsh & McLennan Cos., Inc. ...... 5,300 226,575
-----------
972,967
-----------
IT SERVICES (3.2%)
Accenture Ltd. Class A (a)........ 11,900 278,460
Affiliated Computer Services, Inc.
Class A (a)...................... 5,500 269,115
Automatic Data Processing,
Inc. ............................ 5,400 203,796
Paychex, Inc. .................... 2,400 93,408
-----------
844,779
-----------
MEDIA (5.5%)
Clear Channel Communications,
Inc. ............................ 6,800 277,576
Comcast Corp. Class A (a)......... 12,743 432,243
Knight-Ridder, Inc. .............. 3,000 219,960
Time Warner, Inc. (a)............. 14,500 221,705
Viacom, Inc. Class B.............. 7,600 303,012
-----------
1,454,496
-----------
METALS & MINING (0.6%)
Alcoa, Inc. ...................... 5,000 157,850
-----------
MULTILINE RETAIL (0.8%)
Target Corp. ..................... 5,500 218,570
-----------
OIL & GAS (4.3%)
BP PLC ADR (b).................... 5,600 237,328
ChevronTexaco Corp. .............. 3,800 282,340
Exxon Mobil Corp. ................ 16,900 618,202
-----------
1,137,870
-----------
PHARMACEUTICALS (8.2%)
Eli Lilly & Co. .................. 3,100 206,522
Johnson & Johnson................. 10,950 551,114
Merck & Co., Inc. ................ 7,600 336,300
Pfizer, Inc. ..................... 30,520 964,432
Schering-Plough Corp. ............ 9,100 138,957
-----------
2,197,325
-----------
ROAD & RAIL (0.5%)
CSX Corp. ........................ 4,200 133,644
-----------
</Table>
<Table>
<Caption>
SHARES VALUE
-----------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (4.2%)
Intel Corp. ...................... 22,200 $ 733,710
Novellus Systems, Inc. (a)........ 4,200 173,418
Texas Instruments, Inc. .......... 4,300 124,356
Xilinx, Inc. (a).................. 3,000 95,100
-----------
1,126,584
-----------
SOFTWARE (3.8%)
BMC Software, Inc. (a)............ 9,400 163,372
Microsoft Corp. .................. 32,700 855,105
-----------
1,018,477
-----------
SPECIALTY RETAIL (3.8%)
Best Buy Co., Inc. ............... 4,300 250,733
Gap, Inc. (The)................... 14,600 278,568
Home Depot, Inc. (The)............ 12,900 478,203
-----------
1,007,504
-----------
THRIFTS & MORTGAGE FINANCE (2.4%)
Fannie Mae........................ 5,200 372,788
Freddie Mac....................... 4,600 258,198
-----------
630,986
-----------
TOBACCO (0.4%)
Altria Group, Inc. ............... 2,100 97,650
-----------
WIRELESS TELECOMMUNICATION SERVICES (1.2%)
Vodafone Group PLC ADR (b)........ 14,600 308,790
-----------
Total Investments
(Cost $26,126,891) (c)........... 97.4% 25,952,226(d)
Cash and Other Assets,
Less Liabilities................. 2.6 699,273
------ -----------
Net Assets........................ 100.0% $26,651,499
====== ===========
</Table>
<Table>
- -------
(a) Non-income producing security.
(b) ADR--American Depositary Receipt.
(c) The cost for federal income tax purposes is $26,316,402.
(d) At October 31, 2003, net unrealized depreciation was
$364,176 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 $1,945,716 and aggregate
unrealized depreciation for all investments on which
there was an excess of cost over market value of
$2,309,892.
</Table>
<Table>
- -------
+ Percentages indicated are based on Fund net assets.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
- -
Statement of Assets and Liabilities as of October 31, 2003
<Table>
ASSETS:
Investment in securities, at value (identified cost
$26,126,891).............................................. $25,952,226
Cash........................................................ 1,080,353
Receivables:
Fund shares sold.......................................... 42,094
Dividends................................................. 26,464
Manager................................................... 2,657
Other assets................................................ 7,067
-----------
Total assets........................................ 27,110,861
-----------
LIABILITIES:
Payables:
Investment securities purchased........................... 394,113
Professional.............................................. 21,281
Transfer agent............................................ 14,941
NYLIFE Distributors....................................... 7,414
Custodian................................................. 1,402
Fund shares redeemed...................................... 180
Accrued expenses............................................ 20,031
-----------
Total liabilities................................... 459,362
-----------
Net assets.................................................. $26,651,499
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 27,975
Class B................................................... 3,481
Class C................................................... 272
Additional paid-in capital.................................. 30,436,990
Accumulated undistributed net investment income............. 45,700
Accumulated net realized loss on investments................ (3,688,254)
Net unrealized depreciation on investments.................. (174,665)
-----------
Net assets.................................................. $26,651,499
===========
CLASS A
Net assets applicable to outstanding shares................. $23,522,339
===========
Shares of beneficial interest outstanding................... 2,797,512
===========
Net asset value per share outstanding....................... $ 8.41
Maximum sales charge (5.50% of offering price).............. 0.49
-----------
Maximum offering price per share outstanding................ $ 8.90
===========
CLASS B
Net assets applicable to outstanding shares................. $ 2,902,115
===========
Shares of beneficial interest outstanding................... 348,107
===========
Net asset value and offering price per share outstanding.... $ 8.34
===========
CLASS C
Net assets applicable to outstanding shares................. $ 227,045
===========
Shares of beneficial interest outstanding................... 27,227
===========
Net asset value and offering price per share outstanding.... $ 8.34
===========
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
-
Statement of Operations for the period January 1, 2003 through
October 31, 2003* and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
----------- -----------
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 343,434 $ 416,899
Interest.................................................. 823 7,247
----------- -----------
Total income............................................ 344,257 424,146
----------- -----------
Expenses:
Manager................................................... 124,556 145,611
Transfer agent............................................ 65,569 59,884
Service--Class A.......................................... 43,239 53,508
Service--Class B.......................................... 4,331 2,161
Service--Class C.......................................... 336 335
Professional.............................................. 31,696 27,504
Registration.............................................. 30,551 15,422
Distribution--Class B..................................... 12,993 6,483
Distribution--Class C..................................... 1,008 1,004
Recordkeeping............................................. 10,000 12,000
Custodian................................................. 8,843 8,120
Shareholder communication................................. 7,028 26,029
Pricing service........................................... 5,815 9,228
Trustees.................................................. 3,404 897
Offering costs............................................ -- 41,853
Miscellaneous............................................. 13,135 15,274
----------- -----------
Total expenses before reimbursement..................... 362,504 425,313
Expense reimbursement by Manager............................ (61,063) (81,798)
----------- -----------
Net expenses............................................ 301,441 343,515
----------- -----------
Net investment income....................................... 42,816 80,631
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments............................ (3,071,282) (616,972)
Net change in unrealized depreciation on investments........ 6,296,807 (6,471,472)
----------- -----------
Net realized and unrealized gain (loss) on investments...... 3,225,525 (7,088,444)
----------- -----------
Net increase (decrease) in net assets resulting from
operations................................................ $ 3,268,341 $(7,007,813)
=========== ===========
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
(a) Dividends recorded net of foreign withholding taxes of
$1,415 and $1,737 for 2003 and 2002, respectively.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
Statement of Changes in Net Assets for the period January 1, 2003 through
October 31, 2003* and the year ended December 31, 2002
<Table>
<Caption>
2003* 2002
-------------- ------------
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 42,816 $ 80,631
Net realized loss on investments.......................... (3,071,282) (616,972)
Net change in unrealized depreciation on investments...... 6,296,807 (6,471,472)
----------- -----------
Net increase (decrease) in net assets resulting from
operations.............................................. 3,268,341 (7,007,813)
----------- -----------
Dividends to shareholders:
From net investment income:
Class A................................................. -- (121,363)
Class B................................................. -- (2,044)
Class C................................................. -- (213)
----------- -----------
Total dividends to shareholders....................... -- (123,620)
----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 1,685,553 27,504,249
Class B................................................. 1,978,175 1,975,216
Class C................................................. 94,925 231,188
Net asset value of shares issued to shareholders in
reinvestments of dividends:
Class A................................................. -- 5,352
Class B................................................. -- 1,799
Class C................................................. -- 103
----------- -----------
3,758,653 29,717,907
Cost of shares redeemed:
Class A................................................. (348,550) (1,445,274)
Class B................................................. (857,464) (229,325)
Class C................................................. (35,113) (46,243)
----------- -----------
Increase in net assets derived from capital share
transactions......................................... 2,517,526 27,997,065
----------- -----------
Net increase in net assets............................ 5,785,867 20,865,632
NET ASSETS:
Beginning of period......................................... 20,865,632 --
----------- -----------
End of period............................................... $26,651,499 $20,865,632
=========== ===========
Accumulated undistributed net investment income at end of
period.................................................... $ 45,700 $ 2,870
=========== ===========
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
Financial Highlights selected per share data and ratios
<Table>
<Caption>
Class A Class B Class C
-------------------------- -------------------------- --------------------------
January 1, January 1, January 1,
2003 2003 2003
through Year ended through Year ended through Year ended
October 31, December 31, October 31, December 31, October 31, December 31,
2003* 2002 2003* 2002 2003* 2002
----------- ------------ ----------- ------------ ----------- ------------
Net asset value at beginning of
period............................. $ 7.32 $ 10.00 $ 7.31 $ 10.00 $ 7.31 $ 10.00
------- ------- ------- ------- ------- -------
Net investment income (loss) (a)..... 0.02 0.03 (0.03) (0.02) (0.03) (0.02)
Net realized and unrealized gain
(loss) on investments.............. 1.07 (2.66) 1.06 (2.66) 1.06 (2.66)
------- ------- ------- ------- ------- -------
Total from investment operations..... 1.09 (2.63) 1.03 (2.68) 1.03 (2.68)
------- ------- ------- ------- ------- -------
Less dividends to shareholders:
From net investment income......... -- (0.05) -- (0.01) -- (0.01)
------- ------- ------- ------- ------- -------
Total dividends to shareholders...... -- (0.05) -- (0.01) -- (0.01)
------- ------- ------- ------- ------- -------
Net asset value at end of period..... $ 8.41 $ 7.32 $ 8.34 $ 7.31 $ 8.34 $ 7.31
======= ======= ======= ======= ======= =======
Total investment return (b).......... 14.89% (26.34%) 14.09% (26.79%) 14.09% (26.79%)
Ratios (to average net assets)/
Supplemental Data:
Net investment income (loss)..... 0.30%+ 0.39% (0.45%)+ (0.36%) (0.45%)+ (0.36%)
Net expenses..................... 1.50%+ 1.50% 2.25%+ 2.25% 2.25%+ 2.25%
Expenses (before reimbursement).. 1.82%+ 1.86% 2.57%+ 2.61% 2.57%+ 2.61%
Portfolio turnover rate.............. 38% 6% 38% 6% 38% 6%
Net assets at end of period (in
000's)............................. $23,522 $19,244 $ 2,902 $ 1,476 $ 227 $ 146
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges and is
not annualized.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
MainStay U.S. Large Cap Equity Fund
16
- -
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-four funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay U.S.
Large Cap Equity Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. On December 28, 2001, the
Fund sold Class A, Class B and Class C shares to NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), at a net asset value of $10.00. The Fund commenced
investment operations the following business day on January 2, 2002. Class A
shares are offered at net asset value per share plus an initial sales charge. No
sales charge applies on investments of $1 million or more (and certain other
qualified purchases) in Class A shares, but a contingent deferred sales charge
is imposed on certain redemptions of such shares within one year of the date of
purchase. Class B shares and Class C shares are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase of Class B shares and within one
year of purchase of Class C shares. Class A shares, Class B shares and Class C
shares bear the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and conditions except that the Class B
shares and Class C shares are subject to higher distribution fee rates. Each
class of shares bears distribution and/or service fee payments under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to realize above average total return
consistent with reasonable risk.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with generally accepted
accounting principles and follows the significant accounting policies described
below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent printing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
Notes to Financial Statements
17
-
(B) OFFERING COSTS. Costs incurred in connection with the initial offering of
the Fund, in the amount of $41,853, were amortized over a period of 12 months
beginning with the commencement of operations on January 2, 2002.
(C) 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are withheld at the source.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay any
dividends quarterly and capital gain distributions, if any, annually. Income
dividends and capital gain distributions are determined in accordance with
federal income tax regulations which may differ from generally accepted
accounting principles. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current period reclassifications between
accumulated undistributed net investment income and additional paid-in-capital
arising from permanent differences: net assets at October 31, 2003, are not
affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED
NET INVESTMENT ADDITIONAL
INCOME PAID-IN CAPITAL
- -------------- ---------------
$14 $(14)
</Table>
The reclassifications for the Fund are primarily due to non-deductible expenses.
(E) 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 as earned.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares based upon their relative
net assets on the date the income is earned or realized and unrealized gains and
losses are incurred.
MainStay U.S. Large Cap Equity Fund
18
- -
(F) 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 where direct allocations of expenses can be made. Expenses
(other than expenses incurred under the distribution plans) are allocated to
separate classes of shares based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(G) USE OF ESTIMATES. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
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 TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life, serves as
the Fund's manager. The Manager provides offices, conducts clerical,
recordkeeping and bookkeeping services, and keeps the financial and accounting
records required for the Fund. The Manager also pays the salaries and expenses
of all personnel affiliated with the Fund and all the operational expenses that
are not the responsibility of the Fund. McMorgan & Company LLC (the
"Subadvisor"), a registered investment Advisor and indirect wholly-owned
subsidiary of New York Life, is responsible for the day-to-day portfolio
management of the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.65% of the Fund's
average daily net assets. The Manager has voluntarily agreed to reimburse the
expenses of the Fund to the extent that operating expenses would exceed on an
annualized basis 1.50%, 2.25% and 2.25% of the average daily net assets of the
Class A, Class B and Class C shares, respectively. For the ten months ended
October 31, 2003, the Manager earned from the Fund $124,556 and reimbursed the
Fund $61,063. For the year ended December 31, 2002, the Manager earned from the
Fund $145,611 and reimbursed the Fund $81,798.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and the
Subadvisor, the Manager pays the Subadvisor a monthly fee at an annual rate of
0.325% of the average daily net assets of the Fund.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with the Distributor. The Fund, with respect to each
class of shares, has adopted distribution plans (the "Plans") in accordance with
the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A Plan,
the Distributor receives a monthly fee from the Fund at an annual rate of 0.25%
of the average daily net assets of the Fund's Class A shares, which is an
expense of the Class A shares of the Fund
Notes to Financial Statements (continued)
19
-
for distribution or service activities as designated by the Distributor.
Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a
monthly fee, which is an expense of the Class B and Class C shares of the Fund,
at the annual rate of 0.75% of the average daily net assets of the Fund's Class
B and Class C shares. The Distribution Plans provide that the Class B and Class
C shares of the Fund also incur a service fee at the annual rate of 0.25% of the
average daily net asset value of the Class B or Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $842 for the ten months
ended October 31, 2003. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B and Class C shares
of $4,048 and $333 respectively, for the ten months ended October 31, 2003.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC, ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services ("BFDS") pursuant
to which BFDS will perform certain of the services for which NYLIM Service is
responsible. Transfer agent expenses accrued for the ten months ended October
31, 2003 and year ended December 31, 2002, amounted to $65,569 and $59,884,
respectively.
(E) TRUSTEES FEES. Trustees, other than those currently affiliated with NYLIM,
are paid an annual fee of $45,000, $2,000 for each Board meeting, $1,000 for
each Committee meeting and $500 for each Valuation Subcommittee telephonic
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Lead Non-Interested Trustee is also paid an annual fee of $20,000. Beginning
January 1, 2003, the Audit Committee Chairman receives an additional $2,000 for
each meeting of the Audit Committee attended. Also, beginning January 1, 2003,
the Chairpersons of the Brokerage Committee and the Operations Committee each
receive an additional $1,000 for each meeting of the Brokerage Committee and
Operations Committee attended, respectively. The Trust allocates trustees fees
in proportion to the net assets of the respective Funds. Thus the U.S. Large Cap
Equity Fund only pays a portion of the fees identified above.
(F) CAPITAL. At October 31, 2003, New York Life held shares of Class A, Class B
and Class C with a value of $20,856,800, $83,400 and $83,400, respectively. This
represents 88.7%, 2.9% and 36.7% of the Class A shares, Class B shares and Class
C shares net assets, respectively, and 78.9% of the Fund's total net assets at
period end.
MainStay U.S. Large Cap Equity Fund
20
- -
(G) OTHER. Fees for the cost of legal services, included in Professional fees
as shown on the Statement of Operations, provided to the Fund by the Office of
the General Counsel of NYLIM amounted to $490 for the ten months ended October
31, 2003 and $439 for the year ended December 31, 2002.
The Fund pays the Manager a monthly fee for recordkeeping services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. Fees for recordkeeping services provided
to the Fund by the Manager amounted to $10,000 for the ten months ended October
31, 2003 and $12,000 for the year ended December 31, 2002.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2003, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED
NET INVESTMENT ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
INCOME AND OTHER LOSSES DEPRECIATION LOSS
- --------------- ------------------- ------------ -----------------
$ 45,700 $(3,498,743) $(364,176) $(3,817,219)
</Table>
The difference between book-basis and tax-basis unrealized depreciation is due
to wash sales deferrals.
Dividends to shareholders from net investment income shown in the Statement of
Changes in Net Assets for the year ended December 31, 2002 represent tax-based
distributions of ordinary income.
At October 31, 2003, for federal income tax purposes, capital loss carryforwards
of $3,498,743 were available as shown in the table below, to the extent provided
by the regulations, to offset future realized gains through the years indicated.
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.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
- ------------------------------------------------------------ --------
2010................................................... $ 200
2011................................................... 3,299
------
$3,499
======
</Table>
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the ten months ended October 31, 2003, purchases and sales of securities,
other than short-term securities, were $10,492 and $8,404, respectively.
Notes to Financial Statements (continued)
21
-
NOTE 6--LINE OF CREDIT:
The Fund and certain affiliated funds maintain a line of credit of $160,000,000
with a syndicate of banks in order to secure a source of funds for temporary
purposes to meet unanticipated or excessive shareholder redemption requests. The
funds pay a commitment fee, at an annual rate of .075% of the average commitment
amount, regardless of usage, to The Bank of New York, which acts as agent to the
syndicate. Such commitment fees are allocated among the funds based upon net
assets and other factors. Interest on any revolving credit loan is charged based
upon the Federal Funds Advances rate. There were no borrowings on the line of
credit during the ten months ended October 31, 2003.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
JANUARY 1 THROUGH YEAR ENDED
OCTOBER 31, 2003* DECEMBER 31, 2002
--------------------------- ---------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- -------
Shares sold................................. 216 261 12 2,820 232 26
Shares issued in reinvestment of
dividends................................. -- -- -- 1 --(a) --(a)
--- ---- -- ----- --- --
216 261 12 2,821 232 26
Shares redeemed............................. (46) (115) (5) (193) (30) (6)
--- ---- -- ----- --- --
Net increase................................ 170 146 7 2,628 202 20
=== ==== == ===== === ==
</Table>
- -------
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
(a) Less than one thousand.
</Table>
NOTE 8--OTHER MATTERS:
New York Life Investment Management LLC (NYLIM) and mutual funds that NYLIM
advises, including The MainStay Funds, have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading and other matters. We are cooperating fully in responding
to these requests. We have no reason to believe that NYLIM or any of the mutual
funds NYLIM advises has been targeted as the subject of any governmental or
regulatory enforcement action.
22
- -
Report of Independent Auditors
To the Trustees of The MainStay Funds and Shareholders of
MainStay U.S. Large Cap Equity Fund
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 U.S. Large Cap Equity Fund
(one of the funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at October 31, 2003, the results of its operations for the ten months
ended October 31, 2003 and the year ended December 31, 2002, the changes in its
net assets for the ten months ended October 31, 2003 and each of the two years
in the period ended December 31, 2002 and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 October
31, 2003 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 18, 2003
23
-
The MainStay Funds--Trustees and Officers
Following are the Trustees and Officers of The MainStay Funds, along with a
brief description of their principal occupations during the past five years.
Each Trustee serves until his/her successor is elected and qualified or until
his/her resignation, death, or removal. Officers serve a term of one year and
are elected annually by the Trustees.
The business address of each Trustee and Officer is 51 Madison Avenue, New York,
New York 10010.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
- ---------------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt Chairman since Chief Executive Officer, Chairman, and 43 None
10/8/50 2002 and Manager, New York Life Investment
Trustee since Management LLC (including predecessor
2000 advisory organizations) and New York
Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Manager, NYLIFE Distributors LLC; Vice
Chairman, McMorgan & Company LLC;
Manager, MacKay Shields LLC; Executive
Vice President, New York Life Insurance
and Annuity Corporation; Chairman, Chief
Executive Officer, and Director,
MainStay VP Series Fund, Inc. (19
portfolios); Executive Vice President
and Chief Investment Officer, MassMutual
Life Insurance Company (1993 to 1999).
- ---------------------------------------------------------------------------------------------------------------------
Stephen C. Roussin President, President, Chief Operating Officer, and 41 None
7/12/63 Chief Manager, New York Life Investment
Executive Management LLC (including predecessor
Officer, and advisory organizations) and New York
Trustee since Life Investment Management Holdings LLC;
1997 Senior Vice President, New York Life
Insurance Company; Senior Vice
President, NYLIFE LLC; Director, NYLIFE
Securities, Inc.; Chairman, President,
and Manager, NYLIFE Distributors LLC;
Manager, McMorgan & Company LLC;
Chairman, Trustee, and President,
Eclipse Funds, (4 portfolios); Chairman
and Director, Eclipse Funds Inc. (13
portfolios); Senior Vice President,
Smith Barney (1994 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
* Certain Trustees are considered to be interested persons of the Trust within the meaning of the 1940 Act because of
their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, MacKay Shields
LLC, McMorgan & Company LLC, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., NYLIFE Securities
Inc., and/or NYLIFE Distributors LLC, as described in detail in the column "Principal Occupation(s) During Past 5
Years."
</Table>
24
- -
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Harry G. Hohn Trustee since Retired. Chairman and Chief Executive 24 None
3/1/32 1996 Officer, New York Life Insurance Company
(1990 to 1997); Chairman of the Board,
Life Insurance Council of New York (1996
to 1997); Director, Million Dollar
Roundtable Foundation (1996 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Donald K. Ross Trustee since Retired. Manager, MacKay Shields LLC; 24 None
7/1/25 1991 Chairman, Chief Executive Officer, and
President, New York Life Insurance
Company (1981 to 1990).
- ---------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Charlynn Goins Trustee since Retired. Consultant to U.S. Commerce 24 None
9/15/42 2001 Department, Washington, DC (1998 to
2000); Senior Vice President and
Director of International Marketing,
Prudential Mutual Funds and Annuities
(1990 to 1997).
- ---------------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee since Rear Admiral U.S. Navy (Retired); 24 None
8/17/32 1996 Independent Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
Terry L. Lierman Trustee since Partner, Health Ventures LLC; Vice 24 None
1/4/48 1991 Chair, Employee Health Programs;
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc.
(1984 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee since Chairman, Ulster Television Plc; Pro 24 Non-Executive
11/13/39 1997 Chancellor, Queen's University (1985 to Director, Allied
2001). Irish Banks Plc;
Non-Executive
Director, Irish
Continental Group,
Plc; Non-Executive
Director, Unidare
Plc.
- ---------------------------------------------------------------------------------------------------------------------
Donald E. Nickelson Trustee since Retired. Vice Chairman, Harbour Group 24 Director, Adolor
12/9/32 1994 and Lead Industries, Inc. (leveraged buyout Corporation;
Non- firm). Director, First
Interested Advantage
Trustee Corporation.
- ---------------------------------------------------------------------------------------------------------------------
Michael H. Sutton Trustee since Retired. Independent Consultant (1999 to 24 None
9/19/40 2003 present); Special Consultant, Financial
Accounting Standards Board (1998 to
1999); Chief Accountant, United States
Securities and Exchange Commission (1995
to 1998).
- ---------------------------------------------------------------------------------------------------------------------
</Table>
25
-
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
POSITION(S) IN FUND
HELD WITH FUND COMPLEX
NAME AND AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee since Advisor (July 2003 to present) and 24 None
2/13/52 1994 Managing Director (2001 to June 2003),
The Carlyle Group (private investment
firm); Chairman and Chief Executive
Officer, Somerset Group (financial
advisory firm); Senior Managing
Director, Groupe Arnault (private
investment firm) (1999 to 2001).
- ---------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice Senior Managing Director, New York Life N/A None
9/17/57 President Investment Management LLC (including
since 1995 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Senior Vice
President, Eclipse Funds and Eclipse
Funds Inc.; Manager, NYLIFE Distributors
LLC.
- ---------------------------------------------------------------------------------------------------------------------
Patrick J. Farrell Chief Managing Director, New York Life N/A None
9/27/59 Financial and Investment Management LLC (including
Accounting predecessor advisory organizations);
Officer, Treasurer, Chief Financial and
Treasurer, and Accounting Officer, Eclipse Funds Inc.,
Vice President Eclipse Funds, and MainStay VP Series
since 2001 Fund, Inc.; Chief Financial Officer and
Assistant Treasurer, McMorgan Funds.
- ---------------------------------------------------------------------------------------------------------------------
Robert A. Anselmi Secretary Senior Managing Director, General N/A None
10/19/46 since 2001 Counsel, and Secretary, New York Life
Investment Management LLC (including
predecessor advisory organizations);
Secretary, New York Life Investment
Management Holdings LLC; Senior Vice
President, New York Life Insurance
Company; Vice President and Secretary,
McMorgan & Company LLC; Secretary,
NYLIFE Distributors LLC; Secretary,
MainStay VP Series Fund, Inc., Eclipse
Funds Inc., and Eclipse Funds; Managing
Director and Senior Counsel, Lehman
Brothers Inc., (October 1998 to December
1999); General Counsel and Managing
Director, JP Morgan Investment
Management Inc. (1986 to September
1998).
- ---------------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro Tax Vice Vice President, New York Life Insurance N/A None
12/12/49 President Company; Vice President, New York Life
since 1991 Insurance and Annuity Corporation,
NYLIFE Insurance Company of Arizona,
NYLIFE LLC, NYLIFE Securities Inc.; Vice
President-Financial Operations and Chief
Financial Officer, NYLIFE Distributors
LLC; Tax Vice President, New York Life
International, LLC; Tax Vice President,
Eclipse Funds, Eclipse Funds Inc., and
MainStay VP Series Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</Table>
26
- -
THE MAINSTAY FUNDS
EQUITY FUNDS
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Equity Index Fund(1)
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund(2)
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund(3)
MainStay U.S. Large Cap Equity Fund
EQUITY AND INCOME FUNDS
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Growth Opportunities Fund
MainStay MAP Fund
MainStay Research Value Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
MainStay Value Fund
INCOME FUNDS
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Money Market Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
INTERNATIONAL FUNDS
MainStay Global High Yield Fund
MainStay International Bond Fund
MainStay International Equity Fund
INVESTMENT ADVISOR
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
DALTON, GREINER, HARTMAN, MAHER & CO.
New York, New York
FUND ASSET MANAGEMENT, L.P.
d/b/a Mercury Advisors
Plainsboro, New Jersey
GABELLI ASSET MANAGEMENT COMPANY
Rye, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL, LLC
White Plains, New York
MCMORGAN & COMPANY LLC(4)
San Francisco, California
- -------
1. Closed to new purchases as of January 1, 2002.
2. Ceased operations as of November 28, 2003.
3. Closed to new investors as of December 1, 2001.
4. An affiliate of New York Life Investment Management LLC.
Trustees and Officers(1)
<Table>
GARY E. WENDLANDT Chairman and Trustee
STEPHEN C. ROUSSIN President, Chief Executive
Officer, and Trustee
CHARLYNN GOINS Trustee
EDWARD J. HOGAN Trustee
HARRY G. HOHN Trustee
TERRY L. LIERMAN Trustee
JOHN B. MCGUCKIAN Trustee
DONALD E. NICKELSON Trustee
DONALD K. ROSS Trustee
MICHAEL H. SUTTON Trustee
RICHARD S. TRUTANIC Trustee
JEFFERSON C. BOYCE Senior Vice President
PATRICK J. FARRELL Chief Financial and
Accounting Officer,
Treasurer, and
Vice President
ROBERT A. ANSELMI Secretary
RICHARD W. ZUCCARO Tax Vice President
</Table>
DECHERT LLP
Legal Counsel
PRICEWATERHOUSECOOPERS LLP
Independent Auditors
1. As of October 31, 2003.
[MAINSTAY.LOGO]
MainStay is a division of New York Life Investment Management LLC, the
investment advisor to The MainStay Funds.
- ------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC
169 Lackawanna Avenue
Parsippany, New Jersey 07054
www.mainstayfunds.com
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
(C)2003 NYLIFE Distributors LLC. All rights reserved. MSLE11- 12/03
NYLIM-A04377 31
[RECYCLE GRAPHIC]
[MAINSTAY FUNDS GRAPHIC]
MainStay(R) U.S. Large Cap Equity Fund
ANNUAL REPORT
OCTOBER 31, 2003
[MAINSTAY.LOGO]
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, Registrant had
adopted a code of ethics (the "Code") that applies to the Registrant's principal
executive office ("PEO") and principal financial officer ("PFO"). There were no
amendments to the Code during the period covered by the report. The Registrant
did not grant any waivers, including implicit waivers, from any provisions of
the Code to the PEO or PFO during the period covered by this report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees has determined that the registrant has at least
one audit committee financial expert serving on its Audit Committee. The Audit
Committee financial expert is Michael H. Sutton. Mr. Sutton is "independent"
within the meaning of that term used in Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. [RESERVED]
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the Disclosure Controls and Procedures (as
defined in Rule 30a-2(c) under the Investment Company Act of 1940, the
"Disclosure Controls") as of a date within 90 days prior to the filing date (the
"Filing Date") of this Form N-CSR (the "Report"), the Disclosure Controls are
reasonably designed to ensure that information required to be disclosed by the
Registrant in the Report is recorded, processed, summarized and reported by the
Filing Date, including ensuring that information required to be disclosed in the
Report is accumulated and communicated to the Registrant's management, including
the Registrant's principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) There were no significant changes in the Registrant's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, and there were no corrective actions with regard
to significant deficiencies and material weaknesses.
ITEM 10. EXHIBITS.
(a) Code of Ethics.
(b)(1) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2 under the Investment Company Act of 1940.
(b)(2) Certifications of principal executive officer and principal financial
officer as required by Section 906 of the Sarbanes-Oxley Act of 202.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE MAINSTAY FUNDS
By: /s/ Gary E. Wendlandt
---------------------
GARY E. WENDLANDT
CHAIRMAN
Date: January 6, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Gary E. Wendlandt
---------------------
GARY E. WENDLANDT
CHAIRMAN
Date: January 6, 2004
By: /s/Patrick J. Farrell
---------------------
PATRICK J. FARRELL
TREASURER AND
CHIEF FINANCIAL AND ACCOUNTING OFFICER
Date: January 6, 2004
EXHIBIT INDEX
(a) Code of Ethics
(b)(1) Certifications of principal executive officer and
principal financial officer as required by Rule 30a-2 under
the Investment Company Act of 1940.
(b)(2) Certification of principal executive officer and
principal financial officer as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
3