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)
Marguerite E.H. Morrison, Esq.
169 Lackawanna Avenue
Parsippany, NJ 07054
(Name and address of agent for service)
Registrant's telephone number, including area code: (973) 394-4437
Date of fiscal year end: October 31
Date of reporting period: 11/1/03-10/31/04
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
(MAINSTAY LOGO)
MAINSTAY
CAPITAL APPRECIATION FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay Capital Appreciation Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quarter of 2004, and according to
preliminary estimates from the Bureau of Economic Analysis, gross domestic
product grew at a seasonally adjusted annual rate of 3.9% in the third quarter
of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 12
- ----------------------------------------------------
Notes to Financial Statements 18
Report of Independent Registered Public
Accounting Firm 22
- ----------------------------------------------------
Trustees and Officers 23
- ----------------------------------------------------
Proxy Voting Policies and Procedures 25
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 25
- ----------------------------------------------------
MainStay Funds 26
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -5.92% -9.68% 6.02%
Excluding sales charges -0.44 -8.66 6.63
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
APPRECIATION FUND INDEX S&P 500 INDEX
----------------- ------------------- -------------
10/31/94 9450 10000 10000
12203.9 12921.1 12644.1
14539 15769.8 15690.7
17992.9 20575.5 20729.3
21503.2 25645.9 25288
28225.1 34429 31779.2
31735.4 37641.6 33715
19531.5 22605.4 25318.6
15540.6 18171 21493.9
18029.2 22134.9 25964.6
10/31/04 17949.8 22882.8 28411.1
</Table>
<Table>
-- MainStay Capital Appreciation Fund -- Russell 1000 Growth Index
- - S&P 500 Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -6.13% -9.65% 5.89%
Excluding sales charges -1.18 -9.36 5.89
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
APPRECIATION FUND INDEX S&P 500 INDEX
----------------- ------------------- -------------
10/31/94 10000 10000 10000
12845.1 12921.1 12644.1
15231.9 15769.8 15690.7
18760 20575.5 20729.3
22238.8 25645.9 25288
28960.9 34429 31779.2
32318.3 37641.6 33715
19734.4 22605.4 25318.6
15579.7 18171 21493.9
17929.7 22134.9 25964.6
10/31/04 17717.4 22882.8 28411.1
</Table>
<Table>
-- MainStay Capital Appreciation Fund -- Russell 1000 Growth Index
- - S&P 500 Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -2.17% -9.36% 5.89%
Excluding sales charges -1.18 -9.36 5.89
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
APPRECIATION FUND INDEX S&P 500 INDEX
----------------- ------------------- -------------
10/31/94 10000 10000 10000
12845.1 12921.1 12644.1
15231.9 15769.8 15690.7
18760 20575.5 20729.3
22238.8 25645.9 25288
28960.9 34429 31779.2
32318.3 37641.6 33715
19734.4 22605.4 25318.6
15579.6 18171 21493.9
17929.7 22134.9 25964.6
10/31/04 17717.3 22882.8 28411.1
</Table>
<Table>
-- MainStay Capital Appreciation Fund -- Russell 1000 Growth Index
- - S&P 500 Index
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%,
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee, and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. From inception (5/1/86) through
12/31/94 (for Class A, first offered 1/3/95), 8/31/98 (for Class C, first
offered 9/1/98), and 12/31/03 (for Class I, first offered 1/2/04), performance
of Class A, C, and I shares includes the historical performance of Class B
shares adjusted to reflect the applicable sales charge (or CDSC) and fees and
expenses for Class A, C, and I shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Capital Appreciation Fund
CLASS I SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
-0.26% -8.62% 6.84%
</Table>
(LINE GRAPH FOR CLASS I IN $)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
APPRECIATION FUND INDEX S&P 500 INDEX
----------------- ------------------- -------------
10/31/94 10000 10000 10000
12976 12921.1 12644.1
15547.7 15769.8 15690.7
19335.6 20575.5 20729.3
23143.6 25645.9 25288
30412.8 34429 31779.2
34204.1 37641.6 33715
20966.6 22605.4 25318.6
16713.5 18171 21493.9
19425.4 22134.9 25964.6
10/31/04 19375.4 22882.8 28411.1
</Table>
<Table>
-- MainStay Capital Appreciation Fund -- Russell 1000 Growth Index
- - S&P 500 Index
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Russell 1000(R) Growth Index(1) 3.38% -7.85% 8.63%
S&P 500(R) Index(2) 9.42 -2.22 11.01
Average Lipper large-cap growth fund(3) 2.67 -6.49 7.31
</Table>
1. 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. The Russell 1000(R) Growth
Index is considered to be the Fund's broad-based securities-market index for
comparison purposes. 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(R)
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.
3. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY CAPITAL APPRECIATION FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $967.05 $6.18 $1,018.75 $ 6.34
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $963.30 $9.87 $1,015.00 $10.13
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $963.30 $9.87 $1,015.00 $10.13
- ------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $967.80 $4.35 $1,020.60 $ 4.47
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
Common Stocks 97.7%
Short-Term Investments (collateral from securities lending is 8.8%) 11.7%
Liabilities in Excess of Cash and Other Assets -9.4%
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. UnitedHealth Group, Inc.
2. FedEx Corp.
3. Danaher Corp.
4. Symantec Corp.
5. American Express Co.
6. United Technologies Corp.
7. Johnson & Johnson
8. Illinois Tool Works, Inc.
9. Target Corp.
10. Praxair, Inc.
</Table>
6 MainStay Capital Appreciation Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Rudolph C. Carryl and Edmund C. Spelman
of MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund invests in securities of U.S. companies with investment characteristics
such as participation in expanding product or service markets, increasing unit
sales volume, increasing return on investment, and better-than-average growth in
revenues and earnings when compared to stocks of the S&P 500(R) Index.(1) In
implementing this strategy, the Fund maintains a flexible approach and may
invest in various types of companies and securities. We look for companies that
we feel are ready for a rise in price or may experience acceleration in growth
of earnings, possibly as a result of changes in management, products, consumer
demand, or the economy. We may sell a security if we no longer believe it will
contribute to meeting the Fund's investment objective.
WHAT KEY FACTORS INFLUENCED THE EQUITY MARKETS DURING THE 12 MONTHS ENDED
OCTOBER 31, 2004?
Arguably the biggest factor was the 78% rise in the price of crude oil, since it
stoked inflation fears and could put a damper on consumer spending. Middle
Eastern tensions, news from Iraq, and concerns about another domestic terrorist
attack all had an impact on the markets.
WHICH INDIVIDUAL SECURITIES HAD THE GREATEST POSITIVE IMPACT ON THE FUND'S
PERFORMANCE DURING THE REPORTING PERIOD?
Symantec, a leading provider of Internet-security software, showed consistently
strong earnings growth and made a significant contribution to the Fund's
performance. UnitedHealth Group's earnings and top-line growth benefited from
the company's alliance with top-tier regional health plans and plan
administrators. This arrangement led to network savings and accelerated
membership growth. Danaher Corporation benefited from a realignment strategy
that focused on enhancing earnings growth through strategic acquisitions.
Earnings-per-share growth rose from 3% in 2002 to 20% in 2003 and is projected
to rise to 39% for 2004. Illinois Tool Works benefited from the economic
recovery and the accompanying increase in business capital investment.
Accelerating growth in earnings has helped propel the company's stock price
higher. Harley-Davidson, the motorcycle company, managed to outperform analysts'
earnings estimates by maintaining strong sales and expanding margins.
WHICH STOCKS DETRACTED FROM THE FUND'S PERFORMANCE?
Veritas Software is a leading vendor of enterprise storage-management products.
After achieving a 52-week high in mid-January of this year, the stock fell on
concerns about accounting irregularities, failure to meet analysts' top-line
expectations in early July, and competitive issues. Despite recent improvements,
the stock hurt performance.
New York Community Bancorp suffered from concerns about rising interest rates
affecting New York Community Bank's variable rate debt and possibly creating a
margin squeeze. In response to this situation, we sold the stock in October.
Intel, Applied Materials, and Texas Instruments were all affected by a slowdown
in semiconductor orders. Although all three stocks have begun to recover, they
all detracted from the Fund's performance during the reporting period.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE 12 MONTHS ENDED OCTOBER 31,
2004?
The Fund purchased Harmon International in October, based on the company's
improving sales and earnings growth and increasing penetration in the luxury
automobile market. L-3 Communications manufactures and markets intelligence,
surveillance, and reconnaissance products. We began buying the stock in July,
based on increased strength in security and defense spending. The Fund purchased
Nike in July as the company continued to experience strength across all of its
athletic product categories and in most of its major global markets. We bought
shares of electronic-products retailer Best Buy in October 2004 for the
Company's reasonable valuation relative to growth prospects and because of sales
trends that have recently been positive. We began buying Capital One Financial
shares in March, based on the company's reasonable valuation relative to its
earnings-growth prospects. All of these stocks have had a positive impact on the
Fund's performance for the portion of the reporting period they were held in the
Fund.
WHICH SECURITIES DID YOU SELL DURING THE REPORTING PERIOD?
Marsh & McLennan is a well-diversified financial services company that owns
Marsh, a risk and insurance services firm; Putnam, a mutual fund company; and
Mercer Consulting Group, a provider
1. See footnote on page 5 for more information on the S&P 500(R) Index.
www.mainstayfunds.com 7
of consulting services. We began selling Marsh & McLennan stock in December of
2003, because of slowing growth and asset losses in the company's Putnam mutual
fund unit. The Fund's average sale price was $46.89, well ahead of the stock's
$27.66 closing price on October 29, 2004.
Clear Channel Communications owns and operates a large network of radio and TV
stations around the country and has operations in outdoor advertising and live
entertainment. We sold the Fund's entire position in June and July, which proved
to be a positive move when the stock moved even lower before the end of the
reporting period.
Coca-Cola is the world's leading manufacturer of carbonated soft drinks,
noncarbonated soft drinks, and bottled water. When the company's growth outlook
began to deteriorate, we sold the Fund's entire position in March at
approximately $50 per share. The decision was positive, since the stock reached
a 52-week low of $38.30 on October 26, 2004.
Forest Laboratories is a pharmaceutical company that manufactures and sells both
branded and generic drugs. When concerns mounted over potential problems with
the class of antidepressant drugs the company sells, the share price began to
fall. Fortunately, we managed to sell at an average price well above the stock's
value on the last day of the reporting period.
Fifth Third Bancorp is a well-diversified financial services company whose
businesses include retail banking, commercial banking, investment advisory, and
data processing. We opted to close out our position in the stock during the
fiscal year based on the company's moderating growth rate and deteriorating
margins. The decision proved to be a positive one as the stock price continued
to drift lower.
HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE OVER THE 12-MONTH REPORTING PERIOD?
We increased the Fund's weighting in consumer discretionary stocks from 18.2% at
the beginning of the reporting period to 23.1% at the end. The Fund's energy
holdings, which stood at 1.6% of net assets on October 31, 2003, increased to
4.5% of net assets on October 31, 2004. Industrial holdings increased from 11.4%
at the beginning of the reporting period to 17.5% at the end.
We trimmed the Fund's consumer staples weighting from 8.2% at the beginning of
the reporting period to 3.7% at the end. Over the same period, financials
holdings moved from 10.3% to 7.3% of net assets, information technology from
28.0% to 20.9%, and materials from 2.8% to 2.0%.
HOW DID THIS COMPARE WITH THE RUSSELL 1000(R) GROWTH INDEX?
As of October 31, 2004, the Fund was overweighted relative to the Russell
1000(R) Growth Index(2) in the consumer discretionary, energy, industrials, and
materials sectors. At the same time, the Fund was underweighted relative to the
Index in consumer staples, financials, health care, and information technology.
The Fund held no positions in the telecommunications services or utilities
sectors. The Fund's overweighted position in consumer discretionary and its
underweighted position in consumer staples proved to be appropriate sector
allocations, but individual holdings in these sectors detracted from
performance. The Fund's significantly underweighted information technology
position proved detrimental in September and October, when investors bid up many
technology stocks. The Fund's overweighted positions in both the energy and
industrials sectors, together with strong stock selection, had a positive impact
on the Fund's performance.
WHAT IS YOUR OUTLOOK FOR THE FUND IN THE COMING MONTHS?
With the uncertainty of the presidential election now behind us, we expect
investors to refocus their attention on company fundamentals, which on balance
remain fairly strong. Although high energy prices and the threat of terrorism
remain risk factors, we believe that the combination of a low interest-rate
environment, moderate economic growth, and strengthening employment should help
to drive stocks higher in the coming year.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
2. See footnote on page 5 for more information on the Russell 1000(R) Growth
Index.
8 MainStay Capital Appreciation Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (97.7%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (3.7%)
L-3 Communications Holdings, Inc. (b) 344,700 $ 22,726,071
V United Technologies Corp. (b) 323,200 29,999,424
--------------
52,725,495
--------------
AIR FREIGHT & LOGISTICS (2.3%)
V FedEx Corp. 357,400 32,566,288
--------------
AUTOMOBILES (1.8%)
Harley-Davidson, Inc. 428,800 24,686,016
--------------
BEVERAGES (1.0%)
PepsiCo, Inc. 283,500 14,055,930
--------------
BIOTECHNOLOGY (3.5%)
Amgen, Inc. (a) 433,600 24,628,480
Genentech, Inc. (a) 240,000 10,927,200
Gilead Sciences, Inc. (a)(b) 404,100 13,993,983
--------------
49,549,663
--------------
CAPITAL MARKETS (1.5%)
Morgan Stanley & Co. 425,900 21,759,231
--------------
CHEMICALS (2.0%)
V Praxair, Inc. (b) 661,900 27,932,180
--------------
COMMERCIAL SERVICES & SUPPLIES (1.5%)
Cendant Corp. 1,055,500 21,732,745
--------------
COMMUNICATIONS EQUIPMENT (3.6%)
Avaya, Inc. (a)(b) 1,522,100 21,918,240
Cisco Systems, Inc. (a) 928,700 17,840,327
QUALCOMM, Inc. 246,600 10,310,346
--------------
50,068,913
--------------
COMPUTERS & PERIPHERALS (3.5%)
Dell, Inc. (a) 778,200 27,283,692
Hewlett-Packard Co. 870,300 16,239,798
International Business Machines Corp. 70,500 6,327,375
--------------
49,850,865
--------------
CONSUMER FINANCE (4.0%)
V American Express Co. (b) 576,300 30,584,241
Capital One Financial Corp. (b) 344,000 25,373,440
--------------
55,957,681
--------------
DIVERSIFIED FINANCIAL SERVICES (1.7%)
Citigroup, Inc. 530,600 23,542,722
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.9%)
Agilent Technologies, Inc. (a) 525,400 $ 13,166,524
--------------
ENERGY EQUIPMENT & SERVICES (4.4%)
Baker Hughes, Inc. 472,900 20,254,307
BJ Services Co. 394,500 20,119,500
Weatherford International Ltd. (a) 425,300 22,226,178
--------------
62,599,985
--------------
FOOD & STAPLES RETAILING (1.9%)
Walgreen Co. 761,400 27,326,646
--------------
HEALTH CARE EQUIPMENT & SUPPLIES (4.8%)
Boston Scientific Corp. (a) 591,300 20,872,890
Fisher Scientific International, Inc. (a)(b) 387,700 22,238,472
Medtronic, Inc. (b) 487,200 24,900,792
--------------
68,012,154
--------------
HEALTH CARE PROVIDERS & SERVICES (7.5%)
Caremark Rx, Inc. (a) 770,600 23,094,882
Quest Diagnostics, Inc. 243,000 21,272,220
V UnitedHealth Group, Inc. 489,900 35,468,760
WellPoint Health Networks, Inc. (a) 260,900 25,479,494
--------------
105,315,356
--------------
HOUSEHOLD DURABLES (4.4%)
D.R. Horton, Inc. 583,100 17,493,000
Harman International Industries, Inc. 198,700 23,879,766
Lennar Corp. Class A (b) 472,800 21,266,544
--------------
62,639,310
--------------
HOUSEHOLD PRODUCTS (0.7%)
Colgate-Palmolive Co. 228,900 10,213,518
--------------
INDUSTRIAL CONGLOMERATES (3.5%)
3M Co. 300,800 23,333,056
General Electric Co. 750,000 25,590,000
--------------
48,923,056
--------------
IT SERVICES (1.3%)
Accenture Ltd. Class A (a) 157,900 3,822,759
First Data Corp. 347,400 14,340,672
--------------
18,163,431
--------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
MACHINERY (6.1%)
V Danaher Corp. (b) 583,400 $ 32,162,842
Dover Corp. 641,200 25,179,924
V Illinois Tool Works, Inc. 309,100 28,523,748
--------------
85,866,514
--------------
MEDIA (1.9%)
Omnicom Group, Inc. 336,300 26,534,070
--------------
MULTILINE RETAIL (3.8%)
Kohl's Corp. (a)(b) 503,000 25,532,280
V Target Corp. 561,800 28,101,236
--------------
53,633,516
--------------
PHARMACEUTICALS (4.6%)
V Johnson & Johnson 492,800 28,769,664
Pfizer, Inc. 489,100 14,159,445
Teva Pharmaceutical Industries Ltd. ADR (b)(c) 875,600 22,765,600
--------------
65,694,709
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (5.0%)
Analog Devices, Inc. 313,200 12,609,432
Applied Materials, Inc. (a) 662,900 10,672,690
Intel Corp. 654,800 14,575,848
KLA-Tencor Corp. (a) 270,400 12,311,312
Maxim Integrated Products, Inc. 243,500 10,711,565
Texas Instruments, Inc. 372,200 9,100,290
--------------
69,981,137
--------------
SOFTWARE (6.1%)
Electronic Arts, Inc. (a) 302,400 13,583,808
Microsoft Corp. 777,400 21,759,426
Oracle Corp. (a) 717,400 9,082,284
V Symantec Corp. (a)(b) 543,000 30,918,420
VERITAS Software Corp. (a) 514,900 11,266,012
--------------
86,609,950
--------------
SPECIALTY RETAIL (7.1%)
Bed Bath & Beyond, Inc. (a) 667,900 27,243,641
Best Buy Co., Inc. 353,000 20,904,660
Lowe's Cos., Inc. (b) 484,100 27,245,148
TJX Cos., Inc. (The) (b) 1,033,400 24,780,932
--------------
100,174,381
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
TEXTILES, APPAREL & LUXURY GOODS (3.6%)
Coach, Inc (a) 522,800 $ 24,378,164
NIKE, Inc. Class B 319,500 25,978,545
--------------
50,356,709
--------------
Total Common Stocks (Cost $1,177,244,763) 1,379,638,695
--------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (11.7%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (3.9%)
Morgan Stanley & Co. 1.790%, due 11/4/2004 $20,000,000 19,997,016
Starbird Funding Corp. 2.0851%, due 3/14/05 (d) 15,000,000 14,887,504
UBS Finance LLC 1.840%, due 11/1/2004 20,345,000 20,345,000
--------------
Total Commercial Paper (Cost $55,229,520) 55,229,520
--------------
<Caption>
SHARES
INVESTMENT COMPANY (0.1%)
AIM Institutional Funds Group (d) 947,317 947,317
--------------
Total Investment Company (Cost $947,317) 947,317
--------------
<Caption>
PRINCIPAL
AMOUNT
MASTER NOTE (1.1%)
Banc of America Securities LLC
1.9549%, due 11/1/04 (d) $14,982,000 14,982,000
--------------
Total Master Note (Cost $14,982,000) 14,982,000
--------------
</Table>
10 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (6.6%)
CS First Boston LLC
1.9249%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $36,655,879 (d)
(Collateralized by Various Bonds with a
Principal Amount of $36,752,511 and a Market
Value of $37,384,327) $36,650,000 $ 36,650,000
Lehman Brothers, Inc.
1.9249%, dated 10/29/04 due 11/1/04
Proceeds at Maturity
$12,930,074 (d) (Collateralized by Various Bonds
with a Principal Amount of $25,758,727 and a
Market Value of $13,334,103) 12,928,000 12,928,000
Merrill Lynch & Co., Inc.
1.9549%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $27,980,558 (d)
(Collateralized by Various Bonds with a
Principal Amount of $27,665,609 and a Market
Value of $29,375,768) 27,976,000 27,976,000
Morgan Stanley & Co.
1.9249%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $16,004,488 (d)
(Collateralized by Various Bonds with a
Principal Amount of $24,412,493 and a Market
Value of $16,829,848) 16,000,000 16,000,000
--------------
Total Repurchase Agreements (Cost $93,554,000) 93,554,000
--------------
Total Short-Term Investments (Cost $164,712,837) 164,712,837
--------------
Total Investments (Cost $1,341,957,600) (e) 109.4% 1,544,351,532(f)
Liabilities in Excess of
Cash and Other Assets (9.4) (133,158,072)
----------- --------------
Net Assets 100.0% $1,411,193,460
=========== ==============
</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
$1,344,379,347.
(f) At October 31, 2004 net unrealized appreciation was
$199,972,185, 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 $239,984,082 and
aggregate gross unrealized depreciation for all for all
investments on which there was an excess of cost over
market value of $40,011,897.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
STATEMENT OF ASSETS AND LIABILITIES
AS OF OCTOBER 31, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $1,341,957,600) including
$119,986,926 market value of securities
loaned $1,544,351,532
Deposit with broker for securities loaned 3,781
Cash 3,712
Receivables:
Dividends and interest 460,704
Fund shares sold 262,316
Other assets 32,868
--------------
Total assets 1,545,114,913
--------------
LIABILITIES:
Securities lending collateral 124,374,602
Payables:
Investments securities purchased 4,801,902
Fund shares redeemed 1,902,420
NYLIFE Distributors 1,020,699
Transfer agent 922,976
Manager 684,568
Custodian 22,278
Trustees 20,905
Accrued expenses 171,103
--------------
Total liabilities 133,921,453
--------------
Net assets $1,411,193,460
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized:
Class A $ 98,893
Class B 453,087
Class C 3,473
Class I --(a)
Additional paid-in capital 1,534,792,017
Accumulated net realized loss on investments (326,547,942)
Net unrealized appreciation on investments 202,393,932
--------------
Net assets $$1,411,193,460
==============
CLASS A
Net assets applicable to outstanding shares $ 268,199,019
==============
Shares of beneficial interest outstanding 9,889,258
==============
Net asset value per share outstanding $ 27.12
Maximum sales charge (5.50% of offering
price) 1.58
--------------
Maximum offering price per share outstanding $ 28.70
==============
CLASS B
Net assets applicable to outstanding shares $1,134,299,299
==============
Shares of beneficial interest outstanding 45,308,668
==============
Net asset value and offering price per share
outstanding $ 25.03
==============
CLASS C
Net assets applicable to outstanding shares $ 8,694,189
==============
Shares of beneficial interest outstanding 347,283
==============
Net asset value and offering price per share
outstanding $ 25.03
==============
CLASS I
Net assets applicable to outstanding shares $ 953
==============
Shares of beneficial interest outstanding 35
==============
Net asset value and offering price per share
outstanding $ 27.15
==============
</Table>
(a) Less than one dollar.
12 MainStay Capital Appreciation Fund 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 YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 11,718,798
Interest 89,610
Income from securities loaned -- net 276,580
------------
Total income 12,084,988
------------
EXPENSES:
Distribution -- Class B 9,457,621
Distribution -- Class C 74,982
Manager 8,736,271
Transfer agent -- Classes A, B and C 5,824,567
Transfer agent -- Class I 2
Service -- Class A 745,595
Service -- Class B 3,152,544
Service -- Class C 24,994
Shareholder communication 352,259
Recordkeeping 183,589
Professional 173,574
Custodian 141,946
Trustees 109,469
Registration 61,034
Miscellaneous 63,659
------------
Total expenses 29,102,106
------------
Net investment loss (17,017,118)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (60,332,360)
------------
Net change in unrealized appreciation on
investments 66,663,970
------------
Net realized and unrealized gain on
investments 6,331,610
------------
Net decrease in net assets resulting from
operations $(10,685,508)
============
</Table>
(a) Dividends recorded net of foreign withholding taxes of $32,049.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment loss $ (17,017,118) $ (13,178,093) $ (20,816,619)
Net realized loss on
investments and
written option
transactions (60,332,360) (31,763,736) (119,255,897)
Net change in
unrealized
appreciation
(depreciation) on
investments 66,663,970 328,438,794 (606,013,572)
-------------------------------------------------
Net increase
(decrease) in net
assets resulting
from operations (10,685,508) 283,496,965 (746,086,088)
-------------------------------------------------
Capital share transactions:
Net proceeds from
sale of shares:
Class A 61,275,640 86,054,368 122,521,377
Class B 76,298,217 81,141,359 120,012,435
Class C 1,316,452 943,485 1,696,548
Class I 1,000 -- --
-------------------------------------------------
138,891,309 168,139,212 244,230,360
Cost of shares
redeemed:
Class A (129,066,636) (86,356,395) (153,190,672)
Class B (231,715,272) (168,974,203) (352,883,911)
Class C (3,024,132) (2,118,140) (4,788,461)
Class I -- -- --
-------------------------------------------------
(363,806,040) (257,448,738) (510,863,044)
Decrease in net
assets derived
from capital
share
transactions (224,914,731) (89,309,526) (266,632,684)
-------------------------------------------------
Net increase
(decrease) in
net assets (235,600,239) 194,187,439 (1,012,718,772)
NET ASSETS:
Beginning of period 1,646,793,699 1,452,606,260 2,465,325,032
-------------------------------------------------
End of period $1,411,193,460 $1,646,793,699 $ 1,452,606,260
=================================================
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
14 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH ----------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 27.24 $ 22.49 $ 32.86 $ 43.46 $ 57.12 $ 48.74
-------- -------- -------- -------- -------- --------
Net investment loss (a) (0.13) (0.09) (0.13) (0.15) (0.33) (0.24)
Net realized and unrealized gain (loss) on
investments 0.01 4.84 (10.24) (10.22) (6.16) 12.22
-------- -------- -------- -------- -------- --------
Total from investment operations (0.12) 4.75 (10.37) (10.37) (6.49) 11.98
-------- -------- -------- -------- -------- --------
Less distributions:
From net realized gain on investments -- -- -- (0.23) (7.17) (3.60)
-------- -------- -------- -------- -------- --------
Net asset value at end of period $ 27.12 $ 27.24 $ 22.49 $ 32.86 $ 43.46 $ 57.12
======== ======== ======== ======== ======== ========
Total investment return (b) (0.44%) 21.12%(c) (31.56%) (23.85%) (11.17%) 24.90%
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (0.48%) (0.45%)+ (0.48%) (0.41%) (0.59%) (0.47%)
Expenses 1.25% 1.30%+ 1.28% 1.29% 1.19% 1.19%
Net Expenses (after waiver) 1.25% 1.30%+ 1.23% 1.10% 0.99% 1.00%
Portfolio turnover rate 28% 19% 69% 44% 38% 41%
Net assets at end of period (in 000's) $268,199 $335,484 $277,526 $442,526 $590,366 $587,633
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH ----------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 25.33 $ 21.05 $ 31.00 $ 41.35 $ 55.15 $ 47.54
-------- -------- -------- -------- -------- --------
Net investment loss (a) (0.32) (0.23) (0.32) (0.39) (0.72) (0.61)
Net realized and unrealized gain (loss) on
investments 0.02 4.51 (9.63) (9.73) (5.91) 11.82
-------- -------- -------- -------- -------- --------
Total from investment operations (0.30) 4.28 (9.95) (10.12) (6.63) 11.21
-------- -------- -------- -------- -------- --------
Less distributions:
From net realized gain on investments -- -- -- (0.23) (7.17) (3.60)
-------- -------- -------- -------- -------- --------
Net asset value at end of period $ 25.03 $ 25.33 $ 21.05 $ 31.00 $ 41.35 $ 55.15
======== ======== ======== ======== ======== ========
Total investment return (b) (1.18%) 20.33%(c) (32.10%) (24.46%) (11.82%) 23.90%
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.23%) (1.20%)+ (1.23%) (1.16%) (1.34%) (1.22%)
Expenses 2.00% 2.05%+ 2.03% 2.04% 1.94% 1.94%
Net Expenses (after waiver) 2.00% 2.05%+ 1.98% 1.85% 1.74% 1.75%
Portfolio turnover rate 28% 19% 69% 44% 38% 41%
Net assets at end of period (in 000's) $ 8,694 $ 10,475 $ 9,819 $ 18,162 $ 27,241 $ 23,238
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class I shares were first offered on January 2, 2004.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges. Class
I shares are not subject to sales charges.
(c) Total return is not annualized.
</Table>
16 MainStay Capital Appreciation Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH -------------------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 25.33 $ 21.05 $ 30.99 $ 41.34 $ 55.15 $ 47.54
---------- ---------- ---------- ---------- ---------- ----------
(0.32) (0.23) (0.32) (0.39) (0.72) (0.61)
0.02 4.51 (9.62) (9.73) (5.92) 11.82
---------- ---------- ---------- ---------- ---------- ----------
(0.30) 4.28 (9.94) (10.12) (6.64) 11.21
---------- ---------- ---------- ---------- ---------- ----------
-- -- -- (0.23) (7.17) (3.60)
---------- ---------- ---------- ---------- ---------- ----------
$ 25.03 $ 25.33 $ 21.05 $ 30.99 $ 41.34 $ 55.15
========== ========== ========== ========== ========== ==========
(1.18%) 20.33%(c) (32.07%) (24.47%) (11.85%) 23.90%
(1.23%) (1.20%)+ (1.23%) (1.16%) (1.34%) (1.22%)
2.00% 2.05%+ 2.03% 2.04% 1.94% 1.94%
2.00% 2.05%+ 1.98% 1.85% 1.74% 1.75%
28% 19% 69% 44% 38% 41%
$1,134,299 $1,300,835 $1,165,260 $2,004,638 $2,905,828 $3,486,486
</Table>
<Table>
<Caption>
CLASS I
-----------------
JANUARY 2, 2004**
THROUGH
OCTOBER 31,
2004
$ 28.48
----------
(0.11)
(1.22)
----------
(1.33)
----------
--
----------
$ 27.15
==========
(4.67%)(c)
(0.11%)+
0.88%+
0.88%+
28%
$ 1
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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 four 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 I shares are not subject to
sales charge. Distribution of Class I shares commenced on January 1, 2004. Class
A shares, Class B shares, Class C shares and Class I shares bear the same voting
(except for issues that relate solely to one class), dividend, liquidation and
other rights and conditions. Each class of shares other than Class I shares
bears distribution and/or service fee payments 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.
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. Reasons for
which securities may be valued in this manner include, but are not limited to,
trading for a security has been halted or suspended, a security has been
de-listed from a national exchange, or trading on a security's primary market is
temporarily closed at a time when under normal conditions it would be open. The
Fund did not hold securities at October 31, 2004, that were valued in such
manner.
(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. (See Note 7.)
(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-
18 MainStay Capital Appreciation Fund
capital arising from permanent differences; net assets at October 31, 2004, are
not affected.
<Table>
<Caption>
NET INVESTMENT ADDITIONAL
LOSS PAID-IN CAPITAL
$17,017,118 $(17,017,118)
</Table>
The reclassification for the Fund is due to the fact that net operating losses
cannot be carried forward for federal income tax purposes.
(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 0.72% of the Fund's
average daily net assets 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 year ended October 31, 2004 the Manager earned from the Fund $8,736,271.
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
0.36% of the Fund's average daily net assets 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 other than Class I 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 shares was $78,181 for the year ended
October 31, 2004. 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 $10,291, $770,578 and $1,854, respectively, for the year ended October
31, 2004.
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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 for the year ended October 31, 2004
amounted to $5,824,569.
(E) NON-INTERESTED TRUSTEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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 $45,714 for the year ended October 31,
2004.
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 $183,589 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
State Street Bank and Trust Company is custodian of cash and securities of the
Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 5 -- 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
$(324,126,195) $199,972,185 $(124,154,010)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals.
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $324,126,195 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)
2009 $109,823
2010 104,708
2011 49,074
2012 60,521
- ---------------------------------------------
$324,126
- ---------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $445,876 and $718,681, respectively.
NOTE 7 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2004, the Fund had securities on loan with an aggregate market
value of $119,986,926. The Fund received $124,374,602 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.
Pursuant to Rule 2a-7, securities purchased with collateral received are valued
at amortized cost.
NOTE 8 -- 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.
20 MainStay Capital Appreciation Fund
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 year
ended October 31, 2004.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C CLASS I*
Shares sold 2,191 2,931 50 --(a)
Shares issued in
reinvestment of
dividends and
distributions -- -- -- --
- -----------------------------------------------------------
2,191 2,931 50 --(a)
Shares redeemed (4,620) (8,975) (117) --
- -----------------------------------------------------------
Net increase
(decrease) (2,429) (6,044) (67) --(a)
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1, THROUGH
OCTOBER 31, 2003**
CLASS A CLASS B CLASS C
Shares sold 3,545 3,603 42
Shares issued in reinvestment
of dividends and
distributions -- -- --
- ---------------------------------------------------------
3,545 3,603 42
Shares redeemed (3,569) (7,609) (94)
- ---------------------------------------------------------
Net decrease (24) (4,006) (52)
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 4,496 4,679 65
Shares issued in reinvestment
of dividends and
distributions -- -- --
- ---------------------------------------------------------
4,496 4,679 65
Shares redeemed (5,623) (14,004) (185)
- ---------------------------------------------------------
Net decrease (1,127) (9,325) (120)
- ---------------------------------------------------------
</Table>
(a) Less than one-thousand.
* First offered on January 1, 2004.
** The Fund changed its fiscal year end from December 31 to October 31.
NOTE 10 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 11 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
www.mainstayfunds.com 21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Capital Appreciation Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2004, and the related statement of operations, statement of changes in net
assets and the financial highlights for the year or period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the period ended October 31, 2003 and the year
ended December 31, 2002, and the financial highlights for the periods presented
through October 31, 2003, were audited by other auditors, whose report dated
December 18, 2003 expressed an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Capital Appreciation Fund of The MainStay Funds as of October 31, 2004,
the results of its operations, the changes in its net assets and its financial
highlights for the year or period then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
22 MainStay Capital Appreciation Fund
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 23
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
24 MainStay Capital Appreciation Fund
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that New York Life Investment
Management LLC (NYLIM) uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
and (iii) on the Securities and Exchange Commission's ("SEC") website at
www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 25
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
26 MainStay Capital Appreciation Fund
[True Blank Page]
(MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06363 (RECYCLE LOGO) MSCA11-12/04
04
(MAINSTAY LOGO)
MAINSTAY
CONVERTIBLE FUND
The MainStay Funds
Annual Report
October 31, 2004
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quarter of 2004, and according to
preliminary estimates from the Bureau of Economic Analysis, gross domestic
product grew at a seasonally adjusted annual rate of 3.9% in the third quarter
of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 2
- ----------------------------------------------------
Investment and Performance Comparison 3
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 6
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 15
- ----------------------------------------------------
Notes to Financial Statements 20
Report of Independent Registered Public
Accounting Firm 26
- ----------------------------------------------------
Trustees and Officers 27
- ----------------------------------------------------
Proxy Voting Policies and Procedures 29
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 29
- ----------------------------------------------------
Federal Income Tax Information 30
- ----------------------------------------------------
MainStay Funds 31
</Table>
2 MainStay Convertible Fund
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -1.62% 4.05% 8.10%
Excluding sales charges 4.11 5.24 8.71
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY CONVERTIBLE FUND CSFB(TM) CONVERTIBLE SEC INDEX
------------------------- ------------------------------
10/31/94 9450 10000
10966 11546
12415 13367
14453 15999
13929 15385
16879 19542
21115 24310
18681 19903
17667 17989
20926 23391
10/31/04 21786 25148
</Table>
<Table>
-- MainStay Convertible Fund -- Credit Suisse First Boston
Convertible Securities Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -1.68% 4.16% 7.96%
Excluding sales charges 3.32 4.45 7.96
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MAINSTAY CONVERTIBLE FUND CSFB(TM) CONVERTIBLE SEC INDEX
------------------------- ------------------------------
10/31/94 10000 10000
11527 11546
12985 13367
15018 15999
14372 15385
17297 19542
21478 24310
18866 19903
17702 17989
20808 23391
10/31/04 21500 25148
</Table>
<Table>
-- MainStay Convertible Fund -- Credit Suisse First Boston
Convertible Securities Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 2.32% 4.45% 7.96%
Excluding sales charges 3.32 4.45 7.96
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MAINSTAY CONVERTIBLE FUND CSFB(TM) CONVERTIBLE SEC INDEX
------------------------- ------------------------------
10/31/94 10000 10000
11527 11546
12985 13367
15018 15999
14372 15385
17297 19542
21478 24310
18866 19903
17702 17989
20808 23391
10/31/04 21500 25148
</Table>
<Table>
-- MainStay Convertible Fund -- Credit Suisse First Boston
Convertible Securities Index
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Credit Suisse First Boston(TM) Convertible Securities
Index(1) 7.51% 5.17% 9.66%
Average Lipper convertible securities fund(2) 7.24 5.00 9.16
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
From inception (5/1/86) through 12/3/94 (for Class A, first offered 1/3/95) and
8/31/98 (for Class C, first offered 9/1/98), performance of Class A and C shares
includes the historical performance of Class B shares adjusted to reflect the
applicable sales charge (or CDSC) and fees and expenses for Class A and C
shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 3
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 greater than
$100 million. Results assume reinvestment of all income and capital gains.
The Credit Suisse First Boston(TM) Convertible Securities Index is considered
to be the Fund's broad-based securities-market index for comparison purposes.
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.
4 MainStay Convertible Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY CONVERTIBLE FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $993.80 $ 6.72 $1,018.30 $ 6.80
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $990.05 $10.45 $1,014.55 $10.58
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $990.05 $10.45 $1,014.55 $10.58
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Convertible Bonds 73.60%
Short-Term Investments 21.60%
Convertible Preferred Stocks 12.80%
Common Stocks 8.50%
Corporate Bonds 1.00%
Liabilities in Excess of Cash and Other Assets -17.50%
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Schlumberger Ltd. 1.50%, due 6/1/23
2. Pride International, Inc. 2.50%, due 3/1/07
3. Tyco International Group S.A. 2.75%, due 1/15/18
4. Cooper Cameron Corp. 1.50%, due 5/15/24
5. Whole Foods Market, Inc. (zero coupon), due
3/2/18
6. Lehman Brothers Holdings, Inc. Series HAL 0.25%,
due 9/25/10
7. Teva Pharmaceutical Industries Ltd. 0.375%, due
11/15/22
8. BJ Services Co. 0.3954%, due 4/24/22
9. Lehman Brothers Holdings, Inc. Series TXU 1.00%,
due 11/3/11
10. Lehman Brothers Holdings, Inc. Series IP 0.25%,
due 5/8/10
</Table>
www.mainstayfunds.com 5
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Edward Silverstein and Edmund C.
Spelman of MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund invests primarily in convertible securities and may spread investments
across various types of securities issued by a variety of companies and
industries. The Fund invests in high-yield securities and may invest a portion
of its assets in nonconvertible debt securities, equity securities that do not
pay regular dividends, U.S. government securities, and cash or cash equivalents.
In implementing these strategies, attention may be given to the anticipated
return of the underlying common stock and the credit risk and projected interest
return of fixed-income securities. The premium for the convertible security
relative to the underlying common stock may also be considered. Securities may
be sold if economic, financial, credit, interest return, or other considerations
lead us to believe that the security will not contribute to meeting the Fund's
investment objective.
WHAT MAJOR FACTORS INFLUENCED THE MARKET FOR CONVERTIBLE BONDS DURING THE
12-MONTH REPORTING PERIOD?
Convertible bonds are hybrid instruments whose performance is derived from the
performance of the related equity and fixed-income markets. For the 12 months
ended October 31, 2004, the equity market, as measured by the S&P 500 Index(1)
rose 9.42%. Over the same period, the corporate bond market, as measured by the
Lehman Brothers Investment Grade Index,(2) rose 6.59%, and the Lehman Brothers
High Yield Index(3) rose 12.32%. The positive returns in these equity and
fixed-income markets drove the benchmark Credit Suisse First Boston(TM)
Convertible Securities Index(4) 7.51% higher for the 12 months ended October 31,
2004. During the reporting period, convertible-bond yield spreads relative to
Treasuries contracted 213 basis points, which also enhanced the performance of
convertible bonds.
HOW DID THE FUND PERFORM RELATIVE TO THE CONVERTIBLE MARKET AS A WHOLE?
Many of the best-performing names in the convertible market were speculative
issues such as Nortel, Yahoo!, Sepracor, Elan Pharmaceuticals, and Lucent. These
issues tend to offer unattractive equity-type risk/reward profiles, which
include full participation in the upside potential as well as full participation
on the downside. Since we tend to avoid securities with this profile, the Fund
underperformed the market as measured by the Credit Suisse First Boston(TM)
Convertible Securities Index. We prefer to invest in securities that may offer
substantial participation in the upside potential of the underlying common stock
with only moderate participation on the downside.
WHAT KEY FACTORS INFLUENCED FUND MANAGEMENT DECISIONS DURING THE REPORTING
PERIOD?
Two important factors were our outlook for specific industry groups and our
expectation that interest rates were likely to move higher. We structured the
portfolio so that any upward movement in interest rates would have a minimal
impact on the performance of the convertible bonds held by the Fund. We focused
on securities that were more sensitive to stock movements than to interest
rates. We also sought to reduce interest-rate sensitivity with bonds that have
relatively short-term maturities, floating-rate structures, put features, or a
combination of these characteristics.
HOW DID YOUR INDUSTRY OUTLOOK AFFECT THE FUND'S PERFORMANCE?
During the reporting period, we significantly overweighted the Fund's portfolio
in energy-related names, particularly in the energy equipment and services
industry. Companies in this industry have been indirect beneficiaries of high
energy prices as companies such as ExxonMobil have increased spending on
equipment and services. The Fund's overweighted position in the energy sector
enhanced Fund performance.
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.
1. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
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 Lehman Brothers(R) Investment Grade Index is an unmanaged index that is
considered to be generally representative of the investment-grade bond
market. Results assume reinvestment of all income and capital gains. An
investment cannot be made directly into an index.
3. The Lehman Brothers(R) High Yield Index is an unmanaged index that includes
all fixed-income securities having a maximum rating of Ba1, a minimum amount
outstanding of $100 million, and at least one year to maturity. Results
assume reinvestment of all income and capital gains. An investment cannot be
made directly into an index.
4. See footnote on page 4 for more information on the Credit Suisse First
Boston(TM) Convertible Securities Index.
6 MainStay Convertible Fund
Our unfavorable outlook for information technology led us to underweight this
sector. Unfortunately, the Fund maintained a market weighting in semiconductor
companies that provided weak performance. The Fund was also underweighted in
Internet companies, such as Yahoo!, which performed quite well.
We sold nearly all of the Fund's airline holdings on the belief that fuel prices
will remain high for the foreseeable future. We see downside potential in the
industry's financial duress, overcapacity, high labor costs, and low barriers to
entry. Although airline bonds generally underperformed, they improved slightly
when oil prices moved back from their recent high levels.
WHICH OF THE FUND'S SECURITIES WERE STRONG PERFORMERS DURING THE REPORTING
PERIOD?
The Fund's single-best performer in absolute dollar gain was oil services
company Halliburton. The Fund owned a combination of convertible bonds and
common stock in the company. The shares significantly outperformed the market as
Halliburton's oil services and equipment business revenue and profits exceeded
analyst's expectations. While spending increased on oil equipment and services,
Halliburton appears to have successfully negotiated a settlement in an asbestos
law suit. The settlement should allow the company to once again focus on its
core oil-equipment business.
The Fund's second-best performer was Tyco International. Now under a new
management team, the company has improved its profitability and cash flow. In
just one year, the company has gone from being overly leveraged to generating
significant free cash flow, which Tyco has used to retire debt and decrease
interest expense.
WERE THERE OTHER SOLID PERFORMERS?
Yes. Devon Energy, an exploration and production company, was a beneficiary of
higher energy prices. The company increased production to capitalize on the
trend. Transocean, which owns and leases offshore drilling rigs, saw
expectations improve when the company found customers willing to pay higher day
rates to lease Transocean's equipment. Fisher Scientific shares rose when the
company increased its earnings forecast after several acquisitions during the
year. Box manufacturer Smurfit-Stone Container saw its shares advance when
demand increased and the dollar's decline gave the company an advantage over
foreign competitors. Mandalay Resorts convertible bonds and shares performed
well when the company's newest hotel property, THE HOTEL, opened with high
occupancy rates. The company's share price climbed when Mandalay Resorts
accepted a takeover offer from MGM Mirage.
WHICH SECURITIES DETRACTED FROM THE FUND'S PERFORMANCE DURING THE REPORTING
PERIOD?
Teva Pharmaceutical took the greatest toll on the Fund's performance in absolute
dollar terms. The generic drug company's shares lost nearly nine percent of
their value over the 12-month period, despite successive earnings reports that
handily beat analysts' expectations. Teva was hurt by new competition and
concern about price erosion and disappointing earnings among competitors, even
though evidence of a problem at Teva Pharmaceutical has yet to emerge.
The second-worst performer during the 12-month period was Calpine, whose shares
and convertible bonds declined significantly when the company's electric-power
business was hurt by mild summer weather. Merck's common stock declined when
Vioxx was withdrawn from the market and law suits about the drug's side effects
became a concern. Cypress Semiconductor's shares fell when slowing sales and
rising inventories led to earnings disappointments.
WERE THERE OTHER WEAK PERFORMERS?
Yes. Delta Airlines and Alaska Air were both hurt by the rise in fuel costs and
by overcapacity in the airline industry that has forced carriers to continue
lowering prices to maintain passenger traffic.
WERE THERE ANY SIGNIFICANT SALES DURING THE REPORTING PERIOD?
The disposal of nearly all of the Fund's airline holdings was certainly
significant. We sold the Fund's positions in ASE Test and Beverly when the
shares reached their respective price targets and the stocks appeared to be
fully valued. Masco and Cendant were sold because Masco's home improvement
business and Cendant's real estate brokerage units, Century 21 and Coldwell
Banker, might suffer if interest rates rise substantially. We sold the Fund's
position in Mandalay Resorts when the takeover offer from MGM Mirage pushed the
stock to a level where we felt there was little remaining upside potential.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
We made several significant purchases for the Fund during the first six months
of 2004. We purchased Schlumberger, the world's largest provider of oilfield
services and equipment, to take advantage of higher
www.mainstayfunds.com 7
spending by exploration and production companies such as ExxonMobil and British
Petroleum. We purchased convertible bonds of Whole Foods Markets, a rapidly
growing retailer of organic produce and grocery items. As more Americans look to
improve their diets, Whole Foods is likely to see earnings continue to improve.
New stores and increasing sales-per-store are driving earnings increases.
Goodyear Tire is exiting unprofitable markets, such as original equipment tires,
and is cutting costs and improving its position in the more profitable
replacement-tire market. We believe the company's shares will move higher as the
market becomes aware of this turnaround story. We also added to the Fund's
position in industrial conglomerate Tyco International, which has seen its
bottom line improve as sales growth, cost cutting, and deleveraging have all
helped strengthen earnings. We also added to the Fund's small position in Sirius
Satellite Radio. With the signing of radio personality Howard Stern, Sirius
lifted its profile and increased demand for it satellite-radio service. We added
to the Fund's position in TXU. Under new management, the company has
significantly cut costs and has benefited from higher power prices in Texas, the
company's primary market for electric-utility services.
HOW HAVE THE FUND'S WEIGHTINGS CHANGED?
The Fund's benchmark is the CSFB Convertible Securities Index. As of October 31,
2004, the Fund was significantly overweighted relative to the benchmark in
energy (including oil service companies and exploration and production
companies). The Fund's information technology holdings were significantly
underweighted relative to the Index. The Fund was also overweighted relative to
the CSFB Convertible Securities Index in utilities.
WHAT IS YOUR OUTLOOK GOING FORWARD?
We remain cautiously optimistic. Following the undisputed conclusion of the
Presidential election, we believe that in the absence of any major domestic
terrorism, the equity markets have room to rally from their relative
tranquility. A successful conclusion to the fighting in Iraq would add to this
bullish sentiment. Several factors, however, might offset this positive outlook.
Energy prices remain high by recent historical standards. The American consumer
carries significant debt and access to additional credit might be jeopardized if
the real-estate market levels off or declines. On the other hand, the equity
markets are not overly enthusiastic and may move higher in the absence of major
negative economic or political news.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8 MainStay Convertible Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE SECURITIES (86.4%)+
- ------------------------------------------------------------------------------
CONVERTIBLE BONDS (73.6%)
- ------------------------------------------------------------------------------
AUTO COMPONENTS (1.5%)
Goodyear Tire & Rubber Co. (The)
4.00%, due 6/15/34 (c) $ 7,585,000 $ 8,286,612
------------
BIOTECHNOLOGY (1.2%)
Cell Genesys, Inc.
3.125%, due 11/1/11 (c)(e) 1,055,000 1,056,318
Invitrogen Corp.
1.50%, due 2/15/24 (e) 6,375,000 5,745,469
------------
6,801,787
------------
CAPITAL MARKETS (5.2%)
Affiliated Managers Group, Inc.
(zero coupon), due 5/7/21 (f) 3,650,000 3,823,375
Credit Suisse First Boston, Inc.
0.50%, due 3/21/11 6,600,000 5,874,000
Merrill Lynch & Co., Inc.
(zero coupon), due 3/13/32 (f) 2,500,000 2,517,175
Series DOW (Dow Chemical Co.)
0.25%, due 5/17/10 (g) 3,940,000 4,910,225
Morgan Stanley & Co.
Series JPM (J.P. Morgan Chase & Co.)
0.30%, due 1/30/11 (g) 6,325,000 6,135,250
Series JPM (J.P. Morgan Chase & Co.)
0.30%, due 7/30/11 (g) 5,675,000 5,504,750
------------
28,764,775
------------
COMMERCIAL BANKS (1.0%)
Wells Fargo & Co.
1.4438%, due 5/1/33 (d) 5,345,000 5,318,275
------------
COMMERCIAL SERVICES & SUPPLIES (1.1%)
Waste Connections, Inc.
2.1938%, due 5/1/22 (d) 5,295,000 6,013,532
------------
COMMUNICATIONS EQUIPMENT (1.9%)
Avaya, Inc.
(zero coupon), due 10/31/21 (f) 3,590,000 2,041,813
Brocade Communications Systems, Inc.
2.00%, due 1/1/07 2,445,000 2,301,356
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMUNICATIONS EQUIPMENT (CONTINUED)
CIENA Corp.
3.75%, due 2/1/08 $ 3,035,000 $ 2,534,225
Extreme Networks, Inc.
3.50%, due 12/1/06 2,260,000 2,228,925
Lucent Technologies, Inc.
Series B
2.75%, due 6/15/25 1,050,000 1,475,250
------------
10,581,569
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.2%)
At Home Corp.
4.75%, due 12/15/06 (h) 9,147,056 1,234,852
CoreComm Ltd.
6.00%, due 10/1/06 (h)(i) 1,500,000 37,500
------------
1,272,352
------------
ELECTRIC UTILITIES (0.6%)
PG&E Corp.
9.50%, due 6/30/10 1,185,000 3,073,594
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.6%)
Agilent Technologies, Inc.
3.00%, due 12/1/21 (e) 3,115,000 3,157,831
------------
ENERGY EQUIPMENT & SERVICES (17.5%)
V BJ Services Co.
0.3954%, due 4/24/22 (e) 16,525,000 14,273,469
V Cooper Cameron Corp.
1.50%, due 5/15/24 (e) 16,055,000 16,436,306
Halliburton Co.
3.125%, due 7/15/23 5,225,000 6,296,125
V Lehman Brothers Holdings, Inc.
Series HAL (Halliburton Co.)
0.25%, due 9/25/10 (g) 11,530,000 15,435,788
V Pride International, Inc.
2.50%, due 3/1/07 (e) 17,007,500 20,260,184
V Schlumberger Ltd.
Series A
1.50%, due 6/1/23 (e) 22,490,000 24,176,750
------------
96,878,622
------------
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May
be subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
- ------------------------------------------------------------------------------
FOOD & STAPLES RETAILING (4.8%)
SUPERVALU, Inc.
(zero coupon), due 11/2/31 (f) $27,180,000 $ 9,139,275
V Whole Foods Market, Inc.
(zero coupon), due 3/2/18 18,415,000 16,044,069
Wild Oats Markets, Inc.
3.25%, due 5/15/34 (c) 1,625,000 1,310,156
------------
26,493,500
------------
FOOD PRODUCTS (0.4%)
General Mills, Inc.
(zero coupon), due 10/28/22 2,850,000 2,005,687
------------
HEALTH CARE EQUIPMENT & SUPPLIES (3.5%)
ALZA Corp.
(zero coupon), due 7/28/20 7,025,000 5,672,688
Fisher Scientific International, Inc.
2.50%, due 10/1/23 (e) 3,315,000 4,694,869
3.25%, due 3/1/24 (e) 1,555,000 1,685,231
Medtronic, Inc.
1.25%, due 9/15/21 6,935,000 7,091,038
------------
19,143,826
------------
HEALTH CARE PROVIDERS & SERVICES (1.0%)
Quest Diagnostics, Inc.
1.75%, due 11/30/21 (e) 5,475,000 5,639,250
------------
HOTELS, RESTAURANTS & LEISURE (2.5%)
Brinker International, Inc.
(zero coupon), due 10/10/21 (e) 10,620,000 6,929,550
International Game Technology
(zero coupon), due 1/29/33 8,859,000 6,655,324
------------
13,584,874
------------
HOUSEHOLD PRODUCTS (0.9%)
Merrill Lynch & Co., Inc.
Series PG (Proctor & Gamble Co., The)
0.40%, due 4/15/10 (c)(g) 4,520,000 4,751,650
------------
INDUSTRIAL CONGLOMERATES (3.8%)
V Tyco International Group S.A.
Series A
2.75%, due 1/15/18 (e)(j) 13,600,000 19,261,000
Series B
3.125%, due 1/15/23 (j) 1,200,000 1,807,500
------------
21,068,500
------------
INSURANCE (0.6%)
Aon Corp.
3.50%, due 11/15/12 3,150,000 3,630,375
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
IT SERVICES (0.8%)
DST Systems, Inc.
4.125%, due 8/15/23 (e) $ 3,550,000 $ 4,295,500
------------
MACHINERY (1.5%)
Navistar Financial Corp.
4.75%, due 4/1/09 6,970,000 6,787,037
Wabash National Corp.
3.25%, due 8/1/08 945,000 1,391,513
------------
8,178,550
------------
MEDIA (4.5%)
Lamar Advertising Co.
2.875%, due 12/31/10 (e) 2,970,000 3,215,025
Lehman Brothers Holdings, Inc.
Series VIA (Viacom, Inc.)
0.25%, due 9/30/10 (g) 5,685,000 5,215,988
Liberty Media Corp.
0.75%, due 3/30/23 2,460,000 2,675,250
Sirius Satellite Radio, Inc.
2.50%, due 2/15/09 (c)(e) 890,000 1,040,187
2.50%, due 2/15/09 6,630,000 7,748,813
Walt Disney Co. (The)
2.125%, due 4/15/23 (e) 4,470,000 4,805,250
------------
24,700,513
------------
METALS & MINING (0.7%)
Freeport-McMoRan Copper & Gold, Inc.
7.00%, due 2/11/11 1,630,000 2,369,612
GrafTech International Ltd.
1.625%, due 1/15/24 (e) 1,835,000 1,683,613
------------
4,053,225
------------
MULTI-UTILITIES & UNREGULATED POWER (1.4%)
Calpine Corp.
4.75%, due 11/15/23 (c) 4,685,000 2,816,856
Reliant Energy, Inc.
5.00%, due 8/15/10 (e) 3,470,000 4,706,188
------------
7,523,044
------------
OIL & GAS (0.8%)
Citigroup Global Markets Holdings, Inc.
Series XOI (American Stock Exchange Oil Index)
0.25%, due 2/18/10 (g) 3,115,000 4,525,472
------------
</Table>
10 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
- ------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS (3.5%)
International Paper Co.
(zero coupon), due 6/20/21 (e) $ 6,705,000 $ 3,721,275
V Lehman Brothers Holdings, Inc.
Series IP (International Paper Co.)
0.25%, due 5/8/10 (g) 10,540,000 10,790,325
Merrill Lynch & Co., Inc.
Series MWV (MeadWesvaco Corp.)
0.25%, due 7/28/10 (g) 4,185,000 4,797,056
------------
19,308,656
------------
PHARMACEUTICALS (3.2%)
Elan Capital Corp. Ltd.
6.50%, due 11/10/08 710,000 2,595,050
V Teva Pharmaceutical Industries Ltd.
0.375%, due 11/15/22 11,810,000 15,190,612
------------
17,785,662
------------
ROAD & RAIL (0.6%)
Goldman Sachs Group, Inc. (The)
Series BNI (Burlington Santa Fe Corp.)
1.00%, due 10/30/07 (g) 2,600,000 3,311,750
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (4.0%)
Advanced Micro Devices, Inc.
4.75%, due 2/1/22 (e) 2,850,000 2,935,500
Cymer, Inc.
3.50%, due 2/15/09 2,625,000 2,602,031
Cypress Semiconductor Corp.
1.25%, due 6/15/08 4,610,000 4,661,863
Fairchild Semiconductor International, Inc.
5.00%, due 11/1/08 (e) 5,655,000 5,683,275
Skyworks Solutions, Inc.
4.75%, due 11/15/07 (e) 3,675,000 4,382,438
Vitesse Semiconductor Corp.
1.50%, due 10/1/24 (c) 1,675,000 1,698,031
------------
21,963,138
------------
SOFTWARE (1.3%)
Computer Associates International, Inc.
1.625%, due 12/15/09 (e) 1,975,000 2,997,062
Symantec Corp.
3.00%, due 11/1/06 1,290,000 4,310,213
------------
7,307,275
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TRANSPORTATION INFRASTRUCTURE (1.0%)
Morgan Stanley & Co.
Series CNI (Canadian National Railway Co.)
(zero coupon), due 5/30/10 (g) $ 4,050,000 $ 5,756,062
------------
UTILITIES-ELECTRIC & GAS (2.0%)
V Lehman Brothers Holdings, Inc.
Series TXU (The TXU Corp.)
1.00%, due 11/3/11 (g) 11,025,000 11,107,687
------------
Total Convertible Bonds
(Cost $400,131,195) 406,283,145
------------
<Caption>
SHARES
CONVERTIBLE PREFERRED STOCKS (12.8%)
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.7%)
Northrop Grumman Corp.
7.25% (k) 36,340 3,721,579
------------
AIRLINES (0.2%)
Continental Air Finance Trust II
6.00% 62,800 1,287,400
------------
AUTOMOBILES (1.1%)
Ford Motor Co. Captital Trust II
6.50% 121,000 6,048,790
------------
CAPITAL MARKETS (1.2%)
Gabelli Asset Management, Inc.
6.95% (l) 67,000 1,725,250
Lehman Brothers Holdings, Inc.
6.25%, Series GIS 198,100 4,966,367
------------
6,691,617
------------
COMMUNICATIONS EQUIPMENT (0.3%)
Lucent Technologies Capital Trust I
7.75% 1,642 1,924,227
------------
ELECTRIC UTILITIES (1.2%)
Dominion Resources, Inc.
9.50% (r) 41,600 2,233,088
FPL Group, Inc.
8.00% (m) 78,800 4,471,900
------------
6,704,988
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
INSURANCE (1.5%)
Hartford Financial Services Group, Inc. (The)
7.00% (q) 53,900 $ 3,092,243
Prudential Financial, Inc.
6.75% 73,220 5,053,645
------------
8,145,888
------------
MACHINERY (0.9%)
Cummins Capital Trust I
7.00% 63,780 4,895,115
------------
MEDIA (0.5%)
Interpublic Group of Cos., Inc. (The)
5.375%, Series A (e) 56,400 2,616,960
------------
MULTI-UTILITIES & UNREGULATED POWER (0.3%)
El Paso Corp.
9.00% (e)(o) 57,400 1,676,080
------------
OFFICE ELECTRONICS (0.4%)
Xerox Corp.
6.25% 16,100 2,127,937
------------
OIL & GAS (1.4%)
Amerada Hess Corp.
7.00% 46,000 3,369,500
Chesapeake Energy Corp.
5.00% 19,100 2,229,925
6.00% 22,600 1,885,518
------------
7,484,943
------------
SPECIALTY RETAIL (0.8%)
Boise Cascade Corp.
7.50% 96,670 4,533,823
------------
THRIFTS & MORTGAGE FINANCE (2.0%)
PMI Group, Inc. (The)
5.875% (n) 221,500 5,537,500
Sovereign Capital Trust IV
4.375% 62,000 2,952,750
Washington Mutual, Inc.
5.375% (p) 51,000 2,714,628
------------
11,204,878
------------
</Table>
<Table>
<Caption>
SHARES VALUE
WIRELESS TELECOMMUNICATION SERVICES (0.3%)
Nextel Communications, Inc. 3,370 $ 1,869,086
------------
Total Convertible Preferred Stocks
(Cost $68,253,464) 70,933,311
------------
Total Convertible Securities
(Cost $468,384,659) 477,216,456
------------
COMMON STOCKS (8.5%)
- ------------------------------------------------------------------------------
CAPITAL MARKETS (1.0%)
Bank of New York Co., Inc. (The) 103,900 3,372,594
S&P 500 Depository Receipt(s) 19,200 2,173,440
------------
5,546,034
------------
COMMUNICATIONS EQUIPMENT (0.1%)
Motorola, Inc. 52,600 907,876
------------
DIVERSIFIED FINANCIAL SERVICES (1.1%)
Citigroup, Inc. 87,670 3,889,918
JPMorgan Chase & Co. 55,440 2,139,984
------------
6,029,902
------------
ENERGY EQUIPMENT & SERVICES (3.5%)
Cooper Cameron Corp. (a) 65,700 3,176,595
Diamond Offshore Drilling, Inc. (e) 27,700 936,260
Grant Prideco, Inc. (a) 94,000 1,932,640
Input/Output, Inc. (a)(e) 171,900 1,201,581
Rowan Cos., Inc. (a) 182,100 4,649,013
Tidewater, Inc. 62,700 1,939,311
Transocean, Inc. (a) 152,800 5,386,200
------------
19,221,600
------------
HOTELS, RESTAURANTS & LEISURE (0.0%)(B)
FHC Delaware, Inc. (a)(i) 54,216 542
------------
MEDIA (0.3%)
Time Warner, Inc.(a) 58,700 976,768
XM Satellite Radio Holdings, Inc.
Class A (a) 22,200 717,504
------------
1,694,272
------------
MULTI-UTILITIES & UNREGULATED POWER (0.2%)
AES Corp. (The) (a) 92,800 1,011,520
------------
PHARMACEUTICALS (1.6%)
Merck & Co., Inc. 122,700 3,841,737
Pfizer, Inc. 174,100 5,040,195
------------
8,881,932
------------
</Table>
12 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
SOFTWARE (0.7%)
Microsoft Corp. 130,300 $ 3,647,097
------------
Total Common Stocks
(Cost $44,240,138) 46,940,775
------------
PRINCIPAL
AMOUNT
CORPORATE BOND (1.0%)
- ------------------------------------------------------------------------------
BIOTECHNOLOGY (1.0%)
Genzyme Corp.
1.25%, due 12/1/23 $ 5,295,000 5,500,181
------------
Total Corporate Bond
(Cost $5,325,138) 5,500,181
------------
SHORT-TERM INVESTMENTS (21.6%)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (4.1%)
American Express Credit Corp.
1.80%, due 11/18/04 7,000,000 6,994,048
SBC Communications, Inc.
1.85%, due 11/3/04 5,835,000 5,834,400
Starbird Funding
2.0851%, due 3/14/05 (t) 10,000,000 9,925,003
------------
Total Commercial Paper
(Cost $22,753,451) 22,753,451
------------
SHARES
INVESTMENT COMPANY (1.6%)
AIM Institutional Funds Group (t) 8,668,055 8,668,055
------------
Total Investment Company
(Cost $8,668,055) 8,668,055
------------
PRINCIPAL
AMOUNT
MASTER NOTE (3.8%)
Banc of America Securities 1.9549%, due 11/1/04
(t) $20,817,000 20,817,000
------------
Total Master Note
(Cost $20,817,000) 20,817,000
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
REPURCHASE AGREEMENTS (12.1%)
CS First Boston LLC
1.9249%, dated 10/29/04
due 11/1/04
Proceeds at Maturity
$22,910,974 (t)
(Collateralized by Various
Bonds with a Principal
Amount of $22,971,074 and a
Market Value of $23,365,972) $22,907,000 $ 22,907,000
Lehman Brothers, Inc.
1.9249%, dated 10/29/04
due 11/1/04
Proceeds at Maturity
$18,857,024 (t)
(Collateralized by Various
Bonds with a Principal
Amount of $37,566,138 and a
Market Value of $19,446254) 18,854,000 18,854,000
Merrill Lynch & Co., Inc.
1.9549%, dated 10/29/04
due 11/1/04
Proceeds at Maturity
$10,239,668 (t)
(Collateralized by Various
Bonds with a Principal
Amount of $10,124,410 and a
Market Value of $10,750,254) 10,238,000 10,238,000
Morgan Stanley & Co.
1.9249%, dated 10/29/04
due 11/1/04
Proceeds at Maturity
$15,002,406 (t)
(Collateralized by Various
Bonds with a Principal
Amount of $22,886,712 and a
Market Value of $15,777,983) 15,000,000 15,000,000
------------
Total Repurchase Agreements
(Cost $66,999,000) 66,999,000
------------
Total Short-Term Investments
(Cost $119,237,506) 119,237,506
------------
Total Investments
(Cost $637,187,441) (u) 117.5% 648,894,918(v)
Liabilities in Excess of
Cash and Other Assets (17.5) (96,512,065)
----------- ------------
Net Assets 100.0% $552,382,853
=========== ============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (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, 2004.
(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. The total market value of these
securities at October 31, 2004 is $38,042, less than
0.1% of the Fund's net assets.
(j) Yankee Bond -- Dollar denominated bonds issued in the
United States by foreign banks and corporations.
(k) 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.
(l) Equity Units -- each unit reflects 1 Senior Note plus 1
purchase contract to acquire shares of common stock at
$25.00 by February 17, 2005.
(m) Equity Units -- each unit reflects 1 Senior Note plus 1
purchase contract to acquire shares of common stock at
$50.00 by February 16, 2006.
(n) Equity Units -- each unit reflects 1 Senior Note plus 1
purchase contract to acquire shares of common stock at
$25.00 by November 15, 2006.
(o) Equity Units -- each unit reflects 1 Senior Note plus 1
purchase contract to acquire shares of common stock at
$50.00 by August 16, 2005.
(p) Equity Units -- each unit reflects 1 share of preferred
security of Washington Mutual plus 1 warrant to buy
1.2081 shares of Washington Mutual common shares at
$50.00 by May 3, 2041.
(q) Equity Units -- each unit reflects 1 Senior Note plus 1
purchase contract to acquire shares of common stock at
$50.00 by August 16, 2006.
(r) 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.
(s) Exchange Traded Fund -- Represents a basket of
securities that are traded on an exchange.
(t) Represents a security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(u) The cost for federal income tax purposes is
$638,888,461.
(v) At October 31, 2004 net unrealized appreciation was
$10,006,457, 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 $41,074,447 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $31,067,990.
</Table>
14 MainStay Convertible Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $637,187,441) including
$94,751,864 market value of securities
loaned $648,894,918
Deposits with brokers for securities loaned 2,068
Cash 6,385
Receivables:
Investment securities sold 20,900,050
Dividends and interest 2,017,472
Fund shares sold 94,594
Other assets 25,512
------------
Total assets 671,940,999
------------
LIABILITIES:
Securities lending collateral 106,411,125
Payables:
Investment securities purchased 11,025,000
Fund shares redeemed 983,942
NYLIFE Distributors 411,225
Manager 320,747
Transfer agent 287,057
Custodian 10,925
Trustees 7,823
Accrued expenses 100,302
------------
Total liabilities 119,558,146
------------
Net assets $552,382,853
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 78,532
Class B 355,333
Class C 22,328
Additional paid-in capital 627,728,485
Accumulated distributions in excess of net
investment income (210,509)
Accumulated net realized loss on investments (87,298,793)
Net unrealized appreciation on investments 11,707,477
------------
Net assets $552,382,853
============
CLASS A
Net assets applicable to outstanding shares $ 95,015,420
============
Shares of beneficial interest outstanding 7,853,228
============
Net asset value per share outstanding $ 12.10
Maximum sales charge (5.50% of offering price) 0.70
------------
Maximum offering price per share outstanding $ 12.80
============
CLASS B
Net assets applicable to outstanding shares $430,326,385
============
Shares of beneficial interest outstanding 35,533,259
============
Net asset value and offering price per share
outstanding $ 12.11
============
CLASS C
Net assets applicable to outstanding shares $ 27,041,048
============
Shares of beneficial interest outstanding 2,232,844
============
Net asset value and offering price per share
outstanding $ 12.11
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 7,625,268
Interest 7,325,796
Income from securities loaned -- net 266,812
------------
Total income 15,217,876
------------
EXPENSES:
Manager 4,224,831
Distribution -- Class B 3,496,207
Distribution -- Class C 219,766
Transfer agent 1,774,301
Service -- Class A 244,632
Service -- Class B 1,165,227
Service -- Class C 73,287
Shareholder communication 157,811
Professional 98,859
Recordkeeping 85,991
Custodian 67,831
Registration 46,779
Trustees 43,095
Miscellaneous 38,900
------------
Total expenses before waiver 11,737,517
Fees waived by manager and subadvisor (70,554)
------------
Net expenses 11,666,963
------------
Net investment income 3,550,913
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 34,244,695
Net change in unrealized appreciation on
investments (17,030,732)
------------
Net realized and unrealized gain on
investments 17,213,963
------------
Net increase in net assets resulting from
operations $ 20,764,876
============
</Table>
(a) Dividends recorded net of foreign withholding taxes of $2,618.
16 MainStay Convertible Fund 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 SIX MONTHS ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH
OCTOBER 31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment income $ 3,550,913 $ 5,451,165 $ 9,477,915
Net realized gain (loss)
on investments, written
option and foreign
currency transactions 34,244,695 (441,110) (55,144,731)
Net change in unrealized
appreciation
(depreciation) on
investments and foreign
currency transactions (17,030,732) 71,944,969 (14,537,718)
--------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 20,764,876 76,955,024 (60,204,534)
--------------------------------------------
Dividends to shareholders:
From net investment
income:
Class A (1,319,769) (1,076,883) (1,580,733)
Class B (2,780,272) (3,667,253) (7,311,178)
Class C (173,958) (167,186) (219,203)
--------------------------------------------
Total dividends to
shareholders (4,273,999) (4,911,322) (9,111,114)
--------------------------------------------
Capital share transactions:
Net proceeds from sale
of shares:
Class A 33,706,889 39,188,090 20,051,677
Class B 28,550,484 33,718,114 35,369,125
Class C 9,747,429 11,579,475 8,131,432
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A 1,139,095 949,687 1,400,688
Class B 2,561,103 3,317,307 6,557,319
Class C 119,314 115,178 144,085
--------------------------------------------
75,824,314 88,867,851 71,654,326
Cost of shares redeemed:
Class A (31,970,061) (27,482,132) (20,648,134)
Class B (84,733,276) (62,229,667) (107,229,635)
Class C (9,608,010) (3,553,098) (4,540,979)
--------------------------------------------
(126,311,347) (93,264,897) (132,418,748)
Decrease in net
assets derived from
capital share
transactions (50,487,033) (4,397,046) (60,764,422)
--------------------------------------------
Net increase
(decrease) in net
assets (33,996,156) 67,646,656 (130,080,070)
</Table>
<Table>
<Caption>
2004 2003* 2002
NET ASSETS:
Beginning of period $ 586,379,009 $518,732,353 $ 648,812,423
--------------------------------------------
End of period $ 552,382,853 $586,379,009 $ 518,732,353
============================================
Accumulated undistributed
net investment income
(distributions in excess
of net investment
income) at end of period $ (210,509) $ 396,820 $ (225,242)
============================================
</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. www.mainstayfunds.com
17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 11.78 $ 10.31 $ 11.58 $ 12.45 $ 14.53 $ 12.49
------- ------- ------- ------- ------- -------
Net investment income 0.15 0.16 0.25 0.36(d) 0.56 0.55
Net realized and unrealized gain (loss) on
investments 0.34 1.46 (1.27) (0.87)(d) 0.42 3.55
Net realized and unrealized gain (loss) on
foreign currency transactions -- -- (0.00)(b) 0.00(b) 0.01 (0.00)(b)
------- ------- ------- ------- ------- -------
Total from investment operations 0.49 1.62 (1.02) (0.51) 0.99 4.10
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income (0.17) (0.15) (0.25) (0.36) (0.57) (0.52)
From net realized gain on investments -- -- -- -- (2.50) (1.54)
------- ------- ------- ------- ------- -------
Total dividends and distributions (0.17) (0.15) (0.25) (0.36) (3.07) (2.06)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 12.10 $ 11.78 $ 10.31 $ 11.58 $ 12.45 $ 14.53
======= ======= ======= ======= ======= =======
Total investment return (a) 4.11% 15.86%(c) (8.88%) (4.01%) 7.24% 33.91%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.22% 1.85%+ 2.30% 2.97%(d) 3.63% 3.84%
Net Expenses 1.34% 1.38%+ 1.37% 1.29% 1.24% 1.29%
Expenses (before waiver) 1.35% 1.38%+ 1.37% 1.29% 1.24% 1.29%
Portfolio turnover rate 96% 73% 94% 175% 245% 374%
Net assets at end of period (in 000's) $95,015 $89,751 $66,871 $74,317 $70,915 $46,254
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 11.79 $ 10.33 $ 11.59 $ 12.46 $14.53 $12.49
------- ------- ------- ------- ------ ------
Net investment income 0.06 0.10 0.17 0.27(d) 0.45 0.44
Net realized and unrealized gain (loss) on
investments 0.33 1.45 (1.27) (0.87)(d) 0.43 3.55
Net realized and unrealized gain (loss) on
foreign currency transactions -- -- (0.00)(b) 0.00(b) 0.01 (0.00)(b)
------- ------- ------- ------- ------ ------
Total from investment operations 0.39 1.55 (1.10) (0.60) 0.89 3.99
------- ------- ------- ------- ------ ------
Less dividends and distributions:
From net investment income (0.07) (0.09) (0.16) (0.27) (0.46) (0.41)
From net realized gain on investments -- -- -- -- (2.50) (1.54)
------- ------- ------- ------- ------ ------
Total dividends and distributions (0.07) (0.09) (0.16) (0.27) (2.96) (1.95)
------- ------- ------- ------- ------ ------
Net asset value at end of period $ 12.11 $ 11.79 $ 10.33 $ 11.59 $12.46 $14.53
======= ======= ======= ======= ====== ======
Total investment return (a) 3.32% 15.09%(c) (9.50%) (4.76%) 6.51% 32.90%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.47% 1.10%+ 1.55% 2.22%(d) 2.88% 3.09%
Net Expenses 2.09% 2.13%+ 2.12% 2.04% 1.99% 2.04%
Expenses (before waiver) 2.10% 2.13%+ 2.12% 2.04% 1.99% 2.04%
Portfolio turnover rate 96% 73% 94% 175% 245% 374%
Net assets at end of period (in 000's) $27,041 $26,079 $15,289 $13,241 $7,946 $1,329
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges.
(b) Less than one cent per share.
(c) Total return is not annualized.
(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>
18 MainStay Convertible Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH -------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 11.79 $ 10.33 $ 11.59 $ 12.46 $ 14.53 $ 12.49
-------- -------- -------- -------- -------- --------
0.06 0.10 0.17 0.27(d) 0.45 0.44
0.33 1.45 (1.27) (0.87)(d) 0.43 3.55
-- -- (0.00)(b) 0.00(b) 0.01 (0.00)(b)
-------- -------- -------- -------- -------- --------
0.39 1.55 (1.10) (0.60) 0.89 3.99
-------- -------- -------- -------- -------- --------
(0.07) (0.09) (0.16) (0.27) (0.46) (0.41)
-- -- -- -- (2.50) (1.54)
-------- -------- -------- -------- -------- --------
(0.07) (0.09) (0.16) (0.27) (2.96) (1.95)
-------- -------- -------- -------- -------- --------
$ 12.11 $ 11.79 $ 10.33 $ 11.59 $ 12.46 $ 14.53
======== ======== ======== ======== ======== ========
3.32% 15.09%(c) (9.50%) (4.76%) 6.51% 32.90%
0.47% 1.10%+ 1.55% 2.22%(d) 2.88% 3.09%
2.09% 2.13%+ 2.12% 2.04% 1.99% 2.04%
2.10% 2.13%+ 2.12% 2.04% 1.99% 2.04%
96% 73% 94% 175% 245% 374%
$430,326 $470,549 $436,572 $561,254 $655,343 $658,197
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
19
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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.
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. 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 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. Reasons for
which securities may be valued in this manner include, but are not limited to,
trading for a security has been halted or suspended, a security has been
de-listed from a national exchange, or trading on a security's primary market is
temporarily closed at a time when under normal conditions it would be open. The
Fund held securities with a value of $38,042 that were valued in such manner.
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. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. 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
20 MainStay Convertible Fund
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.
(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.
(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.
(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. (See Note 7.)
(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 distributions in excess of net investment income, accumulated net
realized loss on investments, and additional paid-in capital arising from
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
permanent differences; net assets at October 31, 2004, are not effected.
<Table>
<Caption>
ACCUMULATED
DISTRIBUTIONS ACCUMULATED
IN EXCESS OF NET REALIZED
NET INVESTMENT LOSS ON ADDITIONAL
INCOME INVESTMENTS PAID-IN CAPITAL
$115,757 $21,728 $(137,485)
- ----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to premium amortization
adjustments, real estate Investment trusts gain (loss), and taxable over
distributions of dividends.
(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 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 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.
Through July 31, 2004, 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 $500
million, 0.67% on assets from $500 million to $1 billion and 0.62% on assets in
excess of $1 billion. Effective as of August 1, 2004, NYLIM has voluntarily
agreed to waive its management fee by 0.05% of the Fund's average net assets. In
addition, effective December 1, 2004, NYLIM has voluntarily agreed to reimburse
the
22 MainStay Convertible Fund
expenses of the Fund to the extent that operating expenses would exceed on an
annualized basis 1.20%, 1.95% and 1.95% of the average daily net assets of the
Class A, Class B and Class C shares, respectively. For the year ended October
31, 2004, the Manager earned from the Fund $4,224,831 and waived $70,554 of its
fee.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor a monthly fee of 0.36% of the Fund's
average daily net assets on assets up to $500 million, 0.335% on assets from
$500 million to $1 billion and 0.31% 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) 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 $61,320 for the year ended
October 31, 2004. 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 $4,552, $286,029 and $7,162, respectively, for the year ended October
31, 2004.
(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 for the year ended October 31, 2004,
amounted to $1,774,301.
(E) NON-INTERESTED TRUSTEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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 $17,477 for the year ended October 31,
2004.
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 $85,991 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
State Street Bank and Trust Company is custodian of cash and securities of the
Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
$(85,597,773) $10,006,457 $(75,591,316)
-----------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals.
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $85,597,773 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 $18,796
2010 61,799
2011 5,003
---------------------------------------------
$85,598
---------------------------------------------
</Table>
The tax character of distributions paid during the year ended October 31, 2004,
the ten months ended October 31, 2003 and the year ended December 31, 2002,
shown in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid
from
ordinary income: $4,273,999 $4,911,322 $9,111,114
- ----------------------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $551,207 and $622,868, respectively.
NOTE 7 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2004, the Fund had securities on loan with an aggregate market
value of $94,751,864. The Fund received $106,411,125 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.
Pursuant to Rule 2a-7, securities purchased with collateral received are valued
at amortized cost.
NOTE 8 -- 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 year ended October 31, 2004.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 2,739 2,319 794
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 93 208 10
- -----------------------------------------------------------
2,832 2,527 804
- -----------------------------------------------------------
Shares redeemed (2,599) (6,910) (783)
- -----------------------------------------------------------
Net increase (decrease) 233 (4,383) 21
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1,
THROUGH
OCTOBER 31, 2003*
CLASS A CLASS B CLASS C
Shares sold 3,571 3,067 1,048
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 87 305 10
- -----------------------------------------------------------
3,658 3,372 1,058
- -----------------------------------------------------------
Shares redeemed (2,521) (5,728) (326)
- -----------------------------------------------------------
Net increase (decrease) 1,137 (2,356) 732
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 1,852 3,267 744
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 131 614 14
- -----------------------------------------------------------
1,983 3,881 758
- -----------------------------------------------------------
Shares redeemed (1,917) (10,024) (420)
- -----------------------------------------------------------
Net increase (decrease) 66 (6,143) 338
- -----------------------------------------------------------
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 10 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party
24 MainStay Convertible Fund
to agreements with certain registered representatives of broker-dealers relating
to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 11 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
www.mainstayfunds.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Convertible Fund (the "Fund"), one
of the funds constituting The MainStay Funds, as of October 31, 2004, and the
related statement of operations, statement of changes in net assets and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the period ended October 31, 2003 and the year ended December 31, 2002, and
the financial highlights for the periods presented through October 31, 2003,
were audited by other auditors, whose report dated December 18, 2003 expressed
an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Convertible Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
26 MainStay Convertible Fund
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 27
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
28 MainStay Convertible Fund
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that New York Life Investment
Management LLC (NYLIM) uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
and (iii) on the Securities and Exchange Commission's ("SEC") website at
www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 29
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2004,
should be multiplied by 100% to arrive at the amount eligible for qualified
dividend income and 100% for the corporate dividend received deduction.
In January 2005, shareholders will receive on IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2004. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2004.
30 MainStay Convertible Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
www.mainstayfunds.com 31
(MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06339 (RECYCLE LOGO) MSC11-12/04
05
(MAINSTAY LOGO)
MAINSTAY
EQUITY INDEX FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay Equity Index Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quar-
ter of 2004, and according to preliminary estimates from the Bureau of Economic
Analysis, gross domestic product grew at a seasonally adjusted annual rate of
3.9% in the third quarter of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 6
- ----------------------------------------------------
Portfolio of Investments 8
- ----------------------------------------------------
Financial Statements 17
- ----------------------------------------------------
Notes to Financial Statements 21
Report of Independent Registered Public
Accounting Firm 25
- ----------------------------------------------------
Trustees and Officers 26
- ----------------------------------------------------
Proxy Voting Policies and Procedures 28
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 28
- ----------------------------------------------------
Federal Income Tax Information 29
- ----------------------------------------------------
MainStay Funds 30
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 3% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 5.16% -3.61% 9.73%
Excluding sales charges 8.42 -3.02 10.06
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY EQUITY INDEX FUND S&P 500 INDEX
-------------------------- -------------
10/31/94 9700 10000
12127 12644
14923 15691
19561 20729
23642 25288
29497 31779
31043 33715
23144 25319
19501 21494
23332 25965
10/31/04 25296 28411
</Table>
<Table>
-- MainStay Equity Index Fund -- S&P 500 Index
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
S&P 500(R) Index(1) 9.42% -2.22% 11.01%
Average Lipper S&P 500 Index objective fund (2) 8.75 -2.74 10.53
</Table>
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 graph assumes an initial investment of $10,000 and reflects the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 3% and an annual 12b-1
fee of .25%.
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(R) 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. The S&P 500(R) is
considered to be the Fund's broad-based securities-market index for
comparison purposes. 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.
4 MainStay Equity Index Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY EQUITY INDEX FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES(1) $1,000.00 $1,025.20 $4.89 $1,020.20 $4.87
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
Common Stocks 94.0%
Cash and Other Assets (less liabilities) 6.0%
</Table>
See Portfolio of Investments on page 8 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. General Electric Co.
2. ExxonMobil Corp.
3. Microsoft Corp.
4. Citigroup, Inc.
5. Wal-Mart Stores, Inc.
6. Pfizer, Inc.
7. Bank of America Corp.
8. Johnson & Johnson
9. American International Group, Inc.
10. International Business Machines Corp.
</Table>
www.mainstayfunds.com 5
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGER FRANCIS J. OK OF NEW YORK LIFE
INVESTMENT MANAGEMENT LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests at least 80% of its total assets in stocks contained
in the S&P 500(R) Index(1) in the same proportion, to the extent feasible, as
they are represented in the Index. In implementing this strategy, we use
statistical techniques to determine which stocks are to be purchased or sold to
replicate the S&P 500(R) Index to the extent feasible. From time to time,
adjustments may be made in the Fund's portfolio because of changes in the
composition of the Index.
WHAT WERE THE MAJOR FACTORS THAT AFFECTED THE STOCK MARKET DURING THE 12-MONTH
REPORTING PERIOD?
The reporting period began amid changing investor sentiment. Concerns about the
economy gave way to optimism that a sustainable recovery might be underway.
Several factors helped support the economy, including the lowest interest rates
seen in 45 years and a generous tax-cut package. The weaker dollar helped
stimulate export activity, and low inventory levels prompted additional business
investment.
Investors, however, were not able to sustain the strong stock-market gains
posted in the fourth quarter of 2003. Although stocks did surge into early
February 2004, the latter part of February and much of March proved troublesome
for the equity market. Terrorism muted any momentum that had been building in
the markets when an attack in Madrid, combined with the assassination of Hamas
leader Sheik Ahmed Yasin, drove equities lower. Ongoing violence in Iraq--not
only against U.S. troops but also against civilians working to rebuild Iraq's
infrastructure--further troubled the financial markets. Instability in the
Middle East and geopolitical difficulties in other areas continued to present
obstacles for equity investors.
Caution was a market theme in the second and third quarters of 2004.
Record-breaking oil prices increased the threat of inflation. Meanwhile,
investors seemed preoccupied with the uncertainty surrounding the November
presidential election. The Federal Open Market Committee raised the targeted
federal funds rate 25 basis points three times during the reporting period--in
June, August, and September. Even so, the Federal Reserve remained optimistic
that the economy could weather the "soft patch" brought on by high energy prices
and other forces.
WHAT WERE THE BEST-PERFORMING SUBINDUSTRIES(2) IN THE S&P 500(R) INDEX DURING
THE REPORTING PERIOD?
On the basis of total returns alone, Internet retail (+74.49%)(3) was the
best-performing subindustry for the 12 months ended October 31, 2004. Other top-
performing subindustries included fertilizers & agricultural chemicals
(+70.66%), oil & gas refining, marketing & transportation (+68.00%), Internet
software & services (+65.63), and wireless telecommunication services (+59.51%).
The subindustries that made the greatest positive contribution to the
performance of the Index, however, all had higher weightings and lower total
returns. On the basis of impact, which takes weightings and total returns both
into consideration, the leading subindustry was integrated oil & gas (+38.52%),
followed by industrial conglomerates (+18.38%), diversified banks (+13.99%),
electrical utilities (+22.03%), and aerospace & defense (+18.56%).
WHICH SUBINDUSTRIES WERE THE WORST PERFORMERS?
On the basis of total returns alone, the worst-performing subindustries in the
index for the 12-month reporting period were IT consulting & other services
(-30.86%), semiconductor equipment (-29.57%), insurance brokers (-28.61%),
semiconductors (-24.29%), and airlines (-22.46%).
For the 12 months ended October 31, 2004, semiconductors (-24.29%) was the
subindustry with the greatest negative impact on Index performance when
weightings and total returns were both taken into account. Pharmaceuticals
(-5.68%) was next, followed by semiconductor equipment (-29.57%),
Index funds generally seek to reflect the performance of an index or an
allocation among indices, unlike other funds, whose objectives may, in some
cases, involve seeking to outperform an index or other benchmark. 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.
1. See footnote on page 4 for more information on the S&P 500(R) Index.
2. 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.
3. Percentages reflect the total-return performance, including reinvestment of
all dividends and capital gains, of the subindustries or the securities
mentioned for the 12 months ended 10/31/04. Due to purchases and sales, the
performance of Fund holdings may differ from that of the sub-industries or
securities themselves.
6 MainStay Equity Index Fund
hypermarkets & super centers (-5.88%), and broadcast & cable TV (-13.76%).
WHICH INDIVIDUAL STOCKS HAD THE HIGHEST TOTAL RETURNS DURING THE REPORTING
PERIOD?
For the 12 months ended October 31, 2004, the best-performing company in the S&P
500(R) Index on the basis of total returns alone was Autodesk (+174.03%). The
second-best performer was TXU (+168.27%), followed by Apple Computer (+129.49%),
Allegheny Technology (+119.74%), and Valero Energy (+101.26%).
As impressive as these returns may be, the five stocks that made the greatest
positive contribution to the performance of the S&P 500(R) Index all had higher
weightings and lower total returns. On the basis of impact which takes
weightings and total returns both into account, the strongest positive
contributor to the performance of the Index for the 12-month period was
ExxonMobil (+34.55%), followed by General Electric (+17.61%), ChevronTexaco
(+42.83%), QUALCOMM (+76.04%), and eBay (+74.49%).
WHICH STOCKS WERE THE WEAKEST PERFORMERS DURING THE REPORTING PERIOD?
On the basis of total returns alone, the worst-performing stock in the S&P
500(R) during the 12 months ended October 31, 2004, was Ciena (-61.47%). Other
weak performers included Delta Airlines (-58.14%), Winn-Dixie Stores (-57.48%),
LSI Logic (-50.76%), and Calpine (-45.99%).
On an impact basis, which takes weightings and total returns both into account,
Intel (-32.65%) made the greatest negative contribution to the performance of
the Index for the 12-month reporting period. Merck (-29.24%) was next, followed
by Wal-Mart Stores (-8.53%), Pfizer (-8.39%), and Citigroup (-6.39%).
WERE ANY CHANGES MADE TO THE FUND OR THE INDEX DURING THE REPORTING PERIOD?
The Fund seeks to track the performance and weight-
ings of stocks in the S&P 500(R) 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 fiscal year
ended October 31, 2004, there were 13 companies deleted from the S&P 500(R)
Index and 13 companies added to it. Among the deleted companies were familiar
names such as Tupperware, American Greetings, John Hancock Financial Services,
and AT&T Wireless. Among the additions were such well-known companies as
Caremark Rx, E*TRADE Financial, Valero Energy, and Coach.
WHAT DO YOU ANTICIPATE GOING FORWARD?
After the reporting period ended, President Bush was reelected, which served as
a short-term catalyst for a surge in the equity markets. In our opinion,
however, it remains to be seen whether the direction of oil prices and
inflation--and their effects on corporate profits--will quell some of the
market's anxieties or exacerbate them.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
www.mainstayfunds.com 7
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (94.0%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.9%)
Boeing Co. (The) 45,570 $ 2,273,943
General Dynamics Corp. 10,804 1,103,304
Goodrich Corp. 6,358 196,017
Honeywell International, Inc. 46,792 1,575,955
Lockheed Martin Corp. 24,174 1,331,746
Northrop Grumman Corp. 19,586 1,013,575
Raytheon Co. 24,327 887,449
Rockwell Collins, Inc. 9,815 348,138
United Technologies Corp. 27,851 2,585,130
------------
11,315,257
------------
AIR FREIGHT & LOGISTICS (1.1%)
FedEx Corp. 16,332 1,488,172
Ryder System, Inc. 3,508 175,751
United Parcel Service, Inc. Class B 61,107 4,838,452
------------
6,502,375
------------
AIRLINES (0.1%)
Delta Air Lines, Inc. (a) 6,717 36,608
Southwest Airlines Co. 42,682 673,095
------------
709,703
------------
AUTO COMPONENTS (0.2%)
Cooper Tire & Rubber Co. 3,919 76,342
Dana Corp. 8,088 120,592
Delphi Corp. 30,531 256,766
Goodyear Tire & Rubber Co. (The) (a) 9,609 96,859
Johnson Controls, Inc. 10,304 590,934
Visteon Corp. 7,169 50,972
------------
1,192,465
------------
AUTOMOBILES (0.6%)
Ford Motor Co. 99,489 1,296,342
General Motors Corp. 30,551 1,177,741
Harley-Davidson, Inc. 16,085 926,013
------------
3,400,096
------------
BEVERAGES (2.2%)
Adolph Coors Co. Class B 2,025 135,068
Anheuser-Busch Cos., Inc. 43,407 2,168,180
Brown-Forman Corp. Class B 6,637 298,001
Coca-Cola Co. (The) (c) 131,888 5,362,566
Coca-Cola Enterprises, Inc. 25,518 533,581
Pepsi Bottling Group, Inc. (The) 14,098 395,308
PepsiCo, Inc. 92,023 4,562,500
------------
13,455,204
------------
BIOTECHNOLOGY (1.2%)
Amgen, Inc. (a) 68,825 3,909,260
Biogen Idec, Inc. (a) 18,473 1,074,390
</Table>
<Table>
<Caption>
SHARES VALUE
BIOTECHNOLOGY (CONTINUED)
Chiron Corp. (a) 10,184 $ 330,165
Genzyme Corp. (a) 12,290 644,856
Gilead Sciences, Inc. (a) 23,444 811,866
MedImmune, Inc. (a) 13,645 387,791
------------
7,158,328
------------
BUILDING PRODUCTS (0.2%)
American Standard Cos., Inc. (a) 11,834 432,769
Masco Corp. 23,580 807,851
------------
1,240,620
------------
CAPITAL MARKETS (2.6%)
Bank of New York Co., Inc. (The) 41,931 1,361,080
Bear Stearns Cos., Inc. (The) 5,556 526,431
Charles Schwab Corp. (The) 73,877 675,975
E*TRADE Financial Corp. (a) 19,862 256,220
Federated Investors, Inc. Class B 5,956 172,665
Franklin Resources, Inc. 13,580 823,220
Goldman Sachs Group, Inc. (The) 26,411 2,598,314
Janus Capital Group, Inc. 13,057 199,119
Lehman Brothers Holdings, Inc. 14,764 1,212,863
Mellon Financial Corp. 23,076 666,896
Merrill Lynch & Co., Inc. 50,986 2,750,185
Morgan Stanley 59,557 3,042,767
Northern Trust Corp. 12,099 514,691
State Street Corp. 18,268 822,973
T. Rowe Price Group, Inc. 6,866 382,917
------------
16,006,316
------------
CHEMICALS (1.5%)
Air Products & Chemicals, Inc. 12,405 659,698
Dow Chemical Co. (The) 51,069 2,295,041
E.I. du Pont de Nemours & Co. 54,328 2,329,041
Eastman Chemical Co. 4,230 200,798
Ecolab, Inc. 14,056 475,796
Engelhard Corp. 6,818 192,949
Great Lakes Chemical Corp. 2,809 71,967
Hercules, Inc. (a) 6,125 87,465
International Flavors & Fragrances, Inc. 5,190 202,669
Monsanto Co. 14,290 610,898
PPG Industries, Inc. 9,269 590,899
Praxair, Inc. 17,732 748,290
Rohm & Haas Co. 12,081 512,114
Sigma-Aldrich Corp. 3,757 209,039
------------
9,186,664
------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
</Table>
8 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
- -w
COMMERCIAL BANKS (5.7%)
AmSouth Bancorp 19,064 $ 503,099
V Bank of America Corp. 220,716 9,885,870
BB&T Corp. 30,098 1,237,329
Comerica, Inc. 9,457 581,700
Fifth Third Bancorp 30,947 1,522,283
First Horizon National Corp. 6,753 292,270
Huntington Bancshares, Inc. 12,462 298,465
KeyCorp 22,292 748,788
M&T Bank Corp. 6,404 659,612
Marshall & Ilsley Corp. 12,210 512,454
National City Corp. 35,951 1,401,010
North Fork Bancorp., Inc. 16,930 746,613
PNC Financial Services Group, Inc. (The) 15,224 796,215
Regions Financial Corp. 25,061 879,140
SouthTrust Corp. 17,909 780,295
SunTrust Banks, Inc. 19,463 1,369,806
Synovus Financial Corp. 16,762 455,759
U.S. Bancorp 102,126 2,921,825
Wachovia Corp. 71,133 3,500,455
Wells Fargo & Co. 91,647 5,473,159
Zions Bancorp 4,868 322,115
------------
34,888,262
------------
COMMERCIAL SERVICES & SUPPLIES (0.9%)
Allied Waste Industries, Inc. (a) 17,504 142,833
Apollo Group, Inc. Class A (a) 10,540 695,640
Avery Dennison Corp. 6,083 370,090
Cendant Corp. 57,406 1,181,990
Cintas Corp. 9,306 401,461
Deluxe Corp. 2,710 103,224
Donnelley (R.R.) & Sons Co. 11,931 375,230
Equifax, Inc. 7,473 195,419
H&R Block, Inc. 9,097 432,562
Monster Worldwide, Inc. (a) 6,390 179,239
Pitney Bowes, Inc. 12,524 547,925
Robert Half International, Inc. 9,265 245,800
Waste Management, Inc. 31,365 893,275
------------
5,764,688
------------
COMMUNICATIONS EQUIPMENT (2.7%)
ADC Telecommunications, Inc. (a) 44,103 97,468
Andrew Corp. (a) 8,754 122,381
Avaya, Inc. (a) 24,578 353,923
CIENA Corp. (a) 31,300 77,311
Cisco Systems, Inc. (a) 367,236 7,054,604
Comverse Technology, Inc. (a) 10,637 219,548
Corning, Inc. (a) 75,692 866,673
JDS Uniphase Corp. (a) 78,068 247,476
</Table>
<Table>
<Caption>
SHARES VALUE
COMMUNICATIONS EQUIPMENT (CONTINUED)
Lucent Technologies, Inc. (a) 231,715 $ 822,588
Motorola, Inc. 128,423 2,216,581
QLogic Corp. (a) 5,149 167,342
QUALCOMM, Inc. 88,422 3,696,924
Scientific-Atlanta, Inc. 8,149 223,201
Tellabs, Inc. (a) 22,594 180,752
------------
16,346,772
------------
COMPUTERS & PERIPHERALS (3.5%)
Apple Computer, Inc. (a) 21,078 1,107,227
Dell, Inc. (a) 135,713 4,758,098
EMC Corp. (a) 130,529 1,679,908
Gateway, Inc. (a) 20,404 119,363
Hewlett-Packard Co. 164,145 3,062,946
V International Business Machines Corp. 90,927 8,160,698
Lexmark International, Inc. (a) 7,023 583,682
NCR Corp. (a) 5,200 293,020
Network Appliance, Inc. (a) 19,451 475,966
Sun Microsystems, Inc. (a) 180,772 818,897
------------
21,059,805
------------
CONSTRUCTION & ENGINEERING (0.0%) (b)
Fluor Corp. 4,457 206,983
------------
CONSTRUCTION MATERIALS (0.0%) (b)
Vulcan Materials Co. 5,475 272,546
------------
CONSUMER FINANCE (1.3%)
American Express Co. 68,938 3,658,540
Capital One Financial Corp. 13,074 964,338
MBNA Corp. 69,466 1,780,413
Providian Financial Corp. (a) 15,807 245,799
SLM Corp. 23,842 1,079,089
------------
7,728,179
------------
CONTAINERS & PACKAGING (0.2%)
Ball Corp. 6,000 239,100
Bemis Co., Inc. 5,702 150,932
Pactiv Corp. (a) 8,325 197,219
Sealed Air Corp. (a) 4,657 230,708
Temple-Inland, Inc. 2,892 170,975
------------
988,934
------------
DISTRIBUTORS (0.1%)
Genuine Parts Co. 9,502 379,035
------------
DIVERSIFIED FINANCIAL SERVICES (3.6%)
CIT Group, Inc. 11,400 460,560
V Citigroup, Inc. 280,986 12,467,349
JPMorgan Chase & Co. 193,459 7,467,517
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
Moody's Corp. 8,018 $ 623,881
Principal Financial Group, Inc. 16,978 641,089
------------
21,660,396
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.8%)
ALLTEL Corp. 16,786 922,055
AT&T Corp. 42,945 734,789
BellSouth Corp. 99,365 2,650,065
CenturyTel, Inc. 7,316 234,770
Citizens Communications Co. 17,795 238,453
Qwest Communications International, Inc. (a) 96,331 329,452
SBC Communications, Inc. 179,829 4,542,480
Sprint Corp. (FON Group) 78,944 1,653,877
Verizon Communications, Inc. 150,437 5,882,087
------------
17,188,028
------------
ELECTRIC UTILITIES (2.2%)
Allegheny Energy, Inc. (a) 6,821 124,893
Ameren Corp. 10,585 508,080
American Electric Power Co., Inc. 21,542 709,378
CenterPoint Energy, Inc. 16,668 175,181
Cinergy Corp. 9,679 382,514
CMS Energy Corp. (a) 10,298 96,389
Consolidated Edison, Inc. 13,011 565,328
Dominion Resources, Inc. 17,942 1,154,075
DTE Energy Co. 9,386 400,876
Edison International 17,846 544,303
Entergy Corp. 12,285 802,948
Exelon Corp. 35,838 1,419,902
FirstEnergy Corp. 17,954 742,039
FPL Group, Inc. 9,935 684,521
PG&E Corp. (a) 21,804 698,600
Pinnacle West Capital Corp. 4,991 212,716
PPL Corp. 10,298 535,496
Progress Energy, Inc. 13,446 555,320
Public Service Enterprise Group, Inc. 12,796 544,982
Southern Co. (The) 39,938 1,261,641
TECO Energy, Inc. 10,201 142,814
TXU Corp. 16,088 984,907
Xcel Energy, Inc. 21,698 371,036
------------
13,617,939
------------
ELECTRICAL EQUIPMENT (0.4%)
American Power Conversion Corp. 10,815 208,513
Cooper Industries, Ltd. Class A 5,052 322,823
Emerson Electric Co. 22,944 1,469,563
</Table>
<Table>
<Caption>
SHARES VALUE
ELECTRICAL EQUIPMENT (CONTINUED)
Power-One, Inc. (a) 4,577 $ 32,131
Rockwell Automation, Inc. 10,051 419,026
------------
2,452,056
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.4%)
Agilent Technologies, Inc. (a) 26,128 654,767
Jabil Circuit, Inc. (a) 10,922 265,514
Molex, Inc. 10,384 307,055
PerkinElmer, Inc. 6,967 143,102
Sanmina-SCI Corp. (a) 27,551 220,408
Solectron Corp. (a) 52,136 272,150
Symbol Technologies, Inc. 12,530 184,066
Tektronix, Inc. 4,682 142,005
Thermo Electron Corp. (a) 8,806 255,374
Waters Corp. (a) 6,459 266,692
------------
2,711,133
------------
ENERGY EQUIPMENT & SERVICES (0.9%)
Baker Hughes, Inc. 18,225 780,577
BJ Services Co. 8,776 447,576
Halliburton Co. 23,853 883,515
Nabors Industries, Ltd. (a) 7,920 389,030
Noble Corp. (a) 7,304 333,647
Rowan Cos., Inc. (a) 5,675 144,883
Schlumberger Ltd. 32,026 2,015,716
Transocean, Inc. (a) 17,440 614,760
------------
5,609,704
------------
FOOD & STAPLES RETAILING (3.2%)
Albertson's, Inc. 20,012 456,474
Costco Wholesale Corp. 24,859 1,191,740
CVS Corp. 21,541 936,172
Kroger Co. (The) (a) 40,494 611,864
Safeway, Inc. (a) 24,009 437,924
SUPERVALU, Inc. 7,284 214,805
Sysco Corp. 34,727 1,120,640
Walgreen Co. 55,711 1,999,468
V Wal-Mart Stores, Inc. 230,154 12,409,904
Winn-Dixie Stores, Inc. (d) 7,663 26,361
------------
19,405,352
------------
FOOD PRODUCTS (1.2%)
Archer-Daniels-Midland Co. 35,059 679,093
Campbell Soup Co. 22,476 603,256
ConAgra Foods, Inc. 28,754 759,105
General Mills, Inc. 20,647 913,630
H.J. Heinz Co. 18,965 689,378
Hershey Foods Corp. 13,414 679,956
Kellogg Co. 22,471 966,253
McCormick & Co., Inc. 7,609 269,587
</Table>
10 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
FOOD PRODUCTS (CONTINUED)
Sara Lee Corp. 42,925 $ 999,294
Wm. Wrigley Jr. Co. 12,166 795,656
------------
7,355,208
------------
GAS UTILITIES (0.3%)
KeySpan Corp. 8,566 342,212
Kinder Morgan, Inc. 6,746 434,240
Nicor, Inc. 2,421 90,836
NiSource, Inc. 14,327 307,314
Peoples Energy Corp. 2,022 86,501
Sempra Energy 12,625 423,442
------------
1,684,545
------------
HEALTH CARE EQUIPMENT & SUPPLIES (2.1%)
Applera Corp. Applied Biosystems Group 10,947 208,869
Bausch & Lomb, Inc. 2,957 180,259
Baxter International, Inc. 33,135 1,019,233
Becton, Dickinson & Co. 13,711 719,828
Biomet, Inc. 13,787 643,577
Boston Scientific Corp. (a) 45,803 1,616,846
C.R. Bard, Inc. 5,635 320,068
Fisher Scientific International, Inc. (a) 6,226 357,123
Guidant Corp. 16,987 1,131,674
Hospira, Inc. (a) 8,497 271,139
Medtronic, Inc. 65,562 3,350,874
Millipore Corp. (a) 2,624 120,678
St. Jude Medical, Inc. (a) 9,590 734,306
Stryker Corp. 21,772 938,155
Zimmer Holdings, Inc. (a) 13,292 1,031,326
------------
12,643,955
------------
HEALTH CARE PROVIDERS & SERVICES (1.9%)
Aetna, Inc. 8,316 790,020
AmerisourceBergen Corp. 6,124 337,065
Anthem, Inc. (a) 7,554 607,342
Cardinal Health, Inc. 23,424 1,095,072
Caremark Rx, Inc. (a) 25,300 758,241
CIGNA Corp. 7,426 471,254
Express Scripts, Inc. (a) 4,700 300,800
HCA, Inc. 26,420 970,407
Health Management Associates, Inc. Class A 13,143 271,534
Humana, Inc. (a) 8,763 167,812
IMS Health, Inc. 12,792 270,935
Laboratory Corp. of America Holdings (a) 3,800 174,040
Manor Care, Inc. 4,768 156,104
McKesson Corp. 15,856 422,721
</Table>
<Table>
<Caption>
SHARES VALUE
HEALTH CARE PROVIDERS & SERVICES (CONTINUED)
Medco Health Solutions, Inc. (a) 14,743 $ 499,935
Quest Diagnostics, Inc. 5,580 488,473
Tenet Healthcare Corp. (a) 25,336 271,602
UnitedHealth Group, Inc. 36,181 2,619,504
WellPoint Health Networks, Inc. (a) 8,523 832,356
------------
11,505,217
------------
HOTELS, RESTAURANTS & LEISURE (1.4%)
Carnival Corp. 34,304 1,734,410
Darden Restaurants, Inc. 8,583 210,284
Harrah's Entertainment, Inc. 6,123 358,318
Hilton Hotels Corp. 20,538 408,717
International Game Technology 18,853 622,903
Marriott International, Inc. Class A 12,404 675,894
McDonald's Corp. 68,385 1,993,423
Starbucks Corp. (a) 21,544 1,139,247
Starwood Hotels & Resorts Worldwide, Inc. 11,319 540,256
Wendy's International, Inc. 6,210 207,228
Yum! Brands, Inc. 15,719 683,776
------------
8,574,456
------------
HOUSEHOLD DURABLES (0.5%)
Black & Decker Corp. (The) 4,247 340,949
Centex Corp. 6,666 346,232
Fortune Brands, Inc. 7,825 569,817
KB HOME 2,637 216,893
Leggett & Platt, Inc. 10,539 296,462
Maytag Corp. 4,294 74,716
Newell Rubbermaid, Inc. 14,966 322,667
Pulte Homes, Inc. 6,808 373,623
Snap-on, Inc. 3,210 94,310
Stanley Works (The) 4,373 194,686
Whirlpool Corp. 3,635 213,556
------------
3,043,911
------------
HOUSEHOLD PRODUCTS (1.7%)
Clorox Co. (The) 11,501 627,955
Colgate-Palmolive Co. 29,041 1,295,809
Kimberly-Clark Corp. 26,908 1,605,600
Procter & Gamble Co. (The) 137,937 7,059,616
------------
10,588,980
------------
INDUSTRIAL CONGLOMERATES (4.4%)
3M Co. 42,465 3,294,010
V General Electric Co. (c) 572,748 19,542,162
Textron, Inc. 7,444 507,309
Tyco International Ltd. 108,870 3,391,300
------------
26,734,781
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
INSURANCE (3.9%)
ACE, Ltd. 15,299 $ 582,280
AFLAC, Inc. 27,680 993,158
Allstate Corp. (The) 37,668 1,811,454
Ambac Financial Group, Inc. 5,804 453,060
V American International Group, Inc. 141,367 8,582,390
Aon Corp. 17,005 347,072
Chubb Corp. (The) 10,385 749,070
Cincinnati Financial Corp. 9,193 383,808
Hartford Financial Services Group, Inc. (The) 15,845 926,616
Jefferson-Pilot Corp. 7,440 359,278
Lincoln National Corp. 9,705 425,079
Loews Corp. 10,122 606,308
Marsh & McLennan Cos., Inc. 28,413 785,903
MBIA, Inc. 7,867 455,185
MetLife, Inc. 40,751 1,562,801
Progressive Corp. (The) 10,857 1,015,672
Prudential Financial, Inc. 28,191 1,310,036
SAFECO Corp. 6,879 318,085
St. Paul Travelers Cos., Inc. (The) 36,170 1,228,333
Torchmark Corp. 6,088 328,874
UnumProvident Corp. 16,160 220,746
XL Capital Ltd. Class A 7,404 536,790
------------
23,981,998
------------
INTERNET & CATALOG RETAIL (0.6%)
eBay, Inc. (a) 35,872 3,501,466
------------
INTERNET SOFTWARE & SERVICES (0.4%)
Yahoo!, Inc. (a) 73,974 2,677,119
------------
IT SERVICES (1.1%)
Affiliated Computer Services, Inc. Class A (a) 7,016 382,723
Automatic Data Processing, Inc. 31,724 1,376,504
Computer Sciences Corp. (a) 10,234 508,323
Convergys Corp. (a) 7,746 100,775
Electronic Data Systems Corp. 27,808 591,476
First Data Corp. 46,535 1,920,965
Fiserv, Inc. (a) 10,568 375,586
Paychex, Inc. 20,540 673,589
Sabre Holdings Corp. 7,596 163,390
SunGard Data Systems, Inc. (a) 15,520 411,125
Unisys Corp. (a) 17,882 189,907
------------
6,694,363
------------
</Table>
<Table>
<Caption>
SHARES VALUE
LEISURE EQUIPMENT & PRODUCTS (0.2%)
Brunswick Corp. 5,184 $ 243,233
Eastman Kodak Co. 15,546 470,733
Hasbro, Inc. 9,494 167,949
Mattel, Inc. 22,964 402,100
------------
1,284,015
------------
MACHINERY (1.4%)
Caterpillar, Inc. 18,558 1,494,661
Crane Co. 3,215 89,602
Cummins, Inc. 2,373 166,300
Danaher Corp. 16,851 928,996
Deere & Co. 13,385 800,155
Dover Corp. 11,018 432,677
Eaton Corp. 8,071 516,140
Illinois Tool Works, Inc. 16,368 1,510,439
Ingersoll-Rand Co. Class A 9,392 642,789
ITT Industries, Inc. 4,983 404,321
Navistar International Corp. (a) 3,697 127,731
PACCAR, Inc. 9,468 656,227
Pall Corp. 6,756 174,710
Parker-Hannifin Corp. 6,523 460,720
------------
8,405,468
------------
MEDIA (3.4%)
Clear Channel Communications, Inc. 32,064 1,070,938
Comcast Corp. Class A (a) 121,466 3,583,247
Dow Jones & Co., Inc. 4,416 195,408
Gannett Co., Inc. 14,485 1,201,531
Interpublic Group of Cos., Inc. (The) (a) 22,498 275,825
Knight-Ridder, Inc. 4,286 293,720
McGraw-Hill Cos., Inc. (The) 10,360 893,550
Meredith Corp. 2,758 135,142
New York Times Co. (The) Class A 7,947 318,277
Omnicom Group, Inc. 10,130 799,257
Time Warner, Inc. (a) 248,504 4,135,107
Tribune Co. 17,322 748,310
Univision Communications, Inc. Class A (a) 17,626 545,701
Viacom, Inc. Class B 94,114 3,434,220
Walt Disney Co. (The) (d) 111,406 2,809,659
------------
20,439,892
------------
METALS & MINING (0.7%)
Alcoa, Inc. 47,278 1,536,535
Allegheny Technologies, Inc. 5,059 85,042
Freeport-McMoRan Copper & Gold, Inc. Class B 9,659 349,849
Newmont Mining Corp. 24,056 1,143,141
Nucor Corp. 8,536 360,475
</Table>
12 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
METALS & MINING (CONTINUED)
Phelps Dodge Corp. 5,100 $ 446,454
United States Steel Corp. 6,205 227,848
Worthington Industries, Inc. 4,699 93,275
------------
4,242,619
------------
MULTILINE RETAIL (1.0%)
Big Lots, Inc. (a) 6,274 77,735
Dillard's, Inc. Class A 4,620 94,664
Dollar General Corp. 17,860 343,805
Family Dollar Stores, Inc. 9,128 269,732
Federated Department Stores, Inc. 9,873 498,093
J.C. Penney Co., Inc. Holding Co. 15,687 542,613
Kohl's Corp. (a) 18,571 942,664
May Department Stores Co. (The) 15,716 409,559
Nordstrom, Inc. 7,625 329,247
Sears, Roebuck and Co. 11,561 404,635
Target Corp. 49,131 2,457,533
------------
6,370,280
------------
MULTI-UTILITIES & UNREGULATED POWER (0.5%)
AES Corp. (The) (a) 34,637 377,543
Calpine Corp. (a) 28,882 71,916
Constellation Energy Group, Inc. 9,548 387,840
Duke Energy Corp. 50,900 1,248,577
Dynegy, Inc. Class A (a) 20,273 99,946
El Paso Corp. 34,876 311,791
Williams Cos., Inc. (The) 30,141 377,064
------------
2,874,677
------------
OFFICE ELECTRONICS (0.1%)
Xerox Corp. (a) 45,520 672,330
------------
OIL & GAS (5.8%)
Amerada Hess Corp. 4,911 396,367
Anadarko Petroleum Corp. 13,705 924,402
Apache Corp. 17,723 898,556
Ashland, Inc. 3,766 216,997
Burlington Resources, Inc. 21,489 891,793
ChevronTexaco Corp. 115,722 6,140,209
ConocoPhillips 37,412 3,154,206
Devon Energy Corp. 13,027 963,607
EOG Resources, Inc. 6,356 423,055
V ExxonMobil Corp. 352,957 17,372,544
Kerr-McGee Corp. 8,142 482,169
Marathon Oil Corp. 18,669 711,476
</Table>
<Table>
<Caption>
SHARES VALUE
OIL & GAS (CONTINUED)
Occidental Petroleum Corp. 21,130 $ 1,179,688
Sunoco, Inc. 4,107 305,397
Unocal Corp. 14,349 599,071
Valero Energy Corp. 13,706 588,947
------------
35,248,484
------------
PAPER & FOREST PRODUCTS (0.5%)
Georgia-Pacific Corp. 14,014 484,744
International Paper Co. 26,398 1,016,587
Louisiana-Pacific Corp. 5,663 138,800
MeadWestvaco Corp. 10,932 344,686
Weyerhaeuser Co. 13,078 819,206
------------
2,804,023
------------
PERSONAL PRODUCTS (0.6%)
Alberto-Culver Co. 4,936 221,429
Avon Products, Inc. 25,673 1,015,367
Gillette Co. (The) 54,557 2,263,024
------------
3,499,820
------------
PHARMACEUTICALS (6.7%)
Abbott Laboratories 84,785 3,614,385
Allergan, Inc. 7,132 510,366
Bristol-Myers Squibb Co. 105,625 2,474,794
Forest Laboratories, Inc. (a) 20,104 896,638
V Johnson & Johnson 160,960 9,396,845
King Pharmaceuticals, Inc. (a) 13,220 144,230
Lilly (Eli) & Co. 61,372 3,369,937
Merck & Co., Inc. 120,591 3,775,704
Mylan Laboratories, Inc. (d) 14,550 250,551
V Pfizer, Inc. 409,605 11,858,065
Schering-Plough Corp. 79,948 1,447,858
Watson Pharmaceuticals, Inc. (a) 5,848 163,919
Wyeth 72,440 2,872,246
------------
40,775,538
------------
REAL ESTATE (0.5%)
Apartment Investment & Management Co. Class A 5,227 191,779
Equity Office Properties Trust 21,758 611,835
Equity Residential 15,166 505,786
Plum Creek Timber Co., Inc. 9,976 362,029
ProLogis 9,688 377,638
Simon Property Group, Inc. 11,958 697,391
------------
2,746,458
------------
ROAD & RAIL (0.5%)
Burlington Northern
Santa Fe Corp. 20,327 849,872
CSX Corp. 11,717 427,670
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
ROAD & RAIL (CONTINUED)
'xNorfolk Southern Corp. 21,237 $ 720,996
Union Pacific Corp. 14,080 886,618
------------
2,885,156
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (2.9%)
Advanced Micro Devices, Inc. (a) 18,868 317,360
Altera Corp. (a) 20,354 462,646
Analog Devices, Inc. 20,572 828,229
Applied Materials, Inc. (a) 92,244 1,485,128
Applied Micro Circuits Corp. (a) 16,423 59,780
Broadcom Corp. Class A (a) 17,537 474,376
Intel Corp. 347,955 7,745,478
KLA-Tencor Corp. (a) 10,646 484,712
Linear Technology Corp. 16,793 636,119
LSI Logic Corp. (a) 20,652 93,967
Maxim Integrated Products, Inc. 17,508 770,177
Micron Technology, Inc. (a) 33,252 405,009
National Semiconductor Corp. (a) 19,380 323,646
Novellus Systems, Inc. (a) 7,735 200,414
NVIDIA Corp. (a) 9,020 130,519
PMC-Sierra, Inc. (a) 9,243 94,833
Teradyne, Inc. (a) 10,221 169,260
Texas Instruments, Inc. 94,048 2,299,474
Xilinx, Inc. 18,754 573,872
------------
17,554,999
------------
SOFTWARE (4.3%)
Adobe Systems, Inc. 12,989 727,774
Autodesk, Inc. 6,143 324,043
BMC Software, Inc. (a) 12,156 229,991
Citrix Systems, Inc. (a) 8,897 214,685
Computer Associates International, Inc. 31,668 877,520
Compuware Corp. (a) 20,851 120,727
Electronic Arts, Inc. (a) 16,368 735,251
Intuit, Inc. (a) 10,445 473,785
Mercury Interactive Corp. (a) 4,927 213,980
V Microsoft Corp. (c) 589,854 16,510,013
Novell, Inc. (a) 21,200 152,428
Oracle Corp. (a) 280,948 3,556,802
Parametric Technology Corp. (a) 14,724 76,418
PeopleSoft, Inc. (a) 19,829 411,848
Siebel Systems, Inc. (a) 27,340 259,730
Symantec Corp. (a) 16,932 964,108
VERITAS Software Corp. (a) 23,217 507,988
------------
26,357,091
------------
</Table>
<Table>
<Caption>
SHARES VALUE
SPECIALTY RETAIL (2.4%)
AutoNation, Inc. (a) 14,795 $ 254,918
AutoZone, Inc. (a) 4,561 373,135
Bed Bath & Beyond, Inc. (a) 16,347 666,794
Best Buy Co., Inc. 17,637 1,044,463
Boise Cascade Corp. (a) 4,663 137,652
Circuit City Stores, Inc. 10,773 175,061
Gap, Inc. (The) 48,705 973,126
Home Depot, Inc. (The) 119,281 4,900,063
Limited Brands, Inc. 25,286 626,587
Lowe's Cos., Inc. 42,334 2,382,558
Office Depot, Inc. (a) 16,856 272,899
RadioShack Corp. 8,686 259,972
Sherwin-Williams Co. (The) 7,756 331,336
Staples, Inc. 27,118 806,489
Tiffany & Co. 7,882 231,179
TJX Cos., Inc. (The) 26,928 645,734
Toys "R" Us, Inc. (a) 11,702 210,753
------------
14,292,719
------------
TEXTILES, APPAREL & LUXURY GOODS (0.4%)
Coach, Inc. (a) 10,200 475,626
Jones Apparel Group, Inc. 6,871 242,547
Liz Claiborne, Inc. 5,908 241,519
NIKE, Inc. Class B 14,404 1,171,189
Reebok International Ltd. 3,225 119,325
V.F. Corp. 5,887 316,897
------------
2,567,103
------------
THRIFTS & MORTGAGE FINANCE (1.8%)
Countrywide Financial Corp. 30,644 978,463
Fannie Mae 52,623 3,691,504
Freddie Mac 37,415 2,491,839
Golden West Financial Corp. 8,286 968,799
MGIC Investment Corp. 5,346 343,801
Sovereign Bancorp, Inc. 18,577 402,192
Washington Mutual, Inc. 47,399 1,834,815
------------
10,711,413
------------
TOBACCO (1.0%)
Altria Group, Inc. 111,399 5,398,395
Reynolds American, Inc. 8,146 560,934
UST, Inc. 9,052 372,580
------------
6,331,909
------------
TRADING COMPANIES & DISTRIBUTORS (0.0%) (b)
Grainger (W.W.), Inc. 4,968 291,075
------------
</Table>
14 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES (0.3%)
Nextel Communications, Inc. Class A (a) 60,188 $ 1,594,380
------------
Total Common Stocks (Cost $423,251,744) 571,382,288(f)
------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (6.6%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (4.2%)
7-Eleven, Inc.
1.79%, due 11/22/04 (c) $ 2,500,000 2,497,386
CBA (Delaware) Finance
1.80%, due 11/19/04 (c) 2,800,000 2,797,477
Coca-Cola Co. (The)
1.81%, due 12/6/04 (c) 7,400,000 7,386,962
Cooperative Association of Tractor Dealers
1.80%, due 11/2/04 (c) 300,000 299,985
Dealers Capital Access Trust
1.82%, due 11/12/04 (c) 2,000,000 1,998,887
HBOS Treasury Services
1.79%, due 11/29/04 (c) 1,900,000 1,897,352
Hitachi Credit America Corp.
1.82%, due 11/29/04- 11/30/04 (c) 7,800,000 7,788,630
Wells Fargo & Co.
1.68%, due 11/1/04 (c) 900,000 900,000
------------
Total Commercial Paper (Cost $25,566,679) 25,566,679
------------
SHARES
INVESTMENT COMPANY (0.1%)
AIM Institutional Funds Group (e) 800,250 800,250
------------
Total Investment Company (Cost $800,250) 800,250
------------
PRINCIPAL
AMOUNT VALUE
REPURCHASE AGREEMENTS (0.4%)
Dresdner Kleinwort Wasserstein Securities, LLC
1.95%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $2,000,324 (e)
(Collateralized by Various Bonds with a
Principal Amount of $2,076,133 and a Market
Value of $2,100,107) $ 2,000,000 $ 2,000,000
------------
Morgan Stanley & Co., Inc.
1.93%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $50,008 (e)
(Collateralized by Various Bonds with a
Principal Amount of $76,289 and a Market Value
of $52,593) 50,000 50,000
------------
Total Repurchase Agreements
(Cost $2,050,000) 2,050,000
------------
U.S. GOVERNMENT (1.9%)
United States Treasury Bills
1.75%, due 1/20/05 (c) 8,400,000 8,365,375
1.75%, due 1/27/05 (c) 3,200,000 3,185,539
------------
Total U.S. Government
(Cost $11,553,356) 11,550,914
------------
Total Short-Term Investments
(Cost $39,970,285) 39,967,843
------------
Total Investments
(Cost $463,222,029) (g) 100.6% 611,350,131(h)
Liabilities in Excess of
Cash and Other Assets (0.6) (3,808,338)
------------- ------------
Net Assets 100.0% $607,541,793
============= ============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
CONTRACTS UNREALIZED
LONG APPRECIATION (I)
FUTURES CONTRACTS (0.1%)
- --------------------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX
December 2004 124 $ 350,606
Mini December 2004 35 29,428
----------------
Total Futures Contracts
(Settlement Value $37,017,325) (f) $ 380,034
================
</Table>
<Table>
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) Segregated or designated as collateral for futures
contracts.
(d) Represents securities out on loan or a portion of which
is out on loan.
(e) Represents security or a portion thereof, purchased with
cash collateral received for securities on loan.
(f) The combined market value of common stocks and settle-
ment value of Standard & Poor's 500 Index futures
contracts represents 100.1% of net assets.
(g) The cost for federal income tax purposes is
$472,257,925.
(h) At October 31, 2004 net unrealized appreciation was
$139,092,206, based on cost for federal income tax pur-
poses. This consisted of aggregate gross unrealized
appreciation for all investments on which there was an
excess of market value over cost of $199,353,313 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $60,261,107.
(i) Represents the difference between the value of the con-
tracts at the time they were opened and the value at
October 31, 2004.
</Table>
16 MainStay Equity Index Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $463,222,029) including
$2,752,720 market value of securities
loaned $ 611,350,131
Cash 249,950
Receivables:
Dividends and interest 736,792
Investment securities sold 436,786
Variation margin on futures contracts 88,245
Other assets 13,631
-------------
Total assets 612,875,535
-------------
LIABILITIES:
Securities lending collateral 2,850,250
Payables:
Fund shares redeemed 1,026,050
Investment securities purchased 856,713
Transfer agent 187,950
NYLIFE Distributors 128,241
Manager 128,241
Custodian 30,771
Trustees 8,498
Accrued expenses 117,028
-------------
Total liabilities 5,333,742
-------------
Net assets $ 607,541,793
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized $ 161,457
Additional paid-in capital 587,790,112
Accumulated undistributed net investment
income 4,054,812
Accumulated net realized loss on
investments and futures contracts (132,972,724)
Net unrealized appreciation on investments
and futures contracts 148,508,136
-------------
Net assets applicable to outstanding shares $ 607,541,793
=============
Shares of beneficial interest outstanding (a) 15,979,542
=============
Net asset value per share outstanding (a) $ 38.02
Maximum sales charge (3.00% of offering
price) (a) 1.18
-------------
Maximum offering price per share outstanding
(a) $ 39.20
=============
</Table>
<Table>
(a) Adjusted to reflect the effects of the reverse stock
split on December 21, 2004. (See Notes 2(D) and 11.)
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 10,487,596
Interest 328,120
Income from securities loaned -- net 2,647
------------
Total income 10,818,363
------------
EXPENSES:
Manager 3,193,709
Distribution 1,596,855
Transfer agent 1,156,762
Shareholder communication 159,119
Custodian 103,800
Professional 98,164
Recordkeeping 90,540
Trustees 45,738
Registration 17,334
Miscellaneous 54,347
------------
Total expenses before waiver 6,516,368
Fees waived by Manager (381,648)
------------
Net expenses 6,134,720
------------
Net investment income 4,683,643
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions (13,187,678)
Futures transactions 2,702,011
------------
Net realized loss on investments (10,485,667)
------------
Net change in unrealized appreciation
(depreciation) on investments:
Security transactions 58,033,914
Futures transactions 380,034
------------
Net unrealized gain on investments 58,413,948
------------
Net realized and unrealized gain on
investments 47,928,281
------------
Net increase in net assets resulting from
operations $ 52,611,924
============
</Table>
18 MainStay Equity Index Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment income $ 4,683,643 $ 3,634,283 $ 4,415,729
Net realized loss on
investments (10,485,667) (24,531,705) (97,307,066)
Net change in unrealized
appreciation
(depreciation) on
investments and
futures transactions 58,413,948 132,748,060 (107,566,029)
--------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 52,611,924 111,850,638 (200,457,366)
--------------------------------------------
Dividends and distributions to shareholders:
From net investment
income (2,344,657) -- (6,252,221)
From net realized gain
on investments -- -- (22,887,901)
--------------------------------------------
Total dividends and
distributions to
shareholders (2,344,657) -- (29,140,122)
--------------------------------------------
Capital share transactions:
Net proceeds from sale
of shares 221,843 178,876 2,705,651
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions 2,276,990 -- 28,209,897
--------------------------------------------
2,498,833 178,876 30,915,548
Cost of shares redeemed (91,674,408) (54,613,066) (163,946,815)
--------------------------------------------
Decrease in net assets
derived from capital
share transactions (89,175,575) (54,434,190) (133,031,267)
--------------------------------------------
Net increase (decrease)
in net assets (38,908,308) 57,416,448 (362,628,755)
</Table>
<Table>
<Caption>
2004 2003* 2002
NET ASSETS:
Beginning of period 646,450,101 589,033,653 951,662,408
--------------------------------------------
End of period $607,541,793 $ 646,450,101 $ 589,033,653
============================================
Accumulated undistributed
(Distributions in excess
of) net investment
income at end of period $ 4,054,812 $ 1,790,198 $ (1,845,752)
============================================
</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. www.mainstayfunds.com
19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period (c) $ 35.19 $ 29.27 $ 39.82 $ 47.28 $ 54.37 $ 46.51
-------- -------- -------- -------- ---------- ----------
Net investment income (c) 0.28 0.19 0.23 0.18 0.14 0.24
Net realized and unrealized gain (loss) on
investments (c) 2.68 5.73 (9.28) (6.16) (5.44) 9.03
-------- -------- -------- -------- ---------- ----------
Total from investment operations (c) 2.96 5.92 (9.05) (5.98) (5.30) 9.27
-------- -------- -------- -------- ---------- ----------
Less dividends and distributions:
From net investment income (c) (0.13) -- (0.31) (0.18) (0.14) (0.24)
From net realized gain on investments
(c) -- -- (1.19) (1.30) (1.65) (1.17)
-------- -------- -------- -------- ---------- ----------
Total dividends and distributions (c) (0.13) -- (1.50) (1.48) (1.79) (1.41)
-------- -------- -------- -------- ---------- ----------
Net asset value at end of period (c) $ 38.02 $ 35.19 $ 29.27 $ 39.82 $ 47.28 $ 54.37
======== ======== ======== ======== ========== ==========
Total investment return (a) 8.42% 20.23%(b) (22.70%) (12.65%) (9.71%) 19.99%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.73% 0.72%+ 0.59% 0.38% 0.26% 0.50%
Net expenses 0.96% 1.04%+ 1.02% 0.97% 0.92% 0.94%
Expenses (before waiver) 1.02% 1.04%+ 1.02% 0.97% 0.92% 0.94%
Portfolio turnover rate 3% 2% 4% 4% 9% 3%
Net assets at end of period (in 000's) $607,542 $646,450 $589,034 $951,662 $1,136,628 $1,254,018
</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.
(b) Total return is not annualized.
(c) Adjusted to reflect the cumulative effects of the reverse
stock split in each period, as well as the reverse stock
split on December 21, 2004. (See Notes 2(D) and 11.)
</Table>
20 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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. Reasons for which securities may be valued
in this manner include, but are not limited to, trading for a security has been
halted or suspended, a security has been de-listed from a national exchange, or
trading on a security's primary market is temporarily closed at a time when
under normal conditions it would be open. The Fund did not hold securities at
October 31, 2004, that were valued in such manner.
(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 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
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 2004, are not affected.
<Table>
<Caption>
ACCUMULATED UNDISTRIBUTED ACCUMULATED NET REALIZED
NET INVESTMENT INCOME LOSS ON INVESTMENTS
$(74,372) $74,372
</Table>
The reclassification for the Fund is due to real estate investment trust
distributions.
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.
Certain amounts in the Financial Highlights and Notes to Financial Statements
(see Note 8) have been adjusted to reflect the cumulative effects of this
reverse stock split, those that occurred in each of the periods presented, and
the reverse stock split that occurred subsequent to October 31, 2004 (see Note
11).
(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.
(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:
Expenses borne by the Fund, which are paid to related parties to the Fund, are
included among the fees and expenses set forth in the Prospectus at page 21 in
the table "Fees and Expenses of the Fund", shown in the Statement of Operations,
and described below:
(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. Effective as of August 1, 2004, NYLIM has voluntarily
agreed to waive its management fee by 0.25% of the Fund's average net assets and
voluntarily agreed to limit the total operating expenses of the Fund to 0.80%.
For the year ended October 31, 2004, the Manager earned from the Fund $3,193,709
and waived $381,648 of its fee.
(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) SALES CHARGE. The Fund was advised that the amount of sales charges
retained by the Distributor was $48 for the year ended October 31, 2004. The
Fund was also advised that the Distributor retained contingent deferred sales
charges on redemption of Class A shares of $10,524 for the year ended October
31, 2004.
(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
22 MainStay Equity Index Fund
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 for the year
ended October 31, 2004, amounted to $1,156,762.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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.
(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 $18,862 for the year ended October 31,
2004.
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 $90,540 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged the Fund based on market value of the securities and the number
of certain cash transactions incurred by the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
At November 30, 2003, 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 TOTAL
ORDINARY CAPITAL AND UNREALIZED ACCUMULATED
INCOME OTHER LOSSES DEPRECIATION LOSS
$2,285,251 $(119,052,229) $91,126,781 $(25,640,197)
</Table>
The difference between book-basis and tax-basis unrealized depreciation is due
to wash sale deferrals real estate investment trust distributions and
mark-to-market of futures contracts.
At November 30, 2004, for federal income tax purposes, capital loss
carryforwards of $119,052,229 were available, to the extent provided by the
regulations, to offset future realized gains through 2011. 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 $89,854
2011 29,198
---------------------------------------------
$119,052
---------------------------------------------
</Table>
The tax character of distributions paid during the year ended October 31, 2004,
the ten months ended October 31, 2003 and the year ended December 31, 2002,
shown in the Statement of Changes in Net Assets, were as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid from:
Ordinary Income: $2,344,657 $ -- $ 6,679,103
Long-term Capital Gains -- -- 22,461,019
- ---------------------------------------------------------
$2,344,657 $ -- $29,140,122
- ---------------------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $16,199 and $136,729, respectively.
NOTE 7 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2004, the Fund had securities on loan with an aggregate market
value of $2,752,720. The Fund received $2,850,250 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.
Pursuant to Rule 2a-7, securities purchased with collateral received are valued
at amortized cost.
NOTE 8 -- 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
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 year ended October 31,
2004.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
JANUARY 1
YEAR ENDED THROUGH YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31,
2004 2003* 2002
Shares sold(b) 6 6 70
- -------------------------------------------------------------
Shares issued in
reinvestment of
dividends and
distributions(b) 62 --(a) 959
- -------------------------------------------------------------
68 6 1,029
- -------------------------------------------------------------
Shares redeemed(b) (2,457) (1,758) (4,810)
- -------------------------------------------------------------
Net decrease(b) (2,389) (1,752) (3,781)
- -------------------------------------------------------------
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
(a) Less than one thousand shares.
(b) Adjusted to reflect the cumulative effects of the reverse stock split in
each period, as well as the reverse stock split on December 21, 2004. (See
Notes 2(D) and 11.)
NOTE 10 -- 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. For the services that NYLIM and its
affiliates provide to the Fund, they receive the fees described in the
prospectus. Neither NYLIM nor its affiliates receive a separate fee for
providing the Guarantee, although the Guarantee has been considered in
connection with the annual renewal of the management fee. (See Notes 3 and 9.)
NOTE 11 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the Fund and the fees and expenses of that Fund, as well as the
related guarantee disclosure to Fund shareholders. Discussions have been held
with the SEC concerning a possible resolution of this matter. These discussions
are continuing, but there can be no assurance at this time as to the outcome of
these efforts.
NOTE 12 -- SUBSEQUENT EVENT:
Subsequent to October 31, 2004, the Fund declared a dividend of $0.4138 per
share which was paid on December 21, 2004, and also underwent a reverse share
split on that day. The reverse share split rate was 0.9897 per share outstanding
calculated on fund shares outstanding immediately after reinvestment of
dividends.
Certain amounts in the Statement of Assets and Liabilities, Financial
Highlights, and Notes to Financial Statements (see Note 8) have been adjusted to
reflect the effects of this subsequent reverse stock split.
NOTE 13 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
24 MainStay Equity Index Fund
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
www.mainstayfunds.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Equity Index Fund (the "Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2004, and
the related statement of operations, statement of changes in net assets and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the period ended October 31, 2003 and the year ended December 31, 2002, and
the financial highlights for the periods presented through October 31, 2003,
were audited by other auditors, whose report dated December 18, 2003 expressed
an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Equity Index Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
26 MainStay Equity Index Fund
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 27
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
28 MainStay Equity Index Fund
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that New York Life Investment
Management LLC (NYLIM) uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
and (iii) on the Securities and Exchange Commission's ("SEC") website at
www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 29
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2004,
should be multiplied by 100% to arrive at the amount eligible for qualified
dividend income and 100% for the corporate dividends received deduction.
In January 2005, shareholders will receive on IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2004. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2004.
30 MainStay Equity Index Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
www.mainstayfunds.com 31
(MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06368 (RECYCLE LOGO) MSEI11-12/04
06
(MAINSTAY LOGO)
MAINSTAY
GOVERNMENT FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay Government Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quar-
ter of 2004, and according to preliminary estimates from the Bureau of Economic
Analysis, gross domestic product grew at a seasonally adjusted annual rate of
3.9% in the third quarter of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 13
- ----------------------------------------------------
Notes to Financial Statements 18
Report of Independent Registered Public
Accounting Firm 23
- ----------------------------------------------------
Trustees and Officers 24
- ----------------------------------------------------
Proxy Voting Policies and Procedures 26
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 26
- ----------------------------------------------------
MainStay Funds 27
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -1.07% 5.26% 5.95%
Excluding sales charges 3.60 6.23 6.43
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
LEHMAN BROTHERS(R)
MAINSTAY GOVERNMENT FUND GOVERNMENT BOND INDEX
------------------------ ---------------------
10/31/94 9550 10000
10851.7 11538.3
11299.7 12128.6
12208.5 13178.8
13399.6 14665.6
13169 14488.5
14117.1 15652.7
16115 18013.2
16873.1 19167
17197.8 19723.4
10/31/04 17816.4 20676.7
</Table>
<Table>
-- MainStay Government Fund -- Lehman Brothers
Government Bond Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -2.08% 5.13% 5.69%
Excluding sales charges 2.92 5.45 5.69
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
LEHMAN BROTHERS(R)
MAINSTAY GOVERNMENT FUND GOVERNMENT BOND INDEX
------------------------ ---------------------
10/31/94 10000 10000
11292.7 11538.3
11689.3 12128.6
12557.5 13178.8
13675.9 14665.6
13334.3 14488.5
14196.3 15652.7
16088.6 18013.2
16719.6 19167
16894.8 19723.4
10/31/04 17387.8 20676.7
</Table>
<Table>
-- MainStay Government Fund -- Lehman Brothers
Government Bond Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 1.92% 5.45% 5.69%
Excluding sales charges 2.92 5.45 5.69
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
LEHMAN BROTHERS(R)
MAINSTAY GOVERNMENT FUND GOVERNMENT BOND INDEX
------------------------ ---------------------
10/31/94 10000 10000
11292.7 11538.3
11689.3 12128.6
12557.5 13178.8
13675.9 14665.6
13334.3 14488.5
14196.3 15652.7
16088.6 18013.2
16719.6 19167
16894.8 19723.4
10/31/04 17387.6 20676.7
</Table>
<Table>
-- MainStay Government Fund -- Lehman Brothers
Government Bond Index
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 4.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee, and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. From inception (5/1/86) through
12/31/94 (for Class A, first offered 1/3/95), 8/31/98 (for Class C, first
offered 9/1/98), and 12/31/03 (for Class I, first offered 1/2/04), performance
of Class A, C, and I includes the historical performance of Class B shares
adjusted to reflect the applicable sales charge (or CDSC) and fees and expenses
for Class A, C, and I shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Government Fund
CLASS I SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
3.93% 6.51% 6.74%
</Table>
(LINE GRAPH FOR CLASS I SHARES IN $)
<Table>
<Caption>
LEHMAN BROTHERS(R)
MAINSTAY GOVERNMENT FUND GOVERNMENT BOND INDEX
------------------------ ---------------------
10/31/94 10000 10000
11416.5 11538.3
11921.3 12128.6
12933.2 13178.8
14236.7 14665.6
14005.6 14488.5
15061.3 15652.7
17252.2 18013.2
18104.2 19167
18475 19723.4
10/31/04 19201.7 20676.7
</Table>
<Table>
-- MainStay Government Fund -- Lehman Brothers
Government Bond Index
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Lehman Brothers(R) Government Bond Index 4.83% 7.37% 7.53%
Average Lipper general U.S. government
fund(2) 4.19 6.28 6.53
</Table>
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. The Lehman Brothers(R) Government Bond Index is considered
to be the Fund's broad-based securities-market index for comparison purposes.
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.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY GOVERNMENT FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,032.75 $ 6.39 $1,018.75 $ 6.34
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,028.90 $10.20 $1,015.00 $10.13
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,028.90 $10.20 $1,015.00 $10.13
- ------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,035.15 $ 4.45 $1,020.65 $ 4.42
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
FNMA 52.9%
Short-Term Investments (collateral from securities
lending is 22.3%) 34.3%
FHLMC 10.3%
U.S. Treasury Bonds 8.7%
U.S. Treasury Notes 8.6%
Asset-Backed Securities 5.7%
GNMA 4.4%
Corporate Bonds 3.4%
U.S. Government & Federal Agency 2.0%
Mortgage-Backed Securities 1.8%
Municipal Bonds 0.4%
Liabilities in Excess of Cash and Other Assets -32.5%
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Federal National Mortgage Association 6.00%,
due 12/13/34 TBA
2. Federal National Mortgage Association 4.50%,
due 7/1/18
3. Federal National Mortgage Association 6.625%,
9/15/09
4. U.S. Treasury Bond 8.75%, due 8/15/20
5. Federal National Mortgage Association 4.50%,
due 11/1/18
6. U.S. Treasury Bond 6.25%, due 8/15/23
7. Federal Home Loan Mortgage Association 5.25%,
due 11/5/12
8. U.S. Treasury Note 3.00%, due 2/15/08
9. Federal National Mortgage Association 5.00%,
due 9/1/17
10. Federal National Mortgage Association 5.50%,
due 11/18/19 TBA
</Table>
6 MainStay Government Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Gary Goodenough and Joseph Portera of
MacKay Shields LLC
WHAT ECONOMIC FACTORS INFLUENCED THE BOND MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2004?
The Federal Reserve maintained the targeted federal funds rate at an
accommodative 1.00% through the first half of the Fund's fiscal year, but for
much of that period, economic data was mixed. With slack in the labor markets,
slack in manufacturing capacity, and little pricing power in most industries, it
appeared that there was little risk of the economy overheating. In April 2004,
however, uniformly firm economic releases challenged that view. The risk of
deflation appeared to be waning, while trend-level growth appeared sustainable.
The consensus was that the Federal Reserve's cautionary stance would be
relatively short-lived. Consistent with market expectations, the Federal Open
Market Committee tightened monetary policy at its June 30, 2004, meeting by
raising the targeted federal funds rate to 1.25%. Another 25-basis-point rate
hike followed in August, and yet another in September. These moves brought the
targeted federal funds rate to 1.75% at the end of October 2004.
HOW DID THESE FACTORS AFFECT TREASURY YIELDS?
During the 12-month reporting period, the U.S. Treasury yield curve pivoted
around the five-year maturity benchmark. Two-year Treasury yields rose from 1.8%
to 2.6%; five-year yields were basically unchanged at 3.25%; 10-year yields fell
from 4.3% to 4.0%; and 30-year yields declined from 5.1% to 4.8%. The narrowing
of the yield spread between the two-year and 30-year maturities (commonly known
as a flattening of the yield curve) was not solely a result of Federal Open
Market Committee interest-rate tightening. The flattening also stemmed from
lower inflation expectations and large block purchases of U.S. Treasury
securities by foreign governments.
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests at least 80% of its assets in U.S. government
securities. It may invest up to 20% of its assets in mortgage-related and
asset-backed securities or other securities that are not U.S. government
securities. In implementing this strategy, we use a combined approach to
investing. We analyze economic trends as well as factors pertinent to particular
issuers and securities. The Fund's principal investments include U.S. Treasury
bills, notes, and bonds, Ginnie Mae certificates, and other U.S. government
securities representing ownership interests in mortgage pools, such as
securities issued by Fannie Mae and Freddie Mac. We may sell securities when the
condition of the economy, meaningful changes in an issuer's condition, or other
factors suggest that the securities will no longer contribute to the Fund's
ability to meet its investment objective.
HOW DID YOU POSITION THE FUND'S PORTFOLIO ACROSS THE VARIOUS BOND SECTORS
AVAILABLE TO THE FUND?
The Fund's performance was positively affected by our preference for securities
other than U.S. Treasuries during the reporting period. We favored what are
known as securitized products for their high quality, liquidity, and yield
advantage to Treasuries. We diversified the Fund's commitment to these products
across agency debentures, residential mortgage-backed securities, commercial
mortgage-backed securities, and asset-backed securities. Of these, agency
debentures, residential mortgage-backed securities, and asset-backed securities
each outperformed U.S. Treasuries for the 12-month reporting period. These
sectors tend to do well when U.S. Treasury yields are range-bound, since cash
flows are more predictable under these conditions. As described above, Treasury
yields for maturities of five years and longer held to a fairly tight range
during the annual period.
At the end of the period, the Fund's net assets were invested 18% in U.S.
Treasuries, 17% in agency debentures, 55% in mortgage-backed securities issued
by government-sponsored and government-related enterprises, 6% in asset-backed
securities, and 4% in investment-grade credits. In total, the allocation to
non-government-related securities did not exceed 10%.
DID YOU MAKE ANY CHANGES TO THE FUND'S ALLOCATION DURING THE REPORTING PERIOD?
We reduced the Fund's allocation to Treasuries and evenly split the proceeds
between agency debentures and mortgage-backed securities. These trades boosted
the yield of the Fund without compromising credit quality, and they shortened
the Fund's duration.
Investments in the Fund are not guaranteed, even though some of the Fund's
investments are guaranteed by the U.S. government or its agencies or
instrumentalities. 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.
www.mainstayfunds.com 7
HOW DID THE FUND'S YIELD CURVE AND DURATION POSITIONING AFFECT PERFORMANCE?
We maintained a neutral yield-curve posture during the 12-month reporting
period, so the flattening of the yield curve had minimal impact on the Fund's
performance. The Fund's duration, however, detracted from the Fund's relative
results. The duration effect outweighed the benefits of our focus on securities
that tend to trade at higher-than-Treasury yields.
CAN YOU BE MORE SPECIFIC ABOUT THE FUND'S DURATION POSITIONING?
In April, the Fund's duration posture, which was longer than the average
duration of other intermediate government bond funds, hurt relative performance
when interest rates climbed. We decided to shift the Fund's duration closer to
the median duration(1) by selling long-term Treasuries and buying shorter-
duration mortgage-backed securities and agency debentures. Yield trends for the
balance of the fiscal year, however, did not work in favor of this
repositioning. What we failed to appreciate was the sizeable impact of a weaker
U.S. dollar on interest rates. Specifically, foreign central banks bought large
blocks of U.S. Treasuries to stall the appreciation of their currencies against
the weaker U.S. dollar. Foreign central banks undertook this action to keep the
price of U.S. exports from falling relative to the prices of domestic goods. The
foreign central banks sought to ease deflationary pressures that might impede
the recovery of their home economies. In addition, Treasury yields for
maturities of five years and longer declined significantly between the end of
April and the end of October, which worked against our duration adjustment. At
the end of October 2004, the Fund's duration stood at 3.7 years, toward the
lower end of our target duration range.
WHAT DO YOU ANTICIPATE FOR THE ECONOMY AND INTEREST RATES GOING FORWARD?
At the end of the fiscal year, the eurodollar futures market predicted a 2.5%
targeted U.S. federal funds rate by March 2005. We agree with this view. As we
move toward 2005, we feel that a pick-up in economic growth is a reasonable
assumption given low interest rates, lower marginal tax rates, low inflation,
firm consumer-spending patterns, and improved corporate confidence. We believe
that the balance of the Federal Reserve's move in interest rates can be
accomplished at a reasonable, measured pace. As long as consumers remain highly
leveraged and productivity growth continues to drive labor costs lower, the
Federal Reserve has little incentive to be more aggressive, unless inflation
begins to accelerate.
HOW ARE YOU POSITIONING THE FUND GIVEN YOUR VIEW?
We intend to maintain the Fund's shorter-than-benchmark duration for the near
term. This positioning supports our view of the economy and interest rates, as
well as the need for increased Treasury issuance to fund the federal budget
imbalance. We also intend to continue favoring sectors other than U.S.
Treasuries. In terms of Treasury inflation-protected securities (TIPS), we are
less confident. We believe TIPS offer limited value relative to
duration-equivalent nominal Treasuries at current inflation levels. If the
Treasury yield curve were to steepen, which usually signals that the market
expects inflation to rise, then we might reassess our view.
1. The Fund's duration is gauged against the duration of the median fund in the
Lipper government securities fund universe. Analysis of performance data
suggests that the duration of the average fund is longer than that of the
median fund. Lipper Inc. is an independent fund performance monitor.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts will
come to pass. This material does not constitute investment advice and is not
intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8 MainStay Government Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS (98.2%)+
ASSET-BACKED SECURITIES (5.7%)
- ---------------------------------------------------------------------------------
CONSUMER FINANCE (2.5%)
BMW Vehicle Owner Trust
Series 2003-A Class A3
1.94%, due 2/25/07 $ 2,466,277 $ 2,460,250
Harley-Davidson
Motorcycle Trust
Series 2002-1 Class A2
4.50%, due 1/15/10 6,409,620 6,531,881
Volkswagen Auto Loan
Enhanced Trust
Series 2003-2 Class A3
2.27%, due 10/22/07 1,830,000 1,822,985
-------------
10,815,116
-------------
CONSUMER LOANS (0.6%)
Atlantic City Electric
Transition Funding LLC
Series 2002-1 Class A4
5.55%, due 10/20/23 2,275,000 2,420,889
-------------
DIVERSIFIED FINANCIAL SERVICES (2.2%)
Capital One Master Trust
Series 2001-5 Class A
5.30%, due 6/15/09 1,620,000 1,687,834
Massachusetts RRB Special Purpose Trust
Series 2001-1 Class A
6.53%, due 6/1/15 7,161,749 7,918,655
-------------
9,606,489
-------------
THRIFTS & MORTGAGE FINANCE (0.4%)
Vanderbilt Mortgage Finance
Series 1999-B Class 1A4
6.545%, due 4/7/18 1,673,545 1,709,418
-------------
Total Asset-Backed Securities
(Cost $23,596,663) 24,551,912
-------------
CORPORATE BONDS (3.4%)
- ---------------------------------------------------------------------------------
COMMERCIAL BANKS (0.2%)
Wachovia Corp.
4.875%, due 2/15/14 920,000 926,426
-------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONSUMER FINANCE (0.6%)
Ford Motor Credit Co.
7.00%, due 10/1/13 $ 1,635,000 $ 1,726,648
General Motors Acceptance Corp.
6.875%, due 8/28/12 451,000 469,513
Household Finance Corp.
4.75%, due 7/15/13 440,000 439,344
-------------
2,635,505
-------------
ELECTRIC UTILITIES (0.5%)
Consumers Energy Co.
Series H
4.80%, due 2/17/09 1,970,000 2,036,145
-------------
MEDIA (1.1%)
AT&T Broadband Corp.
9.455%, due 11/15/22 1,695,000 2,326,725
TCI Communications, Inc.
8.875%, due 5/1/17 1,075,000 1,365,537
Tele-Communications, Inc.
10.125%, due 4/15/22 860,000 1,221,464
-------------
4,913,726
-------------
OIL & GAS (0.3%)
Goldman Sachs
Group, Inc. (The)
5.00%, due 10/1/14 (b) 1,115,000 1,114,687
-------------
REAL ESTATE (0.7%)
HRPT Properties Trust
6.40%, due 2/15/15 2,700,000 2,890,007
-------------
Total Corporate Bonds
(Cost $14,053,440) 14,516,496
-------------
MORTGAGE-BACKED SECURITIES (1.8%)
- ---------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (1.8%)
Fannie Mae Grantor Trust
Series 2003-T1 Class B
4.491%, due 11/25/12 3,545,000 3,572,462
Series 1998-M6 Class A1
6.32%, due 8/15/08 3,974,002 4,278,747
-------------
Total Mortgage-Backed Securities
(Cost $7,863,736) 7,851,209
-------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MUNICIPAL BOND (0.4%)
- ---------------------------------------------------------------------------------
TEXAS (0.4%)
Harris County Texas Industrial Development Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 $ 1,720,000 $ 1,753,884
-------------
Total Municipal Bond
(Cost $1,756,888) 1,753,884
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES (86.9%)
- ---------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (3.3%)
V 5.25%, due 11/5/12 10,900,000 11,168,968
6.00%, due 12/17/18 2,865,000 2,873,993
-------------
14,042,961
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (7.0%)
3.00%, due 8/1/10 6,373,959 6,181,760
5.00%, due 6/1/33-8/1/33 (c) 14,048,599 14,048,283
5.50%, due 12/13/34 TBA (a) 9,495,000 9,646,331
-------------
29,876,374
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (11.2%)
2.80%, due 3/1/19 1,750,000 1,737,107
4.375%, due 7/17/13 5,140,000 5,023,229
5.25%, due 1/15/09-8/1/12 (b) 9,600,000 10,171,277
5.50%, due 5/2/06 8,970,000 9,334,487
V 6.625%, due 9/15/09 19,130,000 21,654,050
-------------
47,920,150
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (41.7%)
3.347%, due 4/1/34 (c) 7,191,475 7,202,407
V 4.50%, due 7/1/18 (c) 24,638,321 24,769,036
V 4.50%, due 11/1/18 (c) 14,097,935 14,172,730
V 5.00%, due 9/1/17 (c) 10,463,154 10,692,016
5.00%, due 5/13/34 TBA (a) 10,405,000 10,339,969
5.50%, due 1/1/17-11/1/33 (c) 36,121,160 37,163,631
V 5.50%, due 11/18/19-12/13/34 TBA (a) 17,770,000 18,244,794
6.00%, due 12/1/16-11/1/32 7,029,701 7,319,701
V 6.00%, due 11/15/34-12/13/34 TBA (a) 31,465,000 32,541,875
6.50%, due 10/1/31 2,803,943 2,954,037
7.00%, due 7/1/31-11/1/32 (c) 5,291,693 5,622,441
7.50%, due 1/1/30-8/1/31 7,244,986 7,788,803
-------------
178,811,440
-------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (4.4%)
6.00%, due 8/15/32-12/15/32 (c) $ 9,523,257 $ 9,927,503
6.50%, due 8/15/28-4/15/31 (c) 5,982,993 6,343,679
7.50%, due 12/15/28-2/15/32 2,618,028 2,824,399
-------------
19,095,581
-------------
HVIDE VAN OMMEREN TANKERS (1.4%)
Series I
7.54%, due 12/14/23 (e) 2,963,000 3,080,364
Series II
7.54%, due 12/14/23 (e) 2,964,000 3,081,404
-------------
6,161,768
-------------
OVERSEAS PRIVATE INVESTMENT CORPORATION (0.6%)
3.74%, due 4/15/15 (e) 2,486,009 2,480,416
-------------
UNITED STATES TREASURY BONDS (8.7%)
5.375%, due 2/15/31 (b) 5,755,000 6,250,695
V 6.25%, due 8/15/23 (b) 9,465,000 11,180,531
6.875%, due 8/15/25 630,000 800,051
7.50%, due 11/15/16 530,000 686,412
V 8.75%, due 8/15/20 (b) 12,550,000 18,355,843
-------------
37,273,532
-------------
UNITED STATES TREASURY NOTES (8.6%)
V 3.00%, due 2/15/08 (b) 10,705,000 10,738,871
4.25%, due 11/15/13 920,000 938,687
4.375%, due 5/15/07 (b) 7,620,000 7,931,048
4.625%, due 5/15/06 (b) 5,290,000 5,467,919
4.75%, due 5/15/14 1,240,000 1,311,107
4.875%, due 2/15/12 (b) 3,010,000 3,225,757
5.75%, due 8/15/10 790,000 883,473
6.00%, due 8/15/09 (b) 5,865,000 6,572,694
-------------
37,069,556
-------------
Total U.S. Government & Federal Agencies
(Cost $364,724,024) 372,731,778
-------------
Total Long-Term Investments
(Cost $411,994,751) 421,405,279
-------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
</Table>
10 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (34.3%)
- ---------------------------------------------------------------------------------
COMMERCIAL PAPER (8.2%)
Harwood Street Funding I
Liquidity Note
1.9329%, due 11/8/04 (d) $ 15,000,000 $ 14,994,458
Liquid Funding
1.8794%, due 12/10/04 (d) 10,025,000 10,005,017
Starbird Funding Corp.
2.0851%, due 3/14/05 (d) 10,000,000 9,925,003
-------------
Total Commercial Paper
(Cost $34,924,478) 34,924,478
-------------
FEDERAL AGENCIES (12.0%)
Federal Home Loan Bank
(Discount Notes)
1.69%, due 11/1/04 4,435,000 4,435,000
-------------
Federal National Mortgage Association
(Discount Notes)
1.73%, due 11/4/04 2,585,000 2,584,627
1.73%, due 11/8/04 9,000,000 8,996,972
1.74%, due 11/1/04 6,875,000 6,875,000
1.87%, due 12/8/04 12,000,000 11,976,928
-------------
30,433,527
-------------
Federal Home Loan Mortgage Corporation
1.73%, due 11/2/04 10,075,000 10,074,516
1.73%, due 11/10/04 6,690,000 6,687,105
-------------
16,761,621
-------------
Total Federal Agencies
(Cost $51,630,148) 51,630,148
-------------
<Caption>
SHARES
INVESTMENT COMPANY (0.2%)
AIM Institutional Funds Group (d) 644,746 644,746
-------------
Total Investment Company
(Cost $644,746) 644,746
-------------
<Caption>
PRINCIPAL
AMOUNT VALUE
MASTER NOTE (1.4%)
Bank of America LLC
1.955%, due 11/1/04 (d) $ 6,160,000 $ 6,160,000
-------------
Total Master Note
(Cost $6,160,000) 6,160,000
-------------
REPURCHASE AGREEMENTS (12.5%)
Credit Suisse First Boston LLC
1.925%, dated 10/29/04
due 11/1/04
Proceeds at Maturity
$16,481,646 (d)
(Collateralized by Various Bonds with a
Principal Amount of $16,525,180 and a Market
Value of $16,809,266) 16,479,000 16,479,000
-------------
Lehman Brothers, Inc.
1.925%, dated 10/29/04
due 11/1/04
Proceeds at Maturity
$6,719,078 (d)
(Collateralized by Various Bonds with a
Principal Amount of $13,404,182 and a Market
Value of $6,929,848) 6,718,000 6,718,000
-------------
Merrill Lynch Pierce Fenner & Smith, Inc.
1.955%, dated 10/29/04
due 11/1/04
Proceeds at Maturity
$11,986,953 (d)
(Collateralized by Various Bonds with a
Principal Amount of $11,851,925 and a Market
Value of $12,584,556) 11,985,000 11,985,000
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ---------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (CONTINUED)
Morgan Stanley & Co., Inc.
1.925%, dated 10/29/04
due 11/1/04
Proceeds at Maturity
$18,419,954 (d)
(Collateralized by Various Bonds with a
Principal Amount of $21,208,706 and a Market
Value of $19,372,165) $ 18,417,000 $ 18,417,000
-------------
Total Repurchase Agreements
(Cost $53,599,000) 53,599,000
-------------
Total Short-Term Investments
(Cost $146,958,372) 146,958,372
-------------
Total Investments
(Cost $558,953,123) (f) 132.5% 568,363,651(g)
Liabilities in Excess of
Cash and Other Assets (32.5) (139,316,710)
------------- -------------
Net Assets 100.0% $ 429,046,941
============= =============
</Table>
<Table>
(a) TBA: Securities purchased on a forward commitment basis
with an approximate principal amount and maturity date.
The actual principal amount and the maturity will be
determined upon settlement. The total market value of
the TBAs is $70,772,970.
(b) Represents securities out on loan or a portion of which
is out on loan. (See Note 2c).
(c) Segregated as collateral for TBA.
(d) Represents security or a portion thereof, purchased with
cash collateral received for securities on loan.
(e) United States Government Guaranteed Security.
(f) The cost for federal income tax purpose is $559,011,831.
(g) At October 31, 2004 net unrealized appreciation was
$9,351,820 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 $9,994,141 and
aggregate unrealized depreciation for all investments on
which there was an excess of cost over market value of
$642,321.
</Table>
12 MainStay Government Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $558,953,123) including
$78,874,982 market value of
securities loaned $568,363,651
Cash 4,943
Deposits with brokers for securities loaned 3,654
Receivables:
Investment securities sold 24,594,215
Interest 3,138,948
Fund shares sold 205,128
Other assets 21,691
------------
Total assets 596,332,230
------------
LIABILITIES:
Securities lending collateral 95,331,878
Payables:
Investment securities purchased 70,291,520
Fund shares redeemed 665,931
NYLIFE Distributors 309,047
Transfer agent 265,300
Manager 187,899
Custodian 8,475
Trustees 5,910
Accrued expenses 75,976
Dividends payable 143,353
------------
Total liabilities 167,285,289
------------
Net assets $429,046,941
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 102,937
Class B 397,843
Class C 10,270
Class I 31
Additional paid-in capital 461,672,019
Distributions in excess of net investment
income (202,062)
Accumulated net realized loss on investments (42,344,625)
Net unrealized appreciation on investments 9,410,528
------------
Net assets $429,046,941
============
CLASS A
Net assets applicable to outstanding shares $ 86,516,272
============
Shares of beneficial interest outstanding 10,293,684
============
Net asset value per share outstanding $ 8.40
Maximum sales charge (4.50% of offering price) 0.40
------------
Maximum offering price per share outstanding $ 8.80
============
CLASS B
Net assets applicable to outstanding shares $333,884,215
============
Shares of beneficial interest outstanding 39,784,300
============
Net asset value and offering price per share
outstanding $ 8.39
============
CLASS C
Net assets applicable to outstanding shares $ 8,620,217
============
Shares of beneficial interest outstanding 1,027,030
============
Net asset value and offering price per share
outstanding $ 8.39
============
CLASS I
Net assets applicable to outstanding shares $ 26,237
============
Shares of beneficial interest outstanding 3,119
============
Net asset value and offering price per share
outstanding $ 8.41
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Interest $19,505,667
Income from securities loaned -- net 154,221
-----------
Total income 19,659,888
-----------
EXPENSES:
Manager 2,805,337
Distribution -- Class B 2,753,018
Distribution -- Class C 76,449
Transfer agent -- Classes A, B and C 1,527,177
Transfer agent -- Class I 18
Service -- Class A 225,692
Service -- Class B 917,691
Service -- Class C 25,484
Shareholder communication 102,856
Professional 80,564
Recordkeeping 73,420
Custodian 55,403
Registration 50,898
Trustees 33,932
Miscellaneous 37,921
-----------
Total expenses before waiver 8,765,860
Fees waived by manager (108,955)
-----------
Net expenses 8,656,905
-----------
Net investment income 11,002,983
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (2,060,653)
Net change in unrealized appreciation on
investments 4,945,761
-----------
Net realized and unrealized gain on investments 2,885,108
-----------
Net increase in net assets resulting from
operations $13,888,091
===========
</Table>
14 MainStay Government Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment income $ 11,002,983 $ 10,750,816 $ 16,157,348
Net realized gain
(loss) on investments (2,060,653) 6,310,913 13,384,281
Net change in
unrealized
appreciation
(depreciation) on
investments 4,945,761 (17,432,071) 14,691,813
---------------------------------------------
Net increase (decrease)
in net assets
resulting from
operations 13,888,091 (370,342) 44,233,442
---------------------------------------------
Dividends to shareholders:
From net investment income:
Class A (2,788,796) (3,589,522) (3,148,466)
Class B (9,032,735) (12,703,616) (15,614,432)
Class C (249,466) (447,985) (453,946)
Class I (374) -- --
Return of Capital:
Class A (598,637) -- --
Class B (1,938,443) -- --
Class C (54,422) -- --
---------------------------------------------
Total dividends to
shareholders (14,662,873) (16,741,123) (19,216,844)
---------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 28,921,503 141,504,732 207,805,168
Class B 18,905,610 48,161,809 132,321,833
Class C 2,369,344 7,797,317 14,085,627
Class I 41,932 -- --
</Table>
<Table>
<Caption>
2004 2003* 2002
Net asset value of shares issued to
shareholders in reinvestment of
dividends:
Class A 2,971,684 3,096,505 2,650,009
Class B 9,046,769 10,444,747 12,557,843
Class C 226,402 342,006 350,032
Class I 288 -- --
---------------------------------------------
62,483,532 211,347,116 369,770,512
Cost of shares redeemed:
Class A (45,088,467) (134,112,683) (180,730,168)
Class B (101,629,897) (114,314,699) (99,780,727)
Class C (6,344,857) (13,253,516) (6,334,835)
Class I (15,979) -- --
---------------------------------------------
(153,079,200) (261,680,898) (286,845,730)
Increase (decrease)
in net assets
derived from
capital share
transactions (90,595,668) (50,333,782) 82,924,782
---------------------------------------------
Net increase
(decrease) in net
assets (91,370,450) (67,445,247) 107,941,380
NET ASSETS:
Beginning of period $ 520,417,391 $ 587,862,638 479,921,258
---------------------------------------------
End of period $ 429,046,941 $ 520,417,391 $ 587,862,638
=============================================
Accumulated
distributions in excess
of net investment
income $ (202,062) $ (318,666) $ (58,709)
=============================================
</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. www.mainstayfunds.com
15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH ------------------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of
period $ 8.42 $ 8.67 $ 8.25 $ 8.19 $ 7.75 $ 8.46
------- ------- ------- ------- ------- -------
Net investment income 0.25 0.20 0.32 0.39(a)(e) 0.46(a) 0.42
Net realized and unrealized gain
(loss) on investments 0.05 (0.16) 0.47 0.12(e) 0.45 (0.65)
------- ------- ------- ------- ------- -------
Total from investment operations 0.30 0.04 0.79 0.51 0.91 (0.23)
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income (0.28) (0.29) (0.37) (0.39) (0.46) (0.42)
Return of capital (0.04) -- -- (0.06) (0.01) (0.06)
------- ------- ------- ------- ------- -------
Total dividends and distributions (0.32) (0.29) (0.37) (0.45) (0.47) (0.48)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 8.40 $ 8.42 $ 8.67 $ 8.25 $ 8.19 $ 7.75
======= ======= ======= ======= ======= =======
Total investment return (b) 3.60% 0.50%(c) 9.75% 6.33% 12.20% (2.81%)
Ratios (to average net assets)/
Supplemental Data:
Net investment income 2.96% 2.85%+ 3.76% 4.71%(e) 5.89% 5.17%
Net expenses 1.25% 1.25%+ 1.19% 1.17% 1.16% 1.13%
Expenses (before waiver) 1.27% 1.25%+ 1.19% 1.17% 1.16% 1.13%
Portfolio turnover rate 110% 99% 117% 151% 324% 255%
Net assets at end of period (in
000's) $86,516 $99,852 $92,581 $59,405 $58,674 $34,116
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH ------------------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of
period $ 8.40 $ 8.66 $ 8.24 $ 8.18 $ 7.73 $ 8.44
------- ------- ------- ------- ------- -------
Net investment income 0.17 0.14 0.26 0.33(a)(e) 0.40(a) 0.36
Net realized and unrealized gain
(loss) on investments 0.07 (0.16) 0.46 0.12(e) 0.46 (0.66)
------- ------- ------- ------- ------- -------
Total from investment operations 0.24 (0.02) 0.72 0.45 0.86 (0.30)
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income (0.21) (0.24) (0.30) (0.34) (0.41) (0.36)
Return of capital (0.04) -- -- (0.05) (0.00)(d) (0.05)
------- ------- ------- ------- ------- -------
Total dividends and distributions (0.25) (0.24) (0.30) (0.39) (0.41) (0.41)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 8.39 $ 8.40 $ 8.66 $ 8.24 $ 8.18 $ 7.73
======= ======= ======= ======= ======= =======
Total investment return (b) 2.92% (0.25%)(c) 8.94% 5.54% 11.49% (3.60%)
Ratios (to average net assets)/
Supplemental Data:
Net investment income 2.21% 2.10%+ 3.01% 3.96%(e) 5.14% 4.42%
Net expenses 2.00% 2.00%+ 1.94% 1.92% 1.91% 1.88%
Expenses (before waiver) 2.02% 2.00%+ 1.94% 1.92% 1.91% 1.88%
Portfolio turnover rate 110% 99% 117% 151% 324% 255%
Net assets at end of period (in
000's) $ 8,620 $12,385 $17,940 $ 9,245 $ 5,059 $ 532
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class I shares were first offered on January 2, 2004.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges. Class
I is not subject to sales charges.
(c) Total return is not annualized.
(d) Less than one cent per share.
(e) 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>
16 MainStay Government Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH ------------------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 8.40 $ 8.66 $ 8.24 $ 8.18 $ 7.73 $ 8.44
-------- -------- -------- -------- -------- --------
0.17 0.14 0.26 0.33(a)(e) 0.40(a) 0.36
0.07 (0.16) 0.46 0.12(e) 0.46 (0.66)
-------- -------- -------- -------- -------- --------
0.24 (0.02) 0.72 0.45 0.86 (0.30)
-------- -------- -------- -------- -------- --------
(0.21) (0.24) (0.30) (0.34) (0.41) (0.36)
(0.04) -- -- (0.05) (0.00)(d) (0.05)
-------- -------- -------- -------- -------- --------
(0.25) (0.24) (0.30) (0.39) (0.41) (0.41)
-------- -------- -------- -------- -------- --------
$ 8.39 $ 8.40 $ 8.66 $ 8.24 $ 8.18 $ 7.73
======== ======== ======== ======== ======== ========
2.92% (0.25%)(c) 8.94% 5.54% 11.49% (3.60%)
2.21% 2.10%+ 3.01% 3.96%(e) 5.14% 4.42%
2.00% 2.00%+ 1.94% 1.92% 1.91% 1.88%
2.02% 2.00% 1.94% 1.92% 1.91% 1.88%
110% 99% 117% 151% 324% 255%
$333,884 $408,180 $477,341 $411,271 $403,374 $483,495
</Table>
<Table>
<Caption>
CLASS I
-----------------
JANUARY 2, 2004**
THROUGH
OCTOBER 31,
2004
$ 8.44
--------
0.29
(0.04)
--------
0.25
--------
(0.28)
--
--------
(0.28)
--------
$ 8.41
========
2.99%(c)
3.34%+
0.87%+
0.89%+
110%
$ 26
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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 four 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 I shares are not subject to
sales charge. Distribution of Class I shares commenced on January 2, 2004. Class
A shares, Class B shares, Class C shares and Class I shares bear the same voting
(except for issues that relate solely to one class), dividend, liquidation and
other rights and conditions. Each class of shares other than Class I shares
bears distribution and/or service fee payments 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.
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 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. Reasons for which securities may be valued
in this manner include, but are not limited to, trading for a security has been
halted or suspended, a security has been de-listed from a national exchange, or
trading on a security's primary market is temporarily closed at a time when
under normal conditions it would be open. The Fund did not hold securities at
October 31, 2004, that were valued in such manner.
(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 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. (See Note 7.)
(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
18 MainStay Government Fund
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
distributions in excess of net investment income, accumulated net realized loss
and additional paid-in capital arising from permanent differences; net assets at
October 31, 2004 are not affected.
<Table>
<Caption>
DISTRIBUTIONS IN EXCESS ACCUMULATED NET
NET INVESTMENT REALIZED LOSS ON ADDITIONAL
INCOME INVESTMENTS PAID-IN CAPITAL
$3,776,494 $8,462,615 $(12,239,109)
----------------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to a tax return of capital
and expiration of capital loss carryforwards for tax purposes.
(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, 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.
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.
Through July 31, 2004 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 on assets up to $1 billion
and 0.55% annually on assets in excess of $1 billion. Effective as of August 1,
2004, NYLIM has voluntarily agreed to waive its management fee by 0.10% of the
Fund's average net assets. In addition, effective December 1, 2004, NYLIM has
voluntarily agreed to reimburse the expenses of the Fund to the extent that
operating expenses would exceed on an annualized basis 1.05%, 1.80% and 1.80% of
the average daily net assets of the Class A, Class B and Class C shares,
respectively, and an equivalent reduction in the management fee for Class I. For
the year ended October 31, 2004, the Manager earned from the Fund $2,805,337,
and waived $108,955 of its fee.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager pays the Subadvisor a monthly fee of 0.30% of the Fund's
average daily net assets on assets up to $1 billion and 0.275% 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) 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 other than Class I 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
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 shares was $20,960 for the year ended
October 31, 2004. 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 $9,536, $241,096 and $5,664, respectively, for the year ended October
31, 2004.
(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 for the year ended October 31, 2004,
amounted to $1,527,195.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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 $13,575 for the year ended
October 31, 2004.
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 $73,420 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
State Street Bank and Trust Company is custodian of cash and securities of the
Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
TOTAL
ACCUMULATED CAPITAL UNREALIZED ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
$(42,344,625) $9,351,820 $(32,992,805)
------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to premium amortization adjustments.
At October 31, 2004 for federal income tax purposes, capital loss carryforwards
of $42,344,625 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)
2005 $ 1,897
2007 30,060
2008 6,930
2012 3,458
---------------------------
$42,345
---------------------------
</Table>
20 MainStay Government Fund
The tax character of distributions paid for the year ended October 31, 2004,
during the ten months ended October 31, 2003 and the year ended December 31,
2002, shown in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid from
Ordinary Income $12,071,371 $16,741,123 $19,216,844
Return of Capital 2,591,502 -- --
- ------------------------------------------------------------
$14,662,873 $16,741,123 $19,216,844
- ------------------------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of U.S. Government
securities were $499,968 and $525,206, respectively. Purchases and sales of
securities other than U.S. Government securities and short-term securities, were
$8,548 and $17,720, respectively.
NOTE 7 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2004, the Fund had securities on loan with an aggregate market
value of $78,874,982. The Fund received $95,331,878 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. Pursuant to Rule 2a-7,
securities purchased with collateral received are valued at amortized cost.
NOTE 8 -- 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 year ended October 31, 2004.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C CLASS I*
Shares sold 3,442 2,242 283 5
- ------------------------------------------------------------
Shares issued in
reinvestment of
dividends and
distributions 355 1,081 27 --(a)
- ------------------------------------------------------------
3,797 3,323 310 5
- ------------------------------------------------------------
Shares redeemed (5,368) (12,128) (757) (2)
- ------------------------------------------------------------
Net increase
(decrease) (1,571) (8,805) (447) 3
- ------------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1, THROUGH
OCTOBER 31, 2003**
CLASS A CLASS B CLASS C
Shares sold 16,411 5,582 907
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 361 1,219 40
- -----------------------------------------------------------
16,772 6,801 947
- -----------------------------------------------------------
Shares redeemed (15,587) (13,363) (1,545)
- -----------------------------------------------------------
Net increase (decrease) 1,185 (6,562) 598
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 24,465 15,607 1,659
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 314 1,491 41
- -----------------------------------------------------------
24,779 17,098 1,700
- -----------------------------------------------------------
Shares redeemed (21,296) (11,840) (749)
- -----------------------------------------------------------
Net increase 3,483 5,258 951
- -----------------------------------------------------------
</Table>
(a) Less than one thousand.
* First offered on January 1, 2004.
** The Fund changed its fiscal year end from December 31 to October 31.
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 11 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
22 MainStay Government Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Government Fund (the "Fund"), one
of the funds constituting The MainStay Funds, as of October 31, 2004, and the
related statement of operations, statement of changes in net assets and the
financial highlights for the year or period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the period ended October 31, 2003 and the year ended December
31, 2002, and the financial highlights for the periods presented through October
31, 2003, were audited by other auditors, whose report dated December 18, 2003
expressed an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Government Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year or period then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
www.mainstayfunds.com 23
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
24 MainStay Government Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 25
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102;
or (iii) sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
26 MainStay Government Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
www.mainstayfunds.com 27
(MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06342 (RECYCLE LOGO) MSG11-12/04
07
(MAINSTAY LOGO)
MAINSTAY
HIGH YIELD CORPORATE BOND FUND
The MainStay Funds
Annual Report
October 31, 2004
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quarter of 2004, and according to
preliminary estimates from the Bureau of Economic Analysis, gross domestic
product grew at a seasonally adjusted annual rate of 3.9% in the third quarter
of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 2
- ----------------------------------------------------
Investment and Performance Comparison 3
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 6
- ----------------------------------------------------
Portfolio of Investments 8
- ----------------------------------------------------
Financial Statements 21
- ----------------------------------------------------
Notes to Financial Statements 26
Report of Independent Registered Public
Accounting Firm 34
- ----------------------------------------------------
Trustees and Officers 35
- ----------------------------------------------------
Proxy Voting Policies and Procedures 37
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 37
- ----------------------------------------------------
MainStay Funds 38
</Table>
2 MainStay High Yield Corporate Bond Fund
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
A 2% REDEMPTION FEE WILL BE IMPOSED ON REDEMPTIONS MADE WITHIN 60 DAYS OF
PURCHASE.
CLASS A SHARES -- MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 7.47% 6.84% 8.98%
Excluding sales charges 12.53 7.82 9.48
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE CREDIT SUISSE FIRST BOSTON HIGH
BOND FUND YIELD INDEX
----------------------------- -------------------------------
10/31/94 9550 10000
11171 11524
12904 12731
14876 14608
14363 14244
16210 15033
16397 14918
15529 14973
14601 14963
20993 19671
10/31/04 23624 22221
</Table>
<Table>
-- MainStay High Yield Corporate Bond Fund -- Credit Suisse First Boston High Yield Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 6.65% 6.75% 8.72%
Excluding sales charges 11.65 7.01 8.72
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MAINSTAY HIGH YIELD CREDIT SUISSE FIRST
CORPORATE BOND FUND BOSTON HIGH YIELD INDEX
------------------- -----------------------
10/31/94 10000 10000
11624 11524
13352 12731
15314 14608
14671 14244
16443 15033
16500 14918
15499 14973
14498 14963
20664 19671
10/31/04 23070 22221
</Table>
<Table>
-- MainStay High Yield Corporate Bond Fund -- Credit Suisse First Boston High Yield Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 10.65% 7.01% 8.72%
Excluding sales charges 11.65 7.01 8.72
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE CREDIT SUISSE FIRST BOSTON HIGH
BOND FUND YIELD INDEX
----------------------------- -------------------------------
10/31/94 10000 10000
11624 11524
13352 12731
15314 14608
14671 14244
16443 15033
16500 14918
15499 14973
14498 14963
20664 19671
10/31/04 23070 22221
</Table>
<Table>
-- MainStay High Yield Corporate Bond Fund -- Credit Suisse First Boston High Yield Index
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 4.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee, and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. From inception (5/1/86) through
12/31/94 (for Class A, first offered 1/3/95), 8/31/98 (for Class C, first
offered 9/1/98), and 12/31/03 (for Class I, first offered 1/2/04), performance
of Class A, C, and I shares includes the historical performance of Class B
shares adjusted to reflect the applicable sales charge (or CDSC) and fees and
expenses for Class A, C, and I shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 3
CLASS I SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
12.77% 8.07% 9.77%
</Table>
(LINE GRAPH FOR CLASS I SHARES IN $)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE CREDIT SUISSE FIRST BOSTON HIGH
BOND FUND YIELD INDEX
----------------------------- -------------------------------
10/31/94 10000 10000
11732 11524
13601 12731
15744 14608
15219 14244
17224 15033
17464 14918
16562 14973
15628 14963
22520 19671
10/31/04 25396 22221
</Table>
<Table>
-- MainStay High Yield Corporate Bond Fund -- Credit Suisse First Boston High Yield Index
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Credit Suisse First Boston(TM) High Yield
Index(1) 12.96% 8.13% 8.31%
Average Lipper high current yield fund(2) 11.03 4.93 5.94
</Table>
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 below Baa by Moody's. Results assume reinvestment of
all income and capital gains. The Credit Suisse First Boston(TM) High Yield
Index is considered to be the Fund's broad-based securities-market index for
comparison purposes. 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.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay High Yield Corporate Bond Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY HIGH YIELD CORPORATE BOND
FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,051.65 $ 5.21 $1,019.45 $ 5.13
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,046.90 $ 9.06 $1,016.20 $ 8.92
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,046.90 $ 9.06 $1,016.20 $ 8.92
- ------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,052.90 $ 3.41 $1,021.70 $ 3.35
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Corporate Bonds 59.50%
Short-Term Investments (collateral from Securities is 3.8%) 28.10%
Foreign Corporate Bonds 9.60%
Convertible Bonds 3.60%
Yankee Bonds 2.60%
Common Stocks 3.30%
Loan Assignments and Participations 2.00%
Preferred Stocks 1.80%
Convertible Preferred Stocks 0.50%
Warrants 0.10%
Liabilities in Excess of Cash and Other Assets -11.10%
</Table>
See Portfolio of Investments on page 8 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. UnitedGlobalCom, Inc.
2. Sovereign Real Estate Investment Corp. 12.00%,
Class A
3. El Paso Production Holding Co. 7.75%, due
6/1/13
4. Ono Finance PLC 10.50%, due 5/15/14
5. Goodyear Tire & Rubber Co. (The) 2nd Lien Note
11.00%, due 3/1/11
6. Cedar Brakes II LLC 9.875%, due 9/1/13
7. Crescent Real Estate Equities L.P. 7.50%, due
9/15/07
8. HCA, Inc. 7.50%, due 11/15/95
9. Hollinger Participation Trust 12.125%, due
11/15/10
10. Rainbow National Services LLC 10.375%, due
9/1/14
</Table>
www.mainstayfunds.com 5
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Donald E. Morgan and J. Matthew Philo
of MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests at least 80% of its assets in high-yield corporate
debt securities, including all types of high-yield domestic and foreign
corporate debt securities that are rated below investment grade by Moody's or
S&P or, if unrated, that we consider to be of comparable quality. In
implementing this strategy, we seek to identify investment opportunities based
primarily on the financial condition and competitiveness of individual
companies. The Fund's principal investments include domestic corporate debt
securities, Yankee or dollar-denominated debt securities, zero coupon bonds,
U.S. government securities, convertible corporate bonds, and loan participation
interests. The Fund may invest up to 20% of its assets in equity securities and
may invest up to 20% of its net assets in securities rated lower than B by
Moody's and S&P.(1)
WHAT TRENDS DROVE THE STRONG PERFORMANCE OF THE HIGH-YIELD MARKET DURING THE 12
MONTHS ENDED OCTOBER 31, 2004?
The high-yield-bond bull market that started in the fourth quarter of 2002
continued through most of the 12-month reporting period. Advances were fueled by
positive fundamental and technical factors. High-yield default rates continued
to decline from their peak in 2002, which encouraged investors. An ongoing
economic recovery increased the probability that high-yield issuers would meet
their debt obligations. New money also flowed into the asset class during the
reporting period, and the supply of new issuance failed to keep up with demand.
In addition, high-yield bonds were being refinanced at more-attractive interest
rates, which resulted in frequent tenders. (A tender is a payment for bonds
called prior to maturity.) This refinancing activity significantly decreased the
difference in yield between high-yield bonds and comparable investment-grade
bonds. Such a decrease is often referred to as spread tightening. The three
25-basis-point Federal Reserve interest-rate hikes--one in June, one in August,
and one in September of 2004--were widely anticipated by investors and were
already priced into the market by the time the Federal Open Market Committee
actually raised the targeted federal funds rate.
WHAT EFFECT DID THESE MARKET TRENDS HAVE ON THE FUND?
As a result of the high-yield bond market's upward climb, we kept cash levels in
the Fund higher than usual during the reporting period. We found only a limited
number of attractive buying opportunities, and we had some concerns regarding
the quality of newly issued securities. The Fund also experienced higher-
than-normal tenders from bond issuers, which further added to the Fund's cash
level.
HOW DID YOU POSITION THE FUND FROM A SECTOR OR INDUSTRY PERSPECTIVE?
We are bottom-up investors, so the Fund's exposure to various sectors and
industries is primarily the result of individual security selection. Over the 12
months ended October 31, 2004, we reduced the Fund's exposure to utilities,
wireless communications, telecommunications, information technology, and
food/tobacco bonds. We increased the Fund's absolute weightings in bonds issued
by services and chemicals companies. At the end of October 2004, the Fund's
largest overweighted positions relative to the Credit Suisse First Boston(TM)
High Yield Index(2) were in broadcasting, cable/wireless, and airlines. At the
same time, the Fund held underweighted positions relative to the benchmark index
in gaming, manufacturing, and food & drug bonds.
DID YOU ADJUST THE FUND'S DURATION POSITIONING DURING THE PERIOD?
As bottom-up investors, duration is primarily a residual of our investment
process. We believe that high-yield bonds have risk and reward characteristics
similar to those of equities. For this reason, traditional fixed-income
strategies, such as yield-curve positioning, maturity structure, and duration
management, are not the focal point of our investment process. That said, we
believe that our general duration parameters of plus or minus 10% of the
benchmark index may tend to reduce
High-yield debt 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.
1. Bonds rated B by Moody's Investors Service are deemed by Moody's to generally
lack characteristics of the desirable investment. According to Moody's,
assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small. Debt rated B by
Standard & Poor's is deemed by Standard & Poor's to be more vulnerable to
nonpayment than obligations rated BB, but it is the opinion of Standard &
Poor's that the obligor currently has the capacity to meet its financial
commitment on the obligation. Standard & Poor's believes that adverse
business, financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the obligation.
When applied to Fund holdings, ratings are based solely on the
creditworthiness of the bonds in the portfolio and are not meant to represent
the security or safety of the Fund.
2. See footnote on page 4 for more information on the Credit Suisse First
Boston(TM) High Yield Index.
6 MainStay High Yield Corporate Bond Fund
the duration risk of the Fund. We feel that the ultimate driver of high-yield
returns is the default rate, which has steadily decreased over the last 24
months. While rising interest rates might have a negative impact on the Fund, we
would expect the effects to be less than the related impact on investment-grade
debt. Over the last 12 months, the yield on the 10-year Treasury bond fell from
4.30% to 4.03%. Over the same period, high-yield bonds rallied even more, with
the yield on the Credit Suisse First Boston(TM) High Yield Index falling from
8.36% to 7.26%. (The term "rally" is used because bond prices tend to rise when
yields fall.)
WHAT WERE SOME OF THE FUND'S STRONG PERFORMERS DURING THE REPORTING PERIOD?
The Fund's metal-related bonds--such as AK Steel, Algoma Steel, and Allegheny
Ludlum--were among the top performers for the 12-month reporting period, as the
prices of many basic commodities, including steel, exhibited meaningful
strength. An increase in North American manufacturing activity contributed to
this trend. A weaker U.S. dollar and strong end-user demand in Asia also reduced
the threat posed by low-priced imported steel. These trends also made the
removal of protective tariffs by the Bush administration in November 2003
something of a nonevent for the industry.
Cable companies, including FrontierVision and UGC Europe, were also among the
Fund's strongest performers during the reporting period. In December 2003,
UnitedGlobalCom acquired all shares of the recently reorganized UGC Europe.
These companies were among several cable providers that reported good earnings
over the 12-month period, leading to upbeat expectations for the industry as a
whole.
WERE THERE OTHER AREAS OF STRENGTH IN THE FUND'S PORTFOLIO?
Several of the Fund's wireless companies performed well during the reporting
period. US Unwired, Alamosa, Nextel International, and Mobifon each outperformed
related securities in the CSFB High Yield Index. The Fund's holdings in Nextel
International consisted of equity received as the result of a restructuring at
the beginning of 2003.
WERE THERE ANY HOLDINGS THAT DIDN'T MEET YOUR EXPECTATIONS?
The Fund's investments in the airline industry had disappointing performance, as
airline costs climbed with the rising price of oil. Concerns about a possible
bankruptcy at Delta Airlines affected our position in the company. Delta sought
a resolution with the pilots' union that didn't arrive until the end of October
2004. Delta Airlines and Northwest Airlines were among the Fund's poorest
performers during the reporting period.
Other Fund holdings that produced disappointing results were securities issued
by utilities company Calpine and machinery company Thermadyne Holdings.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
Over the 12 months ended October 31, 2004, we initiated positions in several
securities. The Fund lost UGC Europe bonds and took on UnitedGlobalCom stock as
part of a corporate action. Other significant additions to the Fund's portfolio
included issues of El Paso Production Holdings, Ono Finance, Goodyear Tire &
Rubber, and Rainbow National Services. We eliminated Fund holdings in Pacific
G&E and Alamosa PCS Holding. We also sold securities of Nextel International
that the Fund had received during the company's restructuring.
WHAT DO YOU ANTICIPATE FOR THE HIGH-YIELD BOND MARKET GOING FORWARD?
We believe the high-yield bond market may have now approached fair value
relative to U.S. Treasuries. Thus, we are becoming concerned that we may not be
adequately compensated for both interest-rate risk and credit risk at current
yield-spread levels. We intend to increase the Fund's exposure to floating-rate
debt and to actively sell bonds that have reached our price targets. We may also
allow the Fund's cash levels to remain higher than normal until we see a
correction in the high-yield bond market. In our view, the opportunity cost of
elevated cash levels versus high-yield bonds is not as great as deviating from
our investment process simply to lower the cash level of the portfolio. We will
seek to use the cash tactically, taking quick action should investment
opportunities arise, especially in the new-issue market.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
www.mainstayfunds.com 7
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (77.3%)+
CONVERTIBLE BONDS (3.6%)
- ---------------------------------------------------------------------------------
AIRLINES (0.1%)
Delta Air Lines, Inc.
8.00%, due 6/3/23 $ 11,530,000 $ 5,592,050
--------------
COMMUNICATIONS EQUIPMENT (1.8%)
CIENA Corp.
3.75%, due 2/1/08 (d) 39,835,000 33,262,225
Nortel Networks Corp.
4.25%, due 9/1/08 (d) 33,670,000 32,533,637
Riverstone Networks, Inc.
3.75%, due 12/1/06 (c)(e) 15,490,000 14,250,800
--------------
80,046,662
--------------
CONSUMER FINANCE (0.2%)
Providian Financial Corp.
3.25%, due 8/15/05 (d) 9,040,000 8,994,800
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.2%)
At Home Corp.
4.75%, due 12/15/06 (e)(f) 61,533,853 8,307,070
--------------
HEALTH CARE PROVIDERS & SERVICES (0.7%)
Laboratory Corp. of America Holdings
(zero coupon), due 9/11/21 (k) 18,015,000 13,533,769
Lincare Holdings, Inc.
3.00%, due 6/15/33 18,790,000 19,424,162
--------------
32,957,931
--------------
INSURANCE (0.1%)
Loews Corp.
3.125%, due 9/15/07 3,395,000 3,339,831
--------------
IT SERVICES (0.1%)
Electronic Data Systems Corp.
3.875%, due 7/15/23 (d) 5,785,000 5,915,163
--------------
MEDIA (0.1%)
Adelphia Communications Corp.
6.00%, due 2/15/06 (e) 12,365,000 2,905,775
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.3%)
LSI Logic Corp.
4.00%, due 11/1/06 13,670,000 13,652,913
--------------
Total Convertible Bonds
(Cost $176,435,127) 161,712,195
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (59.5%)
- ---------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.8%)
BE Aerospace, Inc.
Series B
8.00%, due 3/1/08 $ 10,660,000 $ 10,766,600
8.50%, due 10/1/10 1,965,000 2,151,675
Series B
8.875%, due 5/1/11 1,405,000 1,478,060
9.50%, due 11/1/08 1,000,000 1,031,670
Sequa Corp.
Series B
8.875%, due 4/1/08 5,580,000 6,096,150
9.00%, due 8/1/09 14,815,000 16,555,763
--------------
38,079,918
--------------
AIRLINES (2.1%)
Continental Airlines, Inc.
Series A
7.875%, due 7/2/18 (d) 26,521,907 24,978,863
Delta Air Lines, Inc.
8.30%, due 12/15/29 (d) 35,988,000 12,955,680
Series B
9.25%, due 12/27/07 (i) 5,175,000 2,458,125
9.25%, due 3/15/22 (d) 9,000,000 3,240,000
9.75%, due 5/15/21 1,380,000 496,800
10.00%, due 8/15/08 (d) 8,125,000 4,265,625
10.375%, due 2/1/11 3,895,000 1,772,225
10.375%, due 12/15/22 (d) 12,575,000 4,652,750
Northwest Airlines, Inc.
8.875%, due 6/1/06 960,000 816,000
8.97%, due 1/2/15 (d) 1,913,734 1,193,328
9.875%, due 3/15/07 (d) 29,050,000 22,368,500
10.00%, due 2/1/09 (d) 22,430,000 15,364,550
--------------
94,562,446
--------------
AUTO COMPONENTS (2.6%)
Advanced Accessory Systems
10.75%, due 6/15/11 2,195,000 1,997,450
ArvinMeritor, Inc.
6.625%, due 6/15/07 55,000 56,650
8.75%, due 3/1/12 (d) 3,995,000 4,454,425
Collins & Aikman Products
12.875%, due 8/15/12 (c)(d) 21,275,000 18,402,875
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
</Table>
8 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
AUTO COMPONENTS (CONTINUED)
Dana Corp.
7.00%, due 3/1/29 (d) $ 15,660,000 $ 15,346,800
9.00%, due 8/15/11 (d) 8,355,000 9,942,450
Goodyear Tire & Rubber Co. (The)
6.625%, due 12/1/06 (d) 7,469,000 7,693,070
6.375%, due 3/15/08 (d) 2,485,000 2,410,450
8.50%, due 3/15/07 (d) 4,605,000 4,720,125
V 2nd Lien Note
11.00%, due 3/1/11 (c)(h) 40,235,000 45,063,200
Tenneco Automotive, Inc.
Series B
10.25%, due 7/15/13 (d) 7,625,000 8,883,125
--------------
118,970,620
--------------
BUILDING PRODUCTS (0.7%)
Dayton Superior Corp.
10.75%, due 9/15/08 12,865,000 13,701,225
Interline Brands, Inc.
11.50%, due 5/15/11 10,360,000 11,499,600
MMI Products, Inc.
Series B
11.25%, due 4/15/07 7,595,000 7,670,950
--------------
32,871,775
--------------
CAPITAL MARKETS (0.6%)
LaBranche & Co., Inc.
9.50%, due 5/15/09 (d) 8,720,000 8,720,000
11.00%, due 5/15/12 17,800,000 18,267,250
--------------
26,987,250
--------------
CHEMICALS (3.2%)
Crompton Corp.
9.875%, due 8/1/12 (c) 19,870,000 21,906,675
Equistar Chemicals, LP
7.55%, due 2/15/26 13,995,000 13,365,225
10.125%, due 9/1/08 5,685,000 6,530,644
10.625%, due 5/1/11 (d) 12,905,000 14,905,275
FMC Corp.
10.25%, due 11/1/09 30,000 34,800
Lyondell Chemical Co.
9.50%, due 12/15/08 (d) 7,965,000 8,681,850
10.50%, due 6/1/13 (d) 14,310,000 16,885,800
Millennium America, Inc.
7.00%, due 11/15/06 7,395,000 7,727,775
7.625%, due 11/15/26 (d) 8,115,000 7,790,400
Sovereign Specialty Chemicals, Inc.
11.875%, due 3/15/10 11,780,000 12,663,500
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CHEMICALS (CONTINUED)
Terra Capital, Inc.
12.875%, due 10/15/08 $ 28,715,000 $ 35,606,600
--------------
146,098,544
--------------
COMMERCIAL BANKS (0.2%)
UGS Corp.
10.00%, due 6/1/12 (c)(d) 8,270,000 9,262,400
--------------
COMMERCIAL SERVICES & SUPPLIES (1.9%)
American Color Graphics, Inc.
10.00%, due 6/15/10 3,380,000 2,585,700
El Comandante Capital Corp.
11.75%, due 12/15/04 (e)(i) 17,186,051 9,839,014
Geo Sub Corp.
11.00%, due 5/15/12 (c) 14,095,000 13,531,200
Language Line, Inc.
11.125%, due 6/15/12 (c) 8,695,000 9,303,650
MemberWorks, Inc.
9.25%, due 4/1/14 (c) 12,965,000 13,548,425
Phoenix Color Corp.
10.375%, due 2/1/09 7,935,000 7,538,250
Protection One Alarm Monitoring, Inc.
7.375%, due 8/15/05 27,851,000 27,851,000
--------------
84,197,239
--------------
COMMUNICATIONS EQUIPMENT (1.0%)
Lucent Technologies, Inc.
5.50%, due 11/15/08 (d) 8,959,000 9,182,975
6.45%, due 3/15/29 (d) 26,340,000 22,619,475
6.50%, due 1/15/28 5,485,000 4,689,675
7.25%, due 7/15/06 (d) 6,450,000 6,837,000
--------------
43,329,125
--------------
CONSTRUCTION & ENGINEERING (1.4%)
Amsted Industries, Inc.
10.25%, due 10/15/11 (c) 3,200,000 3,520,000
J. Ray McDermott, S.A.
11.00%, due 12/15/13 (c) 18,015,000 19,681,387
Shaw Group, Inc. (The)
10.75%, due 3/15/10 (d) 22,139,000 23,633,383
URS Corp.
11.50%, due 9/15/09 13,267,000 15,257,050
Series B
12.25%, due 5/1/09 205,000 218,325
--------------
62,310,145
--------------
CONTAINERS & PACKAGING (2.1%)
Owens-Brockway Glass Container, Inc.
7.75%, due 5/15/11 45,000 48,937
8.25%, due 5/15/13 (d) 5,710,000 6,281,000
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
CONTAINERS & PACKAGING (CONTINUED)
Owens-Brockway Glass Container, Inc. (continued)
8.75%, due 11/15/12 (d) $ 8,710,000 $ 9,820,525
8.875%, due 2/15/09 24,525,000 26,916,187
Owens-Illinois, Inc.
7.80%, due 5/15/18 10,530,000 10,793,250
8.10%, due 5/15/07 (d) 26,405,000 27,989,300
Tekni-Plex, Inc.
8.75%, due 11/15/13 (c)(d) 9,930,000 9,470,738
Series B
12.75%, due 6/15/10 (d) 3,035,000 2,276,250
--------------
93,596,187
--------------
DIVERSIFIED FINANCIAL SERVICES (3.7%)
Caithness Coso Funding Corp.
Series B
9.05%, due 12/15/09 21,864,105 24,269,156
Dollar Financial Group, Inc.
9.75%, due 11/15/11 8,065,000 8,609,388
ESI Tractebel Acquisition Corp.
Series B
7.99%, due 12/30/11 14,245,000 15,261,295
IPC Acquisition Corp.
11.50%, due 12/15/09 22,580,000 24,950,900
National Beef Packing Co.
10.50%, due 8/1/11 2,780,000 2,849,500
Pharma Services Intermediate Holding Corp.
(zero coupon), due 4/1/14 (c) 27,335,000 17,972,763
Rainbow National Services LLC
8.75%, due 9/1/12 (c)(d) 10,205,000 10,919,350
V 10.375%, due 9/1/14 (c)(d) 35,590,000 38,793,100
UCAR Finance, Inc.
10.25%, due 2/15/12 20,290,000 23,130,600
--------------
166,756,052
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (3.7%)
Mountain States Telephone & Telegraph Co.
7.375%, due 5/1/30 (i) 9,455,000 8,178,575
Qwest Capital Funding, Inc.
7.75%, due 8/15/06 (d) 7,580,000 7,788,450
Qwest Communications International, Inc.
7.25%, due 2/15/11 (c)(d) 26,385,000 26,187,112
Series B
7.50%, due 11/1/08 2,208,000 2,009,280
7.50%, due 2/15/14 (c)(d) 12,825,000 12,376,125
Qwest Corp.
5.625%, due 11/15/08 1,420,000 1,420,000
7.50%, due 6/15/23 335,000 314,900
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
DIVERSIFIED TELECOMMUNICATION SERVICES (CONTINUED)
Qwest Corp. (continued)
8.875%, due 6/1/31 $ 3,600,000 $ 3,636,000
9.125%, due 3/15/12 (c) 13,755,000 15,508,763
Qwest Services Corp.
13.50%, due 12/15/07 (c) 11,631,000 13,317,495
14.00%, due 12/15/10 (c) 24,524,000 29,122,250
14.00%, due 12/15/14 (c) 12,881,000 15,972,440
TSI Telecommunication Services, Inc.
Series B
12.75%, due 2/1/09 30,135,000 33,751,200
--------------
169,582,590
--------------
ELECTRIC UTILITIES (1.7%)
V Cedar Brakes II LLC
9.875%, due 9/1/13 38,328,309 43,502,631
Consumers Energy Co.
6.25%, due 9/15/06 35,000 36,954
Mirant Americas Generation LLC
7.20%, due 10/1/08 (e) 4,755,000 4,600,462
8.30%, due 5/1/11 (e) 1,325,000 1,281,937
8.50%, due 10/1/21 (e) 8,645,000 8,147,913
9.125%, due 5/1/31 (e) 6,220,000 5,909,000
Southern California Edison Co.
8.00%, due 2/15/07 12,365,000 13,672,760
--------------
77,151,657
--------------
ELECTRICAL EQUIPMENT (0.3%)
Knowles Electronics Holdings, Inc.
13.125%, due 10/15/09 12,365,000 12,828,687
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.1%)
Sensus Metering Systems, Inc.
8.625%, due 12/15/13 3,330,000 3,429,900
--------------
ENERGY EQUIPMENT & SERVICES (0.8%)
El Paso Natural Gas Co.
7.50%, due 11/15/26 3,625,000 3,661,250
Series A
7.625%, due 8/1/10 1,490,000 1,611,062
8.375%, due 6/15/32 16,030,000 17,192,175
Grant Prideco, Inc.
9.00%, due 12/15/09 3,125,000 3,507,812
Series B
9.625%, due 12/1/07 25,000 28,250
Lone Star Technologies, Inc.
Series B
9.00%, due 6/1/11 1,710,000 1,829,700
</Table>
10 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES (CONTINUED)
Parker Drilling Co.
9.625%, due 10/1/13 (d) $ 6,745,000 $ 7,503,813
Series B
10.125%, due 11/15/09 3,021,000 3,183,379
--------------
38,517,441
--------------
FOOD PRODUCTS (0.8%)
Pinnacle Foods Holding Corp.
8.25%, due 12/1/13 (c) 2,840,000 2,683,800
Seminis, Inc.
10.25%, due 10/1/13 9,340,000 10,460,800
Swift & Co.
10.125%, due 10/1/09 3,655,000 4,075,325
12.50%, due 1/1/10 (d) 16,418,000 18,265,025
--------------
35,484,950
--------------
GAS UTILITIES (0.8%)
ANR Pipeline, Inc.
7.00%, due 6/1/25 5,555,000 5,663,039
7.375%, due 2/15/24 1,785,000 1,827,394
9.625%, due 11/1/21 (d) 20,666,000 25,419,180
Southern Natural Gas Co.
7.35%, due 2/15/31 5,820,000 5,878,200
--------------
38,787,813
--------------
HEALTH CARE EQUIPMENT & SUPPLIES (0.1%)
Fisher Scientific International, Inc.
8.125%, due 5/1/12 2,166,000 2,415,090
--------------
HEALTH CARE PROVIDERS & SERVICES (3.2%)
AmeriPath, Inc.
10.50%, due 4/1/13 23,865,000 23,387,700
Ardent Health Services, Inc.
10.00%, due 8/15/13 2,710,000 2,770,975
Chemed Corp.
8.75%, due 2/24/11 17,520,000 18,308,400
HCA, Inc.
V 7.50%, due 11/15/95 (g) 44,715,000 41,711,985
8.36%, due 4/15/24 100,000 107,543
National Nephrology Associates, Inc.
9.00%, due 11/1/11 (c) 6,455,000 7,455,525
Quintiles Transnational Corp.
10.00%, due 10/1/13 31,635,000 34,482,150
Vanguard Health Holding Co. II
9.00%, due 10/1/14 (c) 15,350,000 16,040,750
--------------
144,265,028
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
HOTELS, RESTAURANTS & LEISURE (2.5%)
Caesars Entertainment, Inc.
8.125%, due 5/15/11 $ 20,000 $ 23,375
8.875%, due 9/15/08 70,000 80,588
Chumash Casino & Resort Enterprise
9.00%, due 7/15/10 (c) 20,000 22,350
Gaylord Entertainment Co.
8.00%, due 11/15/13 4,475,000 4,821,812
ITT Corp.
7.375%, due 11/15/15 18,475,000 20,876,750
7.75%, due 11/15/25 10,000 10,700
Jacobs Entertainment, Inc.
11.875%, due 2/1/09 12,705,000 14,483,700
MGM Mirage, Inc.
6.75%, due 9/1/12 (c) 4,180,000 4,430,800
Mohegan Tribal Gaming Authorities
6.375%, due 7/15/09 3,650,000 3,823,375
President Casinos, Inc.
12.00%, due 12/31/05 (c)(e)(i)(l) 7,567,000 3,783,500
13.00%, due 12/31/05 (e)(i)(l) 16,273,000 6,183,740
Six Flags, Inc.
9.625%, due 6/1/14 12,100,000 11,555,500
9.75%, due 4/15/13 (d) 9,805,000 9,449,569
Trump Atlantic City Associates
11.25%, due 5/1/06 (e) 19,190,000 16,839,225
Venetian Casino Resort LLC
11.00%, due 6/15/10 16,900,000 19,413,875
--------------
115,798,859
--------------
HOUSEHOLD DURABLES (0.2%)
Fedders North America, Inc.
9.875%, due 3/1/14 8,810,000 7,092,050
Foamex L.P.
10.75%, due 4/1/09 (d) 3,755,000 3,567,250
--------------
10,659,300
--------------
INSURANCE (0.7%)
Crum & Forster
10.375%, due 6/15/13 19,730,000 21,111,100
Fremont General Corp.
Series B
7.875%, due 3/17/09 8,630,000 8,468,187
Lumbermens Mutual Casualty
6.75%, due 12/15/28 1,555,000 1,391,725
8.30%, due 12/1/37 (c)(e) 8,300,000 207,500
8.45%, due 12/1/97 (c)(e) 2,575,000 64,375
9.15%, due 7/1/26 (c)(e) 41,823,000 1,045,575
--------------
32,288,462
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES (0.1%)
Globix Corp.
11.00%, due 5/1/08 (c)(i)(m) $ 6,531,121 $ 5,812,698
--------------
IT SERVICES (0.2%)
Electronic Data Systems Corp.
Series B
6.00%, due 8/1/13 1,950,000 1,991,562
7.125%, due 10/15/09 (d) 4,740,000 5,146,450
7.45%, due 10/15/29 (d) 3,960,000 4,007,013
--------------
11,145,025
--------------
MACHINERY (1.3%)
Dresser, Inc.
9.375%, due 4/15/11 974,000 1,081,140
JLG Industries, Inc.
8.25%, due 5/1/08 45,000 48,150
Mark IV Industries, Inc.
7.50%, due 9/1/07 36,245,000 34,251,525
Mueller Group, Inc.
10.00%, due 5/1/12 11,965,000 12,922,200
Thermadyne Holdings Corp.
9.25%, due 2/1/14 10,320,000 9,804,000
--------------
58,107,015
--------------
MACHINERY & ENGINEERING (0.1%)
Dresser-Rand Group
7.375%, due 11/1/14 (c) 5,260,000 5,509,850
--------------
MEDIA (6.0%)
Adelphia Communications Corp.
Series B
9.25%, due 10/1/05 (e) 1,820,000 1,537,900
9.375%, due 11/15/09 (e) 7,050,000 6,168,750
10.25%, due 11/1/06 (e) 9,310,000 7,960,050
10.25%, due 6/15/11 (e) 30,460,000 27,185,550
FrontierVision Operating Partners L.P.
11.00%, due 10/15/06 (e) 25,590,000 32,115,450
11.875%, due 9/15/07 (e) 10,615,000 13,534,125
Series B
11.875%, due 9/15/07 (e) 4,495,000 5,731,125
V Hollinger Participation Trust
12.125%, due 11/15/10 (c)(m) 33,411,661 40,762,226
Houghton Mifflin Co.
7.20%, due 3/15/11 9,530,000 10,113,713
LCE Acquisition Corp.
9.00%, due 8/1/14 (c) 12,955,000 13,570,363
Medianews Group, Inc.
6.875%, due 10/1/13 6,935,000 7,195,063
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MEDIA (CONTINUED)
Morris Publishing Group LLC
7.00%, due 8/1/13 $ 19,795,000 $ 20,190,900
PanAmSat Corp.
9.00%, due 8/15/14 (c)(d) 13,590,000 14,405,400
Paxson Communications Corp.
(zero coupon), due 1/15/09 (d) 29,860,000 25,978,200
Radio One, Inc.
Series B
8.875%, due 7/1/11 1,390,000 1,535,950
United Artists Theatres Circuit, Inc.
Series 1995-A
9.30%, due 7/1/15 (i) 3,363,981 3,431,260
Vertis, Inc.
9.75%, due 4/1/09 15,035,000 16,388,150
Warner Music Group
7.375%, due 4/15/14 (c) 5,620,000 5,774,550
Young Broadcasting, Inc.
8.50%, due 12/15/08 4,230,000 4,526,100
Ziff Davis Media, Inc.
Series B
13.00%, due 8/12/09 (m) 16,261,287 16,281,613
--------------
274,386,438
--------------
METALS & MINING (0.8%)
Allegheny Ludlum Corp.
6.95%, due 12/15/25 16,410,000 15,671,550
Allegheny Technologies, Inc.
8.375%, due 12/15/11 3,510,000 3,790,800
Commonwealth Industries, Inc.
10.75%, due 10/1/06 4,295,000 4,305,737
United States Steel LLC
10.75%, due 8/1/08 9,425,000 11,168,625
--------------
34,936,712
--------------
MULTILINE RETAIL (0.0%) (B)
Kmart Corp.
Series 1995 Class K3
8.54%, due 1/2/15 (e) 2,556,666 830,916
--------------
MULTI-UTILITIES & UNREGULATED POWER (5.4%)
AES Corp. (The)
9.00%, due 5/15/15 (c) 28,070,000 32,701,550
10.00%, due 7/15/05 (c)(d) 13,468,513 13,603,198
AES Eastern Energy LP
Series 1999-A
9.00%, due 1/2/17 18,402,215 20,702,492
Series 1999-B
9.67%, due 1/2/29 16,820,000 19,679,400
</Table>
12 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
MULTI-UTILITIES & UNREGULATED POWER (CONTINUED)
Calpine Corp.
7.625%, due 4/15/06 (d) $ 875,000 $ 813,750
7.75%, due 4/15/09 (d) 9,020,000 5,096,300
7.875%, due 4/1/08 50,000 30,125
8.50%, due 7/15/10 (c)(d) 44,670,000 32,832,450
8.75%, due 7/15/07 (d) 8,825,000 6,309,875
Calpine Gilroy, L.P.
10.00%, due 9/30/14 (h)(i) 22,802,047 22,802,047
Dynegy Holdings, Inc.
9.875%, due 7/15/10 (c) 20,715,000 23,537,419
10.125%, due 7/15/13 (c) 3,440,000 4,007,600
NRG Energy, Inc.
8.00%, due 12/15/13 (c) 27,350,000 30,119,188
Reliant Energy, Inc.
9.25%, due 7/15/10 6,150,000 6,826,500
Salton Sea Funding Corp.
Series B
7.37%, due 5/30/05 (i) 4,749 4,833
Tiverton/Rumford Power Associates Ltd., L.P.
9.00%, due 7/15/18 (c) 31,321,092 22,237,975
Westar Energy, Inc.
7.125%, due 8/1/09 50,000 55,741
7.875%, due 5/1/07 2,170,000 2,402,667
--------------
243,763,110
--------------
OIL & GAS (2.6%)
El Paso Corp.
6.95%, due 12/15/07 1,870,000 1,921,425
V El Paso Production Holding Co.
7.75%, due 6/1/13 47,560,000 49,581,300
Energy Corp. of America
Series A
9.50%, due 5/15/07 12,035,000 11,553,600
Forest Oil Corp.
8.00%, due 6/15/08 5,833,000 6,474,630
Gemstone Investors Ltd.
7.71%, due 10/31/04 5,245,000 5,245,000
Hilcorp Energy I L.P.
10.50%, due 9/1/10 (c) 1,560,000 1,758,900
Newfield Exploration Co.
7.625%, due 3/1/11 1,785,000 2,012,587
8.375%, due 8/15/12 1,665,000 1,885,613
Northwest Pipeline Corp.
7.125%, due 12/1/25 45,000 46,463
Plains Exploration & Production Co.
Series B
8.75%, due 7/1/12 6,030,000 6,813,900
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
OIL & GAS (CONTINUED)
Tesoro Petroleum Corp.
8.00%, due 4/15/08 $ 40,000 $ 43,500
Vintage Petroleum, Inc.
7.875%, due 5/15/11 25,000 27,000
8.25%, due 5/1/12 25,580,000 28,649,600
--------------
116,013,518
--------------
PAPER & FOREST PRODUCTS (2.0%)
Bowater, Inc.
9.00%, due 8/1/09 7,960,000 8,934,193
Georgia-Pacific Corp.
8.00%, due 1/15/24 (d) 22,075,000 25,551,812
8.875%, due 2/1/10 7,040,000 8,289,600
8.875%, due 5/15/31 25,535,000 31,471,888
9.375%, due 2/1/13 7,650,000 9,007,875
Pope & Talbot, Inc.
8.375%, due 6/1/13 7,275,000 7,638,750
--------------
90,894,118
--------------
PERSONAL PRODUCTS (0.3%)
Herbalife International, Inc.
11.75%, due 7/15/10 11,475,000 13,196,250
--------------
REAL ESTATE (2.5%)
American Real Estate Partners L.P.
8.125%, due 6/1/12 (c) 23,940,000 25,256,700
CB Richard Ellis Services, Inc.
9.75%, due 5/15/10 7,982,000 9,099,480
11.25%, due 6/15/11 25,215,000 29,501,550
Crescent Real Estate Equities L.P.
V 7.50%, due 9/15/07 41,047,000 42,381,028
9.25%, due 4/15/09 25,000 27,125
OMEGA Healthcare Investors, Inc.
7.00%, due 4/1/14 9,105,000 9,196,050
--------------
115,461,933
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.1%)
Amkor Technology, Inc.
7.125%, due 3/15/11 (d) 1,500,000 1,293,750
7.75%, due 5/15/13 (d) 1,870,000 1,612,875
ON Semiconductor Corp.
12.00%, due 3/15/10 1,845,000 2,163,263
--------------
5,069,888
--------------
SPECIALTY RETAIL (0.5%)
Rent-Way, Inc.
11.875%, due 6/15/10 11,630,000 12,967,450
Stratus Technologies, Inc.
10.375%, due 12/1/08 10,180,000 8,653,000
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
SPECIALTY RETAIL (CONTINUED)
Williams Scotsman, Inc.
10.00%, due 8/15/08 $ 370,000 $ 403,300
--------------
22,023,750
--------------
TOBACCO (0.4%)
Commonwealth Brands, Inc.
9.75%, due 4/15/08 (c) 13,035,000 13,817,100
10.625%, due 9/1/08 (c) 2,300,000 2,415,000
--------------
16,232,100
--------------
TRANSPORTATION INFRASTRUCTURE (0.2%)
Great Lakes Dredge & Dock Corp.
7.75%, due 12/15/13 (d) 9,240,000 8,269,800
--------------
WIRELESS TELECOMMUNICATION SERVICES (1.8%)
Alamosa Delaware, Inc.
(zero coupon), due 7/31/09
12.00% beginning 7/31/05 14,858,000 15,823,770
11.00%, due 7/31/10 4,501,000 5,266,170
American Tower Escrow Corp.
(zero coupon), due 8/1/08 5,250,000 3,950,625
Dobson Cellular Systems
6.96%, due 11/1/11 (c)(j) 3,770,000 3,873,675
8.375%, due 11/1/11 (c) 3,775,000 3,892,969
9.875%, due 11/1/12 (c) 6,635,000 6,601,825
Dobson Communications Corp.
8.875%, due 10/1/13 2,630,000 1,768,675
10.875%, due 7/1/10 (d) 2,955,000 2,275,350
Loral CyberStar, Inc.
10.00%, due 7/15/06 (e) 34,610,000 26,649,700
Triton PCS, Inc.
8.50%, due 6/1/13 (d) 13,745,000 12,611,037
--------------
82,713,796
--------------
Total Corporate Bonds
(Cost $2,544,047,675) 2,702,598,395
--------------
FOREIGN CORPORATE BONDS (9.6%)
- ---------------------------------------------------------------------------------
BROADCASTING & PUBLISHING (0.3%)
Telenet Communications NV
9.00%, due 12/15/13 (c) 8,725,000 11,986,521
--------------
CHEMICALS (0.4%)
Acetex Corp.
10.875%, due 8/1/09 3,745,000 4,119,500
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CHEMICALS (CONTINUED)
Invista
9.25%, due 5/1/12 (c) $ 12,915,000 $ 14,206,500
--------------
18,326,000
--------------
COMMERCIAL SERVICES & SUPPLIES (1.0%)
Quebecor Media, Inc.
(zero coupon), due 7/15/11
13.75%, beginning 7/15/06 37,195,000 36,265,125
11.125%, due 7/15/11 9,230,000 10,683,725
--------------
46,948,850
--------------
CONTAINERS & PACKAGING (1.4%)
Crown Euro Holdings S.A.
9.50%, due 3/1/11 (d) 26,110,000 29,765,400
10.875%, due 3/1/13 (d) 30,055,000 35,690,313
--------------
65,455,713
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.5%)
Mobifon Holdings BV
12.50%, due 7/31/10 20,340,000 24,102,900
--------------
FOOD & STAPLES RETAILING (0.1%)
Parmalat Finance Corp. BV
6.25%, due 2/7/05 (e) 29,870,000 6,459,340
--------------
FOOD PRODUCTS (0.6%)
Burns Philp Capital Property Ltd.
9.50%, due 11/15/10 6,120,000 6,701,400
10.75%, due 2/15/11 18,855,000 21,117,600
--------------
27,819,000
--------------
INDUSTRIAL CONGLOMERATES (0.3%)
Stena AB
9.625%, due 12/1/12 10,205,000 11,493,381
--------------
MARINE (0.2%)
Navigator Gas Transport PLC
10.50%, due 6/30/07 (c)(e)(i) 10,425,000 7,506,000
--------------
MEDIA (2.6%)
CanWest Media, Inc.
Series B
7.625%, due 4/15/13 (d) 25,871,000 28,134,712
Hollinger, Inc.
12.875%, due 3/1/11 (c) 4,508,000 4,958,800
2nd Lien
12.875%, due 3/1/11 (c) 3,610,000 3,659,638
V Ono Finance PLC
10.50%, due 5/15/14 (c) 38,195,000 48,828,856
Shaw Communications, Inc.
7.50%, due 11/20/13 C$ 22,825,000 19,479,329
</Table>
14 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
MEDIA (CONTINUED)
Sun Media Corp.
7.625%, due 2/15/13 $ 40,000 $ 43,400
Telenet Group Holding NV
(zero coupon), due 6/15/14 (d)
11.50%, beginning 12/15/08 (c) 16,265,000 12,361,400
--------------
117,466,135
--------------
MULTI-UTILITIES & UNREGULATED POWER (0.6%)
Calpine Canada Energy Finance ULC
8.50%, due 5/1/08 (d) 41,600,000 25,584,000
--------------
PAPER & FOREST PRODUCTS (0.3%)
Norske Skog Canada Ltd.
Series D
8.625%, due 6/15/11 85,000 91,800
Tembec Industries, Inc.
7.75%, due 3/15/12 8,845,000 8,668,100
8.50%, due 2/1/11 (d) 6,355,000 6,497,988
--------------
15,257,888
--------------
PERSONAL PRODUCTS (0.5%)
Jafra Cosmetics International, Inc.
10.75%, due 5/15/11 18,220,000 20,770,800
--------------
ROAD & RAIL (0.4%)
Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
12.50%, due 6/15/12 16,270,000 18,466,450
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.4%)
Millicom International Cellular S.A.
10.00%, due 12/1/13 (c) 17,585,000 17,760,850
--------------
Total Foreign Corporate Bonds
(Cost $399,833,745) 435,403,828
--------------
LOAN ASSIGNMENTS & PARTICIPATIONS (2.0%)
- ---------------------------------------------------------------------------------
AUTO COMPONENTS (0.4%)
Goodyear Tire &
Rubber Co. (The)
Bank debt, Term Loan
6.059%, due 3/31/06 (h)(j) 17,320,000 17,520,271
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CHEMICALS (0.5%)
Rockwood Specialties Group, Inc.
Bank debt, Term Loan
9.092%, due 2/11/11 (h)(j) $ 11,806,088 $ 15,017,927
9.96%, due 2/11/11 (h)(j) 7,274,002 7,274,002
--------------
22,291,929
--------------
CONTAINERS & PACKAGING (0.0%) (b)
Graham Packaging Co., Inc.
Bank debt, Term Loan C
8.00%, due 4/7/12 (h)(j) 1,000,000 1,022,292
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.4%)
Qwest Corp.
Bank debt, Term Loan B
6.95%, due 6/30/10 (h)(j) 18,000,000 17,937,000
--------------
MEDIA (0.0%) (B)
Maxwell Communications Corp. PLC
Facility A (e)(f)(h)(i)(j)(l) 9,973,584 29,921
Facility B (e)(f)(h)(i)(j)(l) 1,131,066 6,217
--------------
36,138
--------------
MULTI-UTILITIES & UNREGULATED POWER (0.3%)
Mirant Corp.
Bank debt, Revolver 5
4.75%, due 7/17/05 (e)(h)(j)(p) 6,686,131 4,513,138
NRG Energy, Inc.
Bank debt, Term Loan B
5.55%, due 6/23/10 (h)(j) 4,780,493 4,921,517
Bank debt, Credit-Linked Deposit
5.87%, due 6/23/10 (h)(j) 2,708,333 2,790,938
--------------
12,225,593
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.3%)
Amkor Technology, Inc.
2nd Lien, Term Loan
6.2875%, due 10/27/10 (h)(j) 16,000,000 16,620,000
--------------
TEXTILES, APPAREL & LUXURY GOODS (0.1%)
Jostens IH Corp.
Secured Loan B
4.54%, due 10/4/11 (h)(j) 3,862,069 3,917,586
--------------
Total Loan Assignments & Participations
(Cost $90,194,024) 91,570,809
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (2.6%) (n)
- ---------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES (0.1%)
Marsulex, Inc.
9.625%, due 7/1/08 $ 6,355,000 $ 6,513,875
--------------
COMMUNICATIONS EQUIPMENT (0.1%)
Nortel Networks Corp.
6.875%, due 9/1/23 (d) 3,000,000 2,790,000
--------------
CONTAINERS & PACKAGING (0.1%)
Smurfit Capital Funding PLC
7.5%, due 11//25 3,475,000 3,492,375
--------------
ENERGY EQUIPMENT & SERVICES (0.6%)
Petroleum Geo-Services ASA
8.00%, due 11/5/06 6,465,676 6,578,825
10.00%, due 11/5/10 19,909,136 22,696,415
--------------
29,275,240
--------------
INSURANCE (0.3%)
Fairfax Financial Holdings Ltd.
7.375%, due 4/15/18 (d) 3,437,000 3,033,153
7.75%, due 7/15/37 4,810,000 4,040,400
8.25%, due 10/1/15 (d) 7,255,000 6,982,937
--------------
14,056,490
--------------
MARINE (0.2%)
Sea Containers Ltd.
10.75%, due 10/15/06 (d) 6,830,000 7,103,200
--------------
MEDIA (0.2%)
Rogers Cablesystem, Ltd.
11.00%, due 12/1/15 7,205,000 8,141,650
--------------
METALS & MINING (0.6%)
Algoma Steel, Inc.
11.00%, due 12/31/09 (i) 23,265,000 26,056,800
--------------
PAPER & FOREST PRODUCTS (0.2%)
Tembec Industries, Inc.
8.625%, due 6/30/09 (d) 10,935,000 11,126,362
--------------
ROAD & RAIL (0.1%)
Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
11.75%, due 6/15/09 4,075,000 4,146,313
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
WIRELESS TELECOMMUNICATION SERVICES (0.1%)
Rogers Cantel, Inc.
9.75%, due 6/1/16 $ 3,660,000 $ 4,209,000
--------------
Total Yankee Bonds
(Cost $96,117,627) 116,911,305
--------------
Total Long-Term Bonds
(Cost $3,306,628,198) 3,508,196,532
--------------
<Caption>
SHARES
COMMON STOCKS (3.3%)
- ---------------------------------------------------------------------------------
AUTO COMPONENTS (0.3%)
Goodyear Tire & Rubber Co. (The) (a)(d) 1,512,400 15,244,992
--------------
CHEMICALS (0.0%) (b)
General Chemical Industrial Products, Inc.
(a)(i)(h)(l) 2,211 306,002
--------------
CONTAINERS & PACKAGING (0.3%)
Owens-Illinois, Inc. (a) 630,150 11,676,680
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.0%) (b)
ICO Global Communications Holdings Ltd. (a)(i) 3,920,467 401,848
--------------
FOOD & STAPLES RETAILING (0.0%) (b)
TLC Beatrice International Holdings, Inc.
(a)(i)(l) 25,000 25,000
--------------
HEALTH CARE PROVIDERS & SERVICES (0.1%)
QuadraMed Corp. (a)(h) 1,580,150 4,187,398
Skilled Healthcare Group, Inc. (h)(i)(l) 11,689 187,024
--------------
4,374,422
--------------
INTERNET SOFTWARE & SERVICES (0.1%)
Globix Corp. (a)(h)(i) 1,037,277 2,022,690
Remote Dynamics, Inc. (a) 358,615 340,684
--------------
2,363,374
--------------
MACHINERY (0.3%)
Joy Global, Inc. 69,947 2,363,509
Morris Material Handling, Inc. (a)(i)(h)(l) 69,236 366,951
Thermadyne Holdings Corp. (a)(i) 1,237,712 12,995,976
--------------
15,726,436
--------------
</Table>
16 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ---------------------------------------------------------------------------------
MEDIA (1.7%)
Alliance Entertainment Corp. (a)(i)(h)(l) 1,095,395 $ 10,954
Comcast Corp. Class A (a) 496,500 14,646,750
V UnitedGlobalCom, Inc. (a)(d) 8,232,838 61,581,628
--------------
76,239,332
--------------
METALS & MINING (0.1%)
ACP Holding Co. (a)(c)(i) 3,925,317 5,495,444
--------------
PAPER & FOREST PRODUCTS (0.2%)
Abitibi-Consolidated, Inc. 1,465,965 8,737,151
--------------
TOBACCO (0.0%) (b)
North Atlantic Trading Co., Inc. (a)(h)(i)(l) 2,156 129,425
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.2%)
NEON Communications, Inc. (a)(h)(i)(l) 1,842,941 2,303,676
US Unwired, Inc. (a)(d) 2,127,490 6,595,219
--------------
8,898,895
--------------
Total Common Stocks
(Cost $207,986,291) 149,619,001
--------------
CONVERTIBLE PREFERRED STOCKS (0.5%)
- ---------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES (0.4%)
QuadraMed Corp. (c)(h)(i)
5.50% 814,000 20,350,000
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.1%)
NEON Communications, Inc.
12.00% (a)(h)(i)(l) 212,404 2,389,545
--------------
Total Convertible Preferred Stocks
(Cost $22,716,169) 22,739,545
--------------
PREFERRED STOCKS (1.8%)
- ---------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES (0.0%) (b)
Colorado Prime Corp. (a)(h)(i)(l) 7,232 72
--------------
MEDIA (0.6%)
Alliance Entertainment Corp.
Series A1 (a)(h)(i)(l) 447 197,127
Series A2 (a)(h)(i)(l) 503 221,823
</Table>
<Table>
<Caption>
SHARES VALUE
MEDIA (CONTINUED)
Haights Cross Communications, Inc.
16.00%, Class B (h)(i)(m) 369,062 $ 18,637,631
Paxson Communications Corp.
13.25% (m) 761 5,783,600
Ziff Davis Media, Inc.
10.00%, Series E-1 (a)(i) 4,240 2,204,800
--------------
27,044,981
--------------
REAL ESTATE (1.2%)
V Sovereign Real Estate Investment Corp.
12.00%, Class A (c) 34,813 52,219,500
--------------
Total Preferred Stocks
(Cost $79,353,285) 79,264,553
--------------
WARRANTS (0.1%)
- ---------------------------------------------------------------------------------
CHEMICALS (0.0%) (b)
General Chemical Industrial Products, Inc.
Series A
Strike Price $195.43
Expire 3/31/11 (a)(h)(i)(l) 1,279 45,053
Series B
Strike Price $376.03
Expire 3/31/11 (a)(h)(i)(l) 947 11,234
--------------
56,287
--------------
DIVERSIFIED FINANCIAL SERVICES (0.0%) (b)
ASAT Finance LLC
Strike Price $18.60
Expire 11/1/06 (a)(c)(i)(l) 8,680 87
--------------
MACHINERY (0.0%) (b)
Thermadyne Holdings Corp.
Class B
Strike Price $20.78
Expire 5/23/06 (a)(i)(l) 2,198 13
--------------
MEDIA (0.0%) (b)
Haights Cross Communications, Inc.
Strike Price $0.001
Expire 12/10/11 (a)(h)(i)(l) 385 4
Preferred Class A
Strike Price $0.001
Expire 12/10/11 (a)(h)(i)(l) 374,051 3,741
Ono Finance PLC
Strike Price $0.01
Expire 2/15/11 (a)(c)(i)(l) 40,495 405
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
WARRANTS (CONTINUED)
- ---------------------------------------------------------------------------------
MEDIA (CONTINUED)
Ziff Davis Media, Inc.
Strike Price $0.001
Expire 8/12/12 (a)(c) 777,370 $ 77,737
--------------
81,887
--------------
METALS & MINING (0.1%)
ACP Holdings Co.
Strike Price $0.01
Expire 10/7/13 (a)(c)(i) 3,871,278 5,419,789
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.0%) (b)
NEON Communications, Inc.
Strike Price $0.01
Expire 12/2/12 (a)(h)(i)(l) 1,842,941 18,430
Class A
Strike Price $0.01
Expire 12/2/12 (a)(h)(i)(l) 1,062,401 1,328,001
Redeemable Preferred
Strike Price $0.01
Expire 12/2/12 (a)(h)(i)(l) 1,274,805 12,748
UbiquiTel, Inc.
Strike Price $22.74
Expire 4/15/10 (a)(c)(i) 14,230 142
--------------
1,359,321
--------------
Total Warrants
(Cost $7,002,205) 6,917,384
--------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (28.1%)
- ---------------------------------------------------------------------------------
COMMERCIAL PAPER (13.3%)
AIG Funding, Inc.
1.78%, due 11/2/04 $ 25,000,000 24,998,763
American Express Credit Corp.
1.80%, due 11/18/04 34,000,000 33,971,090
BellSouth Corporation
1.78%, due 11/8/04 50,000,000 49,982,680
Chevron Texaco Funding Corp.
1.75%, due 11/8/04 20,745,000 20,737,938
Ing Funding LLC
1.78%, due 11/5/04 36,600,000 36,592,755
International Business Machines Corp.
1.77%, due 11/22/04 90,000,000 89,907,016
Laguna CDO Corp.
1.98%, due 11/5/04 (o) 7,000,000 6,998,483
Lilly (Eli) & Co.
1.72%, due 11/3/04 25,000,000 24,997,610
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL PAPER (CONTINUED)
Liquid Funding LTD
1.88%, due 12/10/04 (o) $ 25,765,000 $ 25,713,642
Morgan Stanley Dean Witter & Co.
1.79%, due 11/4/04 36,465,000 36,459,560
Prudential Funding LLC
1.76%, due 11/2/04 50,000,000 49,997,554
Stanfield Victoria Funding LLC
2.15%, due 1/25/05 (o) 20,000,000 19,900,833
Starbird Funding Corp.
2.09%, due 3/14/05 (o) 50,000,000 49,625,014
UBS Finance (Delaware) LLC
1.89%, due 11/1/04 9,750,000 9,750,000
1.84%, due 11/22/04 12,905,000 12,891,140
Wal-Mart Stores, Inc.
1.74%, due 11/9/04 49,710,000 49,690,769
1.83%, due 12/7/04 60,000,000 59,890,105
--------------
Total Commercial Paper
(Cost $602,104,952) 602,104,952
--------------
<Caption>
SHARES
INVESTMENT COMPANIES (4.1%)
AIM Institutional Funds Groups (o) 3,411,773 3,411,773
Merrill Lynch Premier Institutional Fund 181,875,488 181,875,488
--------------
Total Investment Companies
(Cost $185,287,261) 185,287,261
--------------
PRINCIPAL
AMOUNT
MASTER NOTE (2.6%)
Bank of America Securities LLC
1.9549, due 11/1/04 (o) $117,274,000 117,274,000
--------------
Total Master Note
(Cost $117,274,000) 117,274,000
--------------
REPURCHASE AGREEMENTS (7.9%)
Credit Suisse First Boston LLC
1.9249%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $21,075,381 (o)
(Collateralized by Various Bonds with a
Principal Amount of $21,133,949 and a Market
Value of $21,497,266) 21,075,000 21,075,000
</Table>
18 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
REPURCHASE AGREEMENTS (CONTINUED)
Dresdner Kleinwort Wasserstein Securities, LLC
1.9449%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $105,017,018 (o)
(Collateralized by Various Bonds with a
Principal Amount of $108,997,000 and a Market
Value of $110,255,617) $105,000,000 $ 105,000,000
Lehman Brothers, Inc.
1.9249%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $54,755,782 (o)
(Collateralized by Various Bonds with a
Principal Amount of $109,082,072 and a Market
Value of $56,466,749) 54,747,000 54,747,000
Merrill Lynch & Co.
1.9549%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $128,619,950 (o)
(Collateralized by Various Bonds with a
Principal Amount of $127,172,207 and a Market
Value of $135,033,402) 128,599,000 128,599,000
Morgan Stanley & Co.
1.9249%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $50,591,114 (o)
(Collateralized by Various Bonds with a
Principal Amount of $77,178,570 and a Market
Value of $53,206,513) 50,583,000 50,583,000
--------------
Total Repurchase Agreements (Cost $360,004,000) 360,004,000
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM LOAN ASSIGNMENTS & PARTICIPATIONS (0.2%)
- ---------------------------------------------------------------------------------
BUILDING PRODUCTS (0.1%)
Owens Corning, Inc.
Bank debt, Revolver
3.62%, due 1/1/05 (e)(h)(j)(p) $ 7,844,684 $ 5,334,386
--------------
MULTI-UTILITIES & UNREGULATED POWER (0.1%)
Mirant Corp. Revolver 1
4.75%, due 1/15/05 (e)(h)(j) 7,020,000 4,364,102
--------------
Total Short-Term Loan Assignments & Participations
(Cost $11,084,878) 9,698,488
--------------
Total Short-Term Investments
(Cost $1,275,755,091) 1,274,368,701
--------------
Total Investments
(Cost $4,899,441,239) (q) 111.1% 5,041,105,716(r)
Liabilities in Excess of Cash and Other Assets (11.1) (505,401,425)
------------ --------------
Net Assets 100.0% $4,535,704,291
============ ==============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
19
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Represents a security, or a portion thereof, which is
out on loan.
(e) Issue in default.
(f) Issuer in bankruptcy.
(g) Partially segregated for unfunded loan commitments.
(h) Restricted security.
(i) Illiquid security.
(j) Floating rate. Rate shown is the rate in effect at
October 31, 2004.
(k) 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.
(l) Fair valued security. The total market value of these
securities at October 31, 2004 is $17,560,693, which
reflects 0.39% of the Fund's net assets.
(m) PIK ("Payment in Kind") -- Interest or dividend payment
is made with additional securities.
(n) Yankee bond -- Dollar-denominated bonds issued in the
United States by foreign banks and corporations.
(o) Represents a security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(p) This security has additional commitments and
contingencies (see Note 7).
(q) The cost for federal income tax purposes is
$4,978,382,008.
(r) At October 31, 2004, net unrealized appreciation was
$62,723,708 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 $325,617,704 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $262,893,996.
The following abbreviations are used in the above
portfolio:
C$ -- Canadian Dollar.
E -- Euro.
</Table>
20 MainStay High Yield Corporate Bond Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $4,899,441,239) including
$555,763,642 market value of securities
loaned $5,041,105,716
Deposit with broker for securities loaned 548
Cash denominated in foreign currencies
(identified cost $223,852) 223,852
Cash 235,443
Receivables:
Dividends and interest 83,700,294
Fund shares sold 24,954,890
Investment securities sold 7,339,630
Other assets 209,302
--------------
Total assets 5,157,769,675
--------------
LIABILITIES:
Securities lending collateral 582,928,293
Payables:
Investment securities purchased 16,947,225
Fund shares redeemed 6,473,319
NYLIFE Distributors 2,980,505
Manager 2,142,002
Transfer agent 1,010,336
Custodian 77,697
Trustees 56,162
Accrued expenses 518,875
Dividend payable 8,930,970
--------------
Total liabilities 622,065,384
--------------
Net assets $4,535,704,291
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized:
Class A $ 2,024,016
Class B 4,463,886
Class C 665,412
Class I 36,177
Additional paid-in capital 5,170,576,334
Accumulated distributions in excess of net
investment income (27,263,761)
Accumulated net realized loss on investments (756,708,963)
Net unrealized appreciation on investments 141,664,477
Net unrealized appreciation on translation
of other assets and liabilities in foreign
currencies 246,713
--------------
Net assets $4,535,704,291
==============
CLASS A
Net assets applicable to outstanding shares $1,279,163,890
==============
Shares of beneficial interest outstanding 202,401,562
==============
Net asset value per share outstanding $ 6.32
Maximum sales charge (4.50% of offering
price) 0.30
--------------
Maximum offering price per share outstanding $ 6.62
==============
CLASS B
Net assets applicable to outstanding shares $2,814,176,056
==============
Shares of beneficial interest outstanding 446,388,551
==============
Net asset value and offering price per share
outstanding $ 6.30
==============
CLASS C
Net assets applicable to outstanding shares $ 419,496,497
==============
Shares of beneficial interest outstanding 66,541,190
==============
Net asset value and offering price per share
outstanding $ 6.30
==============
CLASS I
Net assets applicable to outstanding shares $ 22,867,848
==============
Shares of beneficial interest outstanding 3,617,748
==============
Net asset value and offering price per share
outstanding $ 6.32
==============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
21
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Interest $375,434,532
Dividends (a) 7,328,816
Income from securities loaned -- net 1,694,679
------------
Total income 384,458,027
------------
EXPENSES:
Manager 25,282,743
Distribution -- Class B 21,440,867
Distribution -- Class C 3,199,194
Service -- Class A 3,159,532
Service -- Class B 7,146,020
Service -- Class C 1,066,529
Transfer agent -- Class A, B, C 6,026,871
Transfer agent -- Class I 841
Professional 800,094
Shareholder communication 746,804
Custodian 504,398
Recordkeeping 481,807
Trustees 302,546
Registration 170,302
Miscellaneous 191,284
------------
Total expenses 70,519,832
------------
Net investment income 313,938,195
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions 102,765,613
Foreign currency transactions 13,793,549
------------
Net realized gain on investments and foreign
currency transactions 116,559,162
------------
Net change in unrealized appreciation on:
Security transactions 83,097,032
Translation of other assets and liabilities
in foreign currencies and foreign currency
forward contracts 198,126
------------
Net unrealized gain on investments and foreign
currency transactions 83,295,158
------------
Net realized and unrealized gain on
investments and foreign currency
transactions 199,854,320
------------
Net increase in net assets resulting from
operations $513,792,515
============
</Table>
(a) Dividends recorded net of foreign withholding taxes of $22,095.
22 MainStay High Yield Corporate Bond Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment
income $ 313,938,195 $ 260,763,777 $ 297,953,683
Net realized gain
(loss) on
investments and
foreign currency
transactions 116,559,162 (287,738,041) (249,447,304)
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currency
transactions 83,295,158 1,096,548,328 (87,269,328)
---------------------------------------------------
Net increase
(decrease) in net
assets resulting
from operations 513,792,515 1,069,574,064 (38,762,949)
---------------------------------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (93,887,880) (78,354,579) (74,335,867)
Class B (193,902,652) (171,286,516) (214,539,114)
Class C (28,937,774) (22,517,628) (20,249,937)
Class I (218,341) -- --
Return of capital:
Class A -- (987,660) (6,742,285)
Class B -- (2,159,069) (19,458,762)
Class C -- (283,835) (1,836,675)
---------------------------------------------------
Total dividends and
distributions to
shareholders (316,946,647) (275,589,287) (337,162,640)
---------------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 757,113,555 1,302,380,040 1,409,215,356
Class B 258,995,408 428,352,766 430,111,828
Class C 152,107,934 241,748,257 175,254,924
Class I 23,399,481 -- --
</Table>
<Table>
<Caption>
2004 2003* 2002
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions.
Class A $ 62,973,482 $ 49,609,674 $ 42,735,569
Class B 129,078,409 107,720,153 142,980,666
Class C 16,718,558 11,150,967 9,763,262
Class I 54,774 -- --
---------------------------------------------------
1,400,441,601 2,140,961,857 2,210,061,605
Cost of shares redeemed:+
Class A (863,943,469) (1,155,824,260) (1,241,244,596)
Class B (571,894,928) (381,101,499) (557,477,978)
Class C (189,340,177) (132,580,904) (95,917,677)
Class I (786,945)
---------------------------------------------------
(1,625,965,519) (1,669,506,663) (1,894,640,251)
Increase
(decrease) in
net assets
derived from
capital share
transactions (225,523,918) 471,455,194 315,421,354
---------------------------------------------------
Net increase
(decrease) in
net assets (28,678,050) 1,265,439,971 (60,504,235)
NET ASSETS:
Beginning of period $ 4,564,382,341 3,298,942,370 3,359,446,605
---------------------------------------------------
End of period $ 4,535,704,291 $ 4,564,382,341 $ 3,298,942,370
===================================================
Accumulated
distributions in
excess of net
investment income at
end of period $ (27,263,761) $ (38,057,670) $ (27,634,616)
===================================================
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
+ Cost of shares redeemed net of redemption fee of $2,887, $6,489, $950, and
$12 for the year ended October 31, 2004.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
23
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH -------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 6.05 $ 4.95 $ 5.56 $ 6.10 $ 7.41 $ 7.54
---------- ---------- -------- -------- -------- --------
Net investment income 0.46(a) 0.39 0.51 0.65(e) 0.80 0.79
Net realized and unrealized gain (loss) on
investments 0.25 1.12 (0.54) (0.50)(e) (1.25) (0.06)
Net realized and unrealized gain (loss) on
foreign currency transactions 0.02 0.00(c) (0.02) 0.00(c) 0.02 0.02
---------- ---------- -------- -------- -------- --------
Total from investment operations 0.73 1.51 (0.05) 0.15 (0.43) 0.75
---------- ---------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.46) (0.40) (0.51) (0.65) (0.83) (0.85)
From net realized gain on investments -- -- -- -- (0.05) (0.03)
Return of capital -- (0.01) (0.05) (0.04) -- --
---------- ---------- -------- -------- -------- --------
Total dividends and distributions (0.46) (0.41) (0.56) (0.69) (0.88) (0.88)
---------- ---------- -------- -------- -------- --------
Redemption fee (a) 0.00(c) -- -- -- -- --
---------- ---------- -------- -------- -------- --------
Net asset value at end of period $ 6.32 $ 6.05 $ 4.95 $ 5.56 $ 6.10 $ 7.41
========== ========== ======== ======== ======== ========
Total investment return (b) 12.53% 31.57%(d) (0.78%) 2.49% (6.48%) 10.33%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 7.44% 8.43%+ 9.63% 10.84%(e) 11.35% 10.36%
Net expenses 1.01% 1.01%+ 1.07% 1.04% 1.03% 1.00%
Expenses (before waiver) 1.01% 1.01%+ 1.08% 1.08% 1.07% 1.04%
Portfolio turnover rate 41% 47% 50% 51% 54% 83%
Net assets at end of period (in 000's) $1,279,164 $1,265,856 $850,899 $710,205 $456,770 $369,275
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 6.04 $ 4.94 $ 5.55 $ 6.09 $ 7.40 $ 7.53
---------- ---------- -------- -------- -------- --------
Net investment income 0.42(a) 0.36 0.46 0.61(e) 0.74 0.73
Net realized and unrealized gain (loss) on
investments 0.24 1.12 (0.53) (0.50)(e) (1.25) (0.06)
Net realized and unrealized gain (loss) on
foreign currency transactions 0.02 0.00(c) (0.02) 0.00(c) 0.02 0.02
---------- ---------- -------- -------- -------- --------
Total from investment operations 0.68 1.48 (0.09) 0.11 (0.49) 0.69
---------- ---------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.42) (0.38) (0.48) (0.61) (0.77) (0.79)
From net realized gain on investments -- -- -- -- (0.05) (0.03)
Return of capital -- (0.00)(c) (0.04) (0.04) -- --
---------- ---------- -------- -------- -------- --------
Total dividends and distributions (0.42) (0.38) (0.52) (0.65) (0.82) (0.82)
---------- ---------- -------- -------- -------- --------
Redemption fee (a) 0.00(c) -- -- -- -- --
---------- ---------- -------- -------- -------- --------
Net asset value at end of period $ 6.30 $ 6.04 $ 4.94 $ 5.55 $ 6.09 $ 7.40
========== ========== ======== ======== ======== ========
Total investment return (b) 11.65% 30.82%(d) (1.53%) 1.72% (7.20%) 9.51%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 6.69% 7.68%+ 8.88% 10.09%(e) 10.60% 9.61%
Net expenses 1.76% 1.76%+ 1.82% 1.79% 1.78% 1.75%
Expenses (before waiver) 1.76% 1.76%+ 1.83% 1.83% 1.82% 1.79%
Portfolio turnover rate 41% 47% 50% 51% 54% 83%
Net assets at end of period (in 000's) $ 419,496 $ 422,392 $236,791 $174,205 $106,709 $ 67,181
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class I shares were offered on January 2, 2004.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges. Class
I is not subject to sales charges.
(c) Less than one cent per share.
(d) Total return is not annualized.
(e) 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 MainStay High Yield Corporate Bond Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH ----------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 6.04 $ 4.94 $ 5.55 $ 6.09 $ 7.40 $ 7.53
- ---------- ---------- ---------- ---------- ---------- ----------
0.42(a) 0.36 0.46 0.61(e) 0.74 0.73
0.24 1.12 (0.53) (0.50)(e) (1.25) (0.06)
0.02 0.00(c) (0.02) 0.00(c) 0.02 0.02
- ---------- ---------- ---------- ---------- ---------- ----------
0.68 1.48 (0.09) 0.11 (0.49) 0.69
- ---------- ---------- ---------- ---------- ---------- ----------
(0.42) (0.38) (0.48) (0.61) (0.77) (0.79)
-- -- -- -- (0.05) (0.03)
-- (0.00)(c) (0.04) (0.04) -- --
- ---------- ---------- ---------- ---------- ---------- ----------
(0.42) (0.38) (0.52) (0.65) (0.82) (0.82)
- ---------- ---------- ---------- ---------- ---------- ----------
0.00(c) -- -- -- -- --
- ---------- ---------- ---------- ---------- ---------- ----------
$ 6.30 $ 6.04 $ 4.94 $ 5.55 $ 6.09 $ 7.40
========== ========== ========== ========== ========== ==========
11.65% 30.82%(d) (1.53%) 1.72% (7.20%) 9.51%
6.69% 7.68%+ 8.88% 10.09%(e) 10.60% 9.61%
1.76% 1.76%+ 1.82% 1.79% 1.78% 1.75%
1.76% 1.76%+ 1.83% 1.83% 1.82% 1.79%
41% 47% 50% 51% 54% 83%
$2,814,176 $2,876,134 $2,211,253 $2,475,037 $2,609,320 $3,294,427
</Table>
<Table>
<Caption>
CLASS I
-----------
JANUARY 2,
2004**
THROUGH
OCTOBER 31,
2004
$ 6.24
----------
0.41(a)
0.07
0.00(c)
----------
0.48
----------
(0.40)
--
--
----------
(0.40)
----------
0.00(c)
----------
$ 6.32
==========
7.97%(d)
7.79%+
0.66%+
0.66%+
41%
$ 22,868
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
25
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay High
Yield Corporate Bond Fund (the "Fund"), a diversified fund.
The Fund currently offers four 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 I shares are not subject to
sales charge. Distribution of Class I shares commenced on January 2, 2004. Class
A shares, Class B shares, Class C shares and Class I shares bear the same voting
(except for issues that relate solely to one class), dividend, liquidation and
other rights and conditions. Each class of shares other than Class I shares
bears distribution and/or service fee payments 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.
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.
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
(generally 4:00 p.m.). Equity securities are valued at the latest quoted sales
prices as of the close of trading on the Exchange 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. Foreign currency forward contracts are valued at their
fair market value determined on the basis of the mean between the last current
bid and asked prices based on dealer or exchange quotations. 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. Reasons for which securities may be valued
in this manner include, but are not limited to, trading for a security has been
halted or suspended, a security has been de-listed from a national exchange, or
trading on a security's primary market is temporarily closed at a time when
under normal conditions it would be open. At October 31, 2004, the Fund held
securities with a value of $17,560,693 that were valued in such manner.
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. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. 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.
26 MainStay High Yield Corporate Bond Fund
(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 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. (See Note 7.)
(E) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
assignments and loan participations. Loan assignments and participations are
agreements to make money available (a "commitment") to a borrower in a specified
amount, at a specified rate and within a specified time. Such loan assignments
and participations are typically senior, secured and collateralized in nature.
The Fund records an investment when the borrower withdraws money and records
interest as earned. These loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or London
InterBank Offered Rate (LIBOR).
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. The Fund may be contractually obligated
to receive approval from the agent bank and/or borrower prior to the sale of
these investments.
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"). In the event that the Borrower, Selling
Participant or Intermediate Participants becomes insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payments,
or may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
Borrower. At any point in time, up to the maturity date of the issue, the
Borrower may demand the unfunded portion. These unfunded amounts are recorded in
memorandum accounts. (See Note 7.)
(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
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
www.mainstayfunds.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and accumulated net
realized loss on investments arising from permanent differences; net assets at
October 31, 2004, are not effected.
<Table>
<Caption>
ACCUMULATED DISTRIBUTION ACCUMULATED NET
IN EXCESS OF NET REALIZED LOSS ON
INVESTMENT INCOME INVESTMENTS
$13,802,361 $(13,802,361)
</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 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.
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 year. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented.
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 year end exchange
rates are reflected in unrealized foreign exchange gains or losses.
(K) REDEMPTION FEE. The Fund imposes a 2.00% redemption fee on redemptions
(including exchanges) of Fund shares made within 60 days of their date of
purchase of Class A, Class B, Class C and Class I shares. 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.
(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.
28 MainStay High Yield Corporate Bond 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 0.60% of the Fund's
average daily net assets on assets up to $500 million and 0.55% annually on
assets in excess of $500 million. For the year ended October 31, 2004, the
Manager earned from the Fund $25,282,743.
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 other than Class I 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 shares was $581,524 for the year
ended October 31, 2004. 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 $186,789, $3,362,137 and $165,719, respectively, for the year ended
October 31, 2004.
(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 for the year ended October 31, 2004,
amounted to $6,027,712.
(E) NON-INTERESTED TRUSTEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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.
(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 $133,867 for the year ended October
31, 2004.
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 $481,807 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
State Street Bank and Trust Company is custodian of cash and securities of the
Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
www.mainstayfunds.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- 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, 2004:
<Table>
<Caption>
PRINCIPAL
DATE(S) OF AMOUNT/ 10/31/04 PERCENT OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
Alliance Entertainment Corp.
Common Stock 12/2/99 1,095,395 $ 4,213,596 $ 10,954 0.0%(a)
Series A1, Preferred Stock 5/19/99-12/2/99 447 446,889 197,127 0.0(a)
Series A2, Preferred Stock 12/2/99 503 956,239 221,823 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
Amkor Technology, Inc.
2nd Lien, Term Loan
6.2875%, due 10/27/10 10/29/04 $16,000,000 16,000,000 16,620,000 0.3
- --------------------------------------------------------------------------------------------------------------------------------
Calpine Gilroy, L.P.
10.00%, due 9/30/14 11/26/03 22,802,047 22,859,185 22,802,047 0.6
- --------------------------------------------------------------------------------------------------------------------------------
Colorado Prime Corp.
Preferred Stock 5/6/97-11/10/99 7,232 23,049,119 72 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
General Chemical Industrial
Products, Inc.
Common Stock 5/25/04 2,211 4,572,110 306,002 0.0(a)
Warrants, Series A 5/25/04 1,279 725,615 45,053 0.0(a)
Warrants, Series B 5/25/04 947 198,093 11,234 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
Globix Corp.
Common Stock 10/15/02 1,037,277 245,760 2,022,690 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
Goodyear Tire & Rubber Co.
Bank debt, Term Loan
6.059%, due 3/31/06 2/25/04-3/11/04 17,320,000 17,281,603 17,520,271 0.4
2nd Lien Note
11.00%, due 3/1/11 3/12/04 40,235,000 40,010,803 45,063,200 1.0
- --------------------------------------------------------------------------------------------------------------------------------
Graham Packaging Co., Inc.
Bank debt, Term Loan C
8.00%, due 4/7/12 1/30/01 1,000,000 1,000,000 1,022,292 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
Haights Cross Communications,
Inc.
Preferred Stock
16.00%, Class B 1/22/04 369,062 17,168,925 18,637,631 0.4
Warrants 1/22/04 385 4 4 0.0(a)
Warrants, Preferred Class A 1/22/04 374,051 3,741 3,740 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
Jostens IH Corp.
Secured Loan B
4.54%, due 10/4/11 10/8/04 3,862,069 3,862,069 3,917,586 0.1
- --------------------------------------------------------------------------------------------------------------------------------
Maxwell Communications Corp. PLC
Facility A 4/29/94-11/22/94 9,973,584 0(b) 29,921 0.0(a)
Facility B 4/29/94-11/22/94 L 1,131,066 0(b) 6,217 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
30 MainStay High Yield Corporate Bond Fund
Restricted Securities held at October 31, 2004 (continued):
<Table>
<Caption>
PRINCIPAL
DATE(S) OF AMOUNT/ 10/31/04 PERCENT OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
Mirant Corp.
Bank debt, Revolver 1
4.75%, due 1/15/05 4/21/03 $ 7,020,000 $ 5,806,021 $ 4,364,102 0.1%
Bank debt, Revolver 5
4.75%, due 7/15/05 1/6/04-4/27/04 6,686,131 5,444,918 4,513,138 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 18,430 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)
- --------------------------------------------------------------------------------------------------------------------------------
North Atlantic Trading Co., Inc.
Common stock 4/21/04 2,156 22 129,425 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
NRG Energy, Inc.
Bank debt, Term Loan B
5.55%, due 6/23/10 12/30/03 4,780,493 4,736,247 4,921,517 0.1
Bank debt, Credit-Linked
Deposit
5.875%, due 6/23/10 12/30/03 2,708,333 2,681,592 2,790,938 0.1
- --------------------------------------------------------------------------------------------------------------------------------
Owens Corning, Inc.
Bank debt, Revolver
3.62%, due 1/1/05 9/26/01-10/15/02 7,844,684 5,278,857 5,334,386 0.1
- --------------------------------------------------------------------------------------------------------------------------------
QuadraMed Corp.
Common Stock 4/30/04 1,580,150 15,802 4,187,398 0.1
Convertible Preferred Stock
5.50% 6/17/04 814,000 20,350,000 20,350,000 0.4
- --------------------------------------------------------------------------------------------------------------------------------
Qwest Corp.
Bank debt, Term Loan B
6.95%, due 6/30/10 6/12/03 18,000,000 17,534,764 17,937,000 0.4
- --------------------------------------------------------------------------------------------------------------------------------
Rockwood Specialties Group, Inc.
Bank debt, Term Loan
9.092%, due 2/11/11 8/16/04 11,806,088 14,446,574 15,017,927 0.3
9.96%, due 2/11/11 8/16/04 7,274,002 7,206,258 7,274,002 0.2
- --------------------------------------------------------------------------------------------------------------------------------
Skilled Healthcare Group, Inc.
Common Stock 9/4/03 11,689 117 187,024 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
$ 241,785,861 $221,864,072 4.9%
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Less than one tenth of a percent.
(b) Less than one dollar.
www.mainstayfunds.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED TOTAL
ORDINARY CAPITAL AND UNREALIZED ACCUMULATED
INCOME OTHER LOSSES APPRECIATION LOSS
$7,092,816 $(677,839,388) $62,970,421 $(607,776,151)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals, premium amortization adjustments, bond
reorganizations and interest write-offs.
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $677,839,388 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 $202,686
2010 169,119
2011 306,034
---------------------------------------------
$677,839
---------------------------------------------
</Table>
The tax character of distributions paid during the year ended October 31, 2004,
the ten months ended October 31, 2003, and year ended December 31, 2002, shown
in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid from:
Ordinary Income $316,946,647 $272,158,723 $309,124,918
Return of Capital -- 3,430,564 28,037,722
- ---------------------------------------------------------------
$316,946,647 $275,589,287 $337,162,640
- ---------------------------------------------------------------
</Table>
NOTE 7 -- PORTFOLIO SECURITIES LOANED, LOAN COMMITMENTS AND FOREIGN CURRENCY:
As of October 31, 2004, the Fund had securities on loan with a market value of
$555,763,642 and received collateral of $582,928,293 for securities on loan
which was used to purchase highly liquid short-term investments in accordance
with the Fund's securities lending procedures. Pursuant to Rule 2a-7, securities
purchased with collateral received are valued at amortized cost.
As of October 31, 2004, the Fund had unfunded loan commitments pursuant to the
following loan agreements:
<Table>
<Caption>
UNFUNDED
BORROWER COMMITMENT
Mirant Corp., due 7/17/05 $ 3,796,333
NRG Energy, Inc., due 12/31/07 4,600,000
Owens Corning, Inc., due 1/1/05 15,462,738
Universal City, Inc., due 6/30/07 10,000,000
- ---------------------------------------------------------
$33,859,071
- ---------------------------------------------------------
</Table>
Foreign currency held at October 31, 2004:
<Table>
<Caption>
CURRENCY COST VALUE
Euro E175,978 $223,852 $223,852
- ------------------------------------------------
</Table>
NOTE 8 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than U.S. Government and short-term securities, were $1,654,860 and $1,938,098,
respectively.
NOTE 9 -- 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 year ended October 31, 2004.
32 MainStay High Yield Corporate Bond Fund
NOTE 10 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C CLASS I*
Shares sold 121,503 41,658 24,460 3,736
- ---------------------------------------------------------------
Shares issued in
reinvestment of
dividends and
distributions 10,116 20,785 2,690 9
- ---------------------------------------------------------------
131,619 62,443 27,150 3,745
- ---------------------------------------------------------------
Shares redeemed (138,398) (91,988) (30,506) (127)
- ---------------------------------------------------------------
Net increase
(decrease) (6,779) (29,545) (3,356) 3,618
- ---------------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003**
CLASS A CLASS B CLASS C
Shares sold 237,513 77,972 43,734
- -----------------------------------------------------------
Shares issued in
reinvestment of
dividends and
distributions 8,908 19,447 1,999
- -----------------------------------------------------------
246,421 97,419 45,733
- -----------------------------------------------------------
Shares redeemed (209,184) (69,036) (23,761)
- -----------------------------------------------------------
Net increase 37,237 28,383 21,972
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 280,014 82,864 33,375
- -----------------------------------------------------------
Shares issued in
reinvestment of
dividends and
distributions 8,345 27,828 1,909
- -----------------------------------------------------------
288,359 110,692 35,284
- -----------------------------------------------------------
Shares redeemed (244,150) (109,057) (18,744)
- -----------------------------------------------------------
Net increase 44,209 1,635 16,540
- -----------------------------------------------------------
</Table>
<Table>
(a) Less than one thousand.
* First offered on January 2, 2004.
** The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
NOTE 11 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 12 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
www.mainstayfunds.com 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay High Yield Corporate Bond Fund
(the "Fund"), one of the funds constituting The MainStay Funds, as of October
31, 2004, and the related statement of operations, statement of changes in net
assets and the financial highlights for the year or period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the period ended October 31, 2003 and the year
ended December 31, 2002, and the financial highlights for the periods presented
through October 31, 2003, were audited by other auditors, whose report dated
December 18, 2003 expressed an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay High Yield Corporate Bond Fund of The MainStay Funds as of October 31,
2004, the results of its operations, the changes in its net assets and its
financial highlights for the year or period then ended, in conformity with U.S.
generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
34 MainStay High Yield Corporate Bond Fund
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 35
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
36 MainStay High Yield Corporate Bond Fund
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 37
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
38 MainStay High Yield Corporate Bond Fund
(MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C)2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06362 (RECYCLE LOGO) MSHY11-12/04
08
(MAINSTAY LOGO)
MAINSTAY
INTERNATIONAL BOND FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay International Bond Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quar-
ter of 2004, and according to preliminary estimates from the Bureau of Economic
Analysis, gross domestic product grew at a seasonally adjusted annual rate of
3.9% in the third quarter of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 13
- ----------------------------------------------------
Notes to Financial Statements 18
Report of Independent Registered Public
Accounting Firm 25
- ----------------------------------------------------
Trustees and Officers 26
- ----------------------------------------------------
Proxy Voting Policies and Procedures 28
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 28
- ----------------------------------------------------
MainStay Funds 29
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 4.36% 4.40% 5.83%
Excluding sales charges 9.28 5.37 6.32
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY INTERNATIONAL BOND CITIGROUP NON-U.S. DOLLAR WORLD
FUND GOVERNMENT BOND INDEX
--------------------------- -------------------------------
10/31/94 9550 10000
10733 11519
12432 12147
13052 12109
14108 13658
13574 13254
11696 11968
12906 12793
13931 14081
16135 16580
10/31/04 17631 18608
</Table>
<Table>
-- MainStay International Bond Fund -- Citigroup Non-U.S. Dollar World
Government Bond Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 3.51% 4.25% 5.56%
Excluding sales charges 8.51 4.59 5.56
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY INTERNATIONAL BOND CITIGROUP NON-U.S. DOLLAR WORLD
FUND GOVERNMENT BOND INDEX
--------------------------- -------------------------------
10/31/94 10000 10000
11170 11519
12848 12147
13399 12109
14387 13658
13731 13254
11740 11968
12867 12793
13774 14081
15835 16580
10/31/04 17183 18608
</Table>
<Table>
-- MainStay International Bond Fund -- Citigroup Non-U.S. Dollar World
Government Bond Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 7.51% 4.59% 5.56%
Excluding sales charges 8.51 4.59 5.56
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY INTERNATIONAL BOND CITIGROUP NON-U.S. DOLLAR WORLD
FUND GOVERNMENT BOND INDEX
--------------------------- -------------------------------
10/31/94 10000 10000
11170 11519
12848 12147
13399 12109
14387 13658
13731 13254
11740 11968
12867 12793
13774 14081
15835 16580
10/31/04 17183 18608
</Table>
<Table>
-- MainStay International Bond Fund -- Citigroup Non-U.S. Dollar World
Government Bond Index
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 4.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. The fee waivers and/or expense
limitations are voluntary and may be discontinued at any time. From inception
(9/13/94) through 12/31/94 (for Class A, first offered 1/3/95) and 8/31/98 for
Class C (first offered 9/1/98), performance of Class A and C shares includes the
historical performance of Class B shares adjusted to reflect the respective
applicable sales charge (or CDSC) and fees and expenses for Class A and C
shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay International Bond Fund
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Citigroup Non-U.S. Dollar World Government Bond
Index(1) 12.23% 7.02% 6.41%
Average Lipper international income fund(2) 10.39 7.34 6.82
</Table>
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 reinvestment of all income and capital gains. The Citigroup
Non-U.S. World Government Bond Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. 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.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY INTERNATIONAL BOND FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,065.70 $ 8.83 $1,016.50 $ 8.62
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,062.95 $12.70 $1,012.75 $12.40
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,062.95 $12.70 $1,012.75 $12.40
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Governments and Federal Agencies 76.0%
Corporate Bonds 27.1
Short-Term Investments 1.1
Loan Participation 0.5%
Yankee Bond 0.3
Liabilities in Excess of Cash and Other Assets -5.0
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Bonos y Obligacion del Estado 4.75%, due
7/30/14
2. Federal Republic of Germany 5.00%, due 7/14/11
3. Buoni Poliennali del Tesoro 5.50%, due 11/1/10
4. Federal Republic of Germany 5.25%, due 1/4/08
5. United Kingdom Treasury Bond 4.25%, due 6/7/32
6. KFW Kreditanstalt fuer Wiederaufbau 4.75%, due
8/18/06
7. Government of France 5.25%, due 4/25/08
8. Kingdom of Denmark 5.00%, due 11/15/13
9. Hellenic Republic 5.90%, due 10/22/22
10. Stadshypotek AB 6.00%, due 6/15/06
</Table>
6 MainStay International Bond Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Joseph Portera and Gary Goodenough of
MacKay Shields LLC
WHAT MAJOR FACTORS INFLUENCED THE INTERNATIONAL BOND MARKETS DURING THE 12
MONTHS ENDED OCTOBER 31, 2004?
In the early part of the reporting period, geopolitical risks buoyed government
bond markets. Few investors believed that the global economy was growing fast
enough to warrant higher interest rates soon. With improving economic data from
the United States, Japan, and China, however, rising rates became inevitable.
Indeed, for most of the period, the United Kingdom and Australian monetary
authorities were aggressively raising short-term interest rates. They were
joined by the U.S. in late June.
DID CURRENCY MOVEMENTS HAVE A MAJOR IMPACT ON BOND VALUES?
Yes, they did. The U.S. dollar was under pressure during most of the 12-month
period, and nearly every major currency rallied relative to the dollar. In fact,
the U.S. dollar reached new lows against the euro during the reporting period.
As the U.S. dollar continued to weaken, The Bank of Japan felt compelled to
intervene and spent over 100 billion dollars to keep the yen from rising in the
first few months of 2004.
For the 12-month period, the return for the Citigroup Non-U.S. Dollar World
Government Bond Index(1) was less than 5% in local currency terms, but once
currency movements were taken into account, the Index returned more than 12% in
U.S. dollar terms.
HOW DID VARIOUS MARKETS PERFORM?
Among developed markets, the best performer was Norway, which returned more than
8% in local currency terms for the 12-month reporting period. The U.K., Canada,
Australia, and Sweden each had 12-month returns greater than 7% in local
currency terms. The worst performer was Japan, which was up only 1.5% in local
currency terms for the reporting period.
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests at least 80% of its assets in debt securities.
Normally, the Fund invests in debt securities of foreign governments, agencies,
and supranational organizations, and secondarily in debt securities of corporate
issuers located in a variety of developed and emerging-market countries,
primarily outside the U.S. The Fund's principal investments also include
high-yield debt securities, with certain limitations on credit quality. We also
invest in mortgage-related and asset-backed securities. In implementing this
strategy, we seek to identify opportunities based on our assessments of
countries, currencies, and individual securities. We may consider currency
exchange rates, interest rates, inflation, relative economic growth, and
governmental policies. The Fund may also buy and sell currency on a spot basis,
enter into foreign currency forward contracts, and buy and sell foreign-currency
options.
WHAT AFFECT DID CURRENCY POSITIONING HAVE ON FUND RESULTS DURING THE REPORTING
PERIOD?
Currency positioning was the major reason for the Fund's underperformance versus
its peer group for the reporting period. Defensive currency management and
fundamental analysis led us to underweight foreign currency in the portfolio,
specifically but not solely the Japanese yen.
WHAT INFLUENCE DID COUNTRY ALLOCATION HAVE ON FUND PERFORMANCE?
During the reporting period we made significant asset shifts among international
bond markets, based primarily on our expectations regarding interest rates and
currency movements. We reduced the portfolio's exposure to Canadian-dollar bonds
from 8% to 2%. We redeployed some of those assets into U.K. bonds, increasing
the Fund's position in the U.K. market from 8% to 10%. In so doing, we increased
the duration within the U.K. market significantly, on the belief that U.K.
monetary authorities were nearing the end of their interest-rate tightening. We
also increased the Fund's exposure in core European bonds from just under 53% to
56% of net assets. Within the Scandinavian markets, we shifted from a 3% to 5%
exposure in Danish krone denominated bonds and established a position in Norway.
Norway represents a special opportunity since its economy is so heavily weighted
in the oil sector. We believed that the Norwegian krone would likely outperform
the euro as oil prices continued to rise. Indeed, after
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 is nondiversified. By
concentrating in a smaller number of investments, the Fund's risk is increased
because each investment has a greater effect on the Fund's performance. 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.
1. See footnote on page 5 for more information on the Citigroup Non-U.S. Dollar
World Government Bond Index.
www.mainstayfunds.com 7
we purchased the Norwegian bonds in early February, the Norwegian krone
appreciated against the U.S. dollar and the euro. We shifted the portfolio's
duration risk away from Canada (because of Canada's high correlation with the
U.S. market) and into markets that we believed would outperform in a rising U.S.
interest-rate environment. This strategy made a positive contribution to the
Fund's results.
We also increased the Fund's exposure to Japan from 7% to 9% during the
reporting period. With Japanese short-term rates close to zero, however, we
focused on investments in corporate and emerging names rather than on government
bonds.
HOW DID EMERGING-MARKET DEBT PERFORM?
The Fund's holdings in emerging-market debt performed well over the 12-month
reporting period, despite higher U.S. interest rates. There was a sell-off in
the emerging-market sector during the second quarter of 2004, but
emerging-market debt subsequently recovered and posted impressive returns as
yield spreads to U.S. Treasuries narrowed. On average, the yield spread of
emerging-market debt to U.S. Treasuries narrowed 60 basis points from April 2004
to the end of October 2004. The Fund's exposure to this sector remained
virtually unchanged at approximately 12% of net assets.
DID DURATION POSITIONING AFFECT FUND PERFORMANCE DURING THE REPORTING PERIOD?
The Fund's excess return derives primarily from asset or country allocation and
currency selection, not from duration alone. Duration positioning in the Fund is
largely a residual of asset selection. The portfolio as a whole usually does not
stray more than 10% from the duration of the benchmark. Throughout the 12-month
period, the Fund's duration remained between 93% and 95% of the duration of the
Citigroup Non-U.S. Dollar World Government Bond Index, so the impact of duration
on relative performance was relatively modest. We believe that the Fund's
decision to shift duration risk away from Canada had a positive impact on
performance. Our decision to increase duration in the U.K. market may help
strengthen performance relative to the U.S. bond market if interest rates
continue to rise in the United States.
WHAT DO YOU ANTICIPATE GOING FORWARD?
We believe that the U.S. dollar's prospects remain dim, as the U.S. current
account and budget deficits will require massive amounts of foreign capital
funding. For this reason, we intend to shift toward additional foreign-currency
exposure. In particular, we are likely to look for opportunities to increase
exposure to the euro going forward.
With prospects for higher U.S. interest rates still intact, we intend to focus
our efforts on finding investment opportunities in markets whose interest-rate
cycle is not synchronized with that of the U.S. We believe Europe and the U.K.
may offer the best relative-value opportunities and that these markets will
likely remain among the most heavily weighted in the Fund. In our view,
emerging-market debt remains attractive as well, and we expect continued
outperformance from this sector relative to U.S. Treasuries.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
At a meeting on September 21, 2004, the Board of Trustees of The MainStay Funds
(the "Trust") approved an Agreement and Plan of Reorganization whereby all of
the assets and liabilities of the Fund will be transferred to the MainStay
Global High Income Fund (a series of the Trust) in exchange for shares of
MainStay Global High Income Fund (the "Reorganization"). Under this Agreement,
the Fund would be completely liquidated after the Reorganization. A meeting of
shareholders of the Fund has been scheduled for January 18, 2005 in order to
vote on the proposed Reorganization. Should shareholders approve a
Reorganization, it is scheduled to be effective on or about the close of
business on January 21, 2005.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8 MainStay International Bond Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (103.9%)+
CORPORATE BONDS (27.1%)
- ------------------------------------------------------------------------------
AUSTRALIA (0.6%)
Australia & New Zealand Banking Group Ltd. Series
E
4.2544%, due 2/27/07 (b) L 110,000 $ 201,514
-----------
BERMUDA (0.7%)
AES China Generating Co., Ltd.
8.25%, due 6/26/10 $ 250,000 253,949
-----------
BRAZIL (0.4%)
CIA Brasileira de Bebidas
10.50%, due 12/15/11 $ 125,000 153,750
-----------
CAYMAN ISLANDS (0.5%)
CSN Islands VIII Corp.
9.75%, due 12/16/13 (a) $ 170,000 172,550
-----------
CHILE (1.6%)
AES General SA
7.50%, due 3/25/14 (a) $ 200,000 204,750
Compania Nacional de Transmision Electrica S.A.
7.875%, due 4/15/11 100,000 116,405
Empresa Nacional de Electricidad S.A. Series B
8.50%, due 4/1/09 100,000 112,684
Empresa Nacional de Petroleo
6.75%, due 11/15/12 (a) 100,000 111,958
-----------
545,797
-----------
CZECH REPUBLIC (0.4%)
Oskar Mobile Series REGS
7.50%, due 10/15/11 (a) E 100,000 131,339
-----------
DENMARK (1.0%)
Danske Kredit Realkreditaktieselskab
7.00%, due 10/1/32 DK 122,250 22,272
Realkredit Danmark A/S
6.00%, due 10/1/29 1,757,627 311,278
-----------
333,550
-----------
FRANCE (0.8%)
Veolia Environnement Series E
5.875%, due 6/27/08 E 200,000 276,294
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GERMANY (5.7%)
Aries Vermogensverwaltungs GmbH Series C
9.60%, due 10/25/14 (a) $ 250,000 $ 291,875
Citibank Global Markets Deutschland for Severstal
9.25%, due 4/19/14 (a) 100,000 98,000
VKfW Kreditanstalt fuer Wiederaufbau Series INTL
4.75%, due 8/18/06 E 875,000 1,157,291
Kyivstar GSM
10.375%, due 8/17/09 (a) $ 150,000 165,750
Morgan Stanley Bank AG for OAO Gazprom
9.625%, due 3/1/13 (a) 260,000 299,000
-----------
2,011,916
-----------
LUXEMBORG (0.9%)
Gazprom International S.A.
7.201%, due 2/1/20 (a) $ 200,000 210,000
UBS Luxembourg SA Wimm-Bill-Dann
8.50%, due 5/21/08 (a) 100,000 97,750
-----------
307,750
-----------
MEXICO (1.4%)
Banco Nacional de Comercio Exterior S.N.C.
11.25%, due 5/30/06 (a) $ 350,000 396,375
Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
12.50%, due 6/15/12 90,000 102,150
-----------
498,525
-----------
NETHERLANDS (2.4%)
Allianz Finance II B.V.
6.125%, due 5/31/22 (b) E 100,000 141,757
Deutsche Post Finance BV
5.125%, due 10/4/12 250,000 342,791
Kazkommerts International BV
7.00%, due 11/3/09 (a) $ 100,000 99,375
Mobifon Holdings BV
12.50%, due 7/31/10 80,000 94,800
RWE Finance BV
4.625%, due 8/17/10 L 100,000 177,150
-----------
855,873
-----------
SINGAPORE (0.4%)
Singapore Powerassets Ltd.
5.00%, due 10/22/13 (a) $ 150,000 153,602
-----------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May
be subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (CONTINUED)
CORPORATE BONDS (CONTINUED)
- ------------------------------------------------------------------------------
SUPRANATIONAL (2.4%)
Corporacion Andina de Fomento CAF Series 4BR
1.17%, due 7/27/06 Y 25,000,000 $ 237,618
European Investment Bank Series E
2.125%, due 9/20/07 60,000,000 593,535
-----------
831,153
-----------
SWEDEN (2.5%)
VStadshypotek AB
Series 1564
6.00%, due 3/15/06 SK 6,000,000 880,552
-----------
UNITED KINGDOM (1.1%)
Annington Finance
4.9188%, due 10/2/06 (b) L 116,923 213,519
GKN Holdings PLC
6.75%, due 10/28/19 100,000 186,033
-----------
399,552
-----------
UNITED STATES (4.3%)
AT & T Corp.
Series REGS
6.00%, due 11/21/06 E 130,000 179,193
Citigroup, Inc.
0.80%, due 10/30/08 Y 30,000,000 284,217
Goldman Sachs Group, L.P.
5.125%, due 4/24/13 E 230,000 309,057
McDonald's Corp.
Series E
5.125%, due 5/23/06 195,000 257,444
Morgan Stanley & Co.
5.375%, due 11/14/13 L 85,000 154,628
Pemex Project Funding Master Trust
6.375%, due 8/5/16 (a) E 250,000 328,793
-----------
1,513,332
-----------
Total Corporate Bonds
(Cost $8,145,466) 9,520,998
-----------
GOVERNMENTS & FEDERAL AGENCIES (76.0%)
- ------------------------------------------------------------------------------
AUSTRALIA (2.0%)
Australian Government
Series 909
7.50%, due 9/15/09 A$ 850,000 694,849
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
AUSTRIA (1.0%)
Republic of Austria
Series 2
4.65%, due 1/15/18 E 277,000 $ 368,308
-----------
BELGIUM (2.6%)
Kingdom of Belgium
Series 42
3.00%, due 9/28/08 E 425,000 541,820
Series 36
5.00%, due 9/28/11 270,000 373,347
-----------
915,167
-----------
BRAZIL (1.4%)
Republic of Brazil
Series 11BR
4.75%, due 4/10/07 Y 30,000,000 286,411
Series 20 Year
8.00%, due 4/15/14 $ 38,994 38,628
11.00%, due 1/11/12 140,000 159,600
-----------
484,639
-----------
CANADA (1.9%)
Canadian Government
5.25%, due 6/1/12 C$ 385,000 334,501
5.75%, due 6/1/33 385,000 353,941
-----------
688,442
-----------
COLOMBIA (0.5%)
Republic of Colombia
8.125%, due 5/21/24 $ 180,000 163,350
-----------
DENMARK (2.6%)
VKingdom of Denmark
5.00%, due 11/15/13 DK 4,985,000 921,362
-----------
EL SALVADOR (0.3%)
Republic of El Salvador
7.75%, due 1/24/23 (a) $ 100,000 107,875
-----------
FRANCE (4.6%)
French Treasury Note
4.75%, due 7/12/07 E 500,000 670,715
VGovernment of France
5.25%, due 4/25/08 700,000 960,108
-----------
1,630,823
-----------
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May
be subject to change daily.
</Table>
10 MainStay International Bond Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GOVERNMENTS & FEDERAL AGENCIES (CONTINUED)
- ------------------------------------------------------------------------------
GERMANY (19.8%)
Federal Republic of Germany
Series 99
3.75%, due 1/4/09 E 400,000 $ 524,050
Series 138
4.50%, due 8/18/06 145,000 191,187
Series 98
4.75%, due 7/4/08 150,000 203,116
Series 01
V 5.00%, due 7/4/11 1,895,000 2,618,025
Series 98
V 5.25%, due 1/4/08 1,367,000 1,867,570
Series 99
5.375%, due 1/4/10 540,000 756,069
Series 00
6.25%, due 1/4/30 500,000 794,686
-----------
6,954,703
-----------
GREECE (2.5%)
VHellenic Republic
5.90%, due 10/22/22 E 607,000 898,328
-----------
ITALY (6.5%)
VBuoni Poliennali del Tesero
5.50%, due 11/1/10 E 1,365,000 1,933,452
Republic of Italy
3.80%, due 3/27/08 Y 33,000,000 346,160
-----------
2,279,612
-----------
JAPAN (3.4%)
Development Bank of Japan
Series INTL
1.05%, due 6/20/23 Y 41,000,000 318,286
Japan Finance Corp. for Municipal Enterprises
Series INTL
1.55%, due 2/21/12 90,000,000 870,901
-----------
1,189,187
-----------
MEXICO (0.5%)
United Mexican States
7.50%, due 1/14/12 $ 150,000 170,400
-----------
NETHERLANDS (1.8%)
Netherlands Government
3.75%, due 7/15/09 E 500,000 652,243
-----------
NORWAY (2.5%)
Norwegian Government
6.75%, due 1/15/07 NK 5,135,000 874,978
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SOUTH AFRICA (1.6%)
Republic of South Africa
Series E
7.00%, due 4/10/08 E 400,000 $ 565,146
-----------
SPAIN (10.3%)
Bonos Y Obligacion del Estado
V 4.75%, due 7/30/14 E 2,035,000 2,771,186
5.15%, due 7/30/09 612,000 847,334
-----------
3,618,520
-----------
SWEDEN (0.6%)
Swedish Government
Series 1043
5.00%, due 1/28/09 SK 1,025,000 152,572
Series 1045
5.25%, due 3/15/11 350,000 52,920
-----------
205,492
-----------
UKRAINE (0.9%)
Ukraine Government
6.875%, due 3/4/11 (a) $ 100,000 100,875
7.65%, due 6/11/13 (a) 200,000 205,750
-----------
306,625
-----------
UNITED KINGDOM (7.9%)
United Kingdom Treasury Bond
4.00%, due 3/7/09 L 170,000 303,581
V 4.25%, due 6/7/32 725,000 1,262,661
5.00%, due 3/7/12 183,000 341,011
6.25%, due 11/25/10 200,000 396,680
7.50%, due 12/7/06 200,000 387,825
8.00%, due 12/7/15 45,000 105,622
-----------
2,797,380
-----------
VENEZUELA (0.8%)
Republic of Venezuela
13.625%, due 8/15/18 $ 200,000 264,000
-----------
Total Governments & Federal Agencies
(Cost $23,187,825) 26,751,429
-----------
LOAN PARTICIPATION (0.5%)
- ------------------------------------------------------------------------------
ALGERIA (0.5%)
Republic of Algeria
Term Loan, Tranche 3
Series YEN
0.9375%, due 3/4/10 (b)(c) Y 20,263,160 187,958
-----------
Total Loan Participation
(Cost $139,727) 187,958
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BOND (0.3%) (D)
- ------------------------------------------------------------------------------
MEXICO (0.3%)
Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
11.75%, due 6/15/09 $ 100,000 $ 101,750
-----------
Total Yankee Bond
(Cost $97,085) 101,750
-----------
Total Long-Term Bonds
(Cost $31,570,103) 36,562,135
-----------
SHORT-TERM INVESTMENT (1.1%)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (1.1%)
UBS Finance (Delaware) LLC
1.8654% due 11/1/04 $ 370,000 370,000
-----------
Total Commercial Paper
(Cost $370,000) 370,000
-----------
Total Short-Term Investment
(Cost $370,000) 370,000
-----------
Total Investments
(Cost $31,940,103) (e) 105.0% 36,932,135(f)
Liabilities in Excess of Cash and Other Assets (5.0) (1,755,563)
------------ -----------
Net Assets 100.0% $35,176,572
============ ===========
</Table>
<Table>
(a) May be sold to institutional investors only.
(b) Floating rate. Rate shown is the rate in effect at
October 31, 2004.
(c) Restricted security.
(d) Yankee Bond -- Dollar denominated bond issued in the
United States by a foreign bank or corporation.
(e) The cost for federal income tax purposes is $34,909,069.
(f) At October 31, 2004 net unrealized appreciation for
securities was $2,023,066, 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
$2,047,429, and aggregate gross unrealized depreciation
for all investments on which there was an excess of cost
over market value of $24,363.
The following abbreviations are used in the above portfolio:
A$-- Australian Dollar
C$-- Canadian Dollar
DK-- Danish Krone
E-- Euro
Y-- Japanese Yen
NK -- Norwegian Krone
L-- Pound Sterling
SK-- Swedish Krona
$-- U.S. Dollar
</Table>
12 MainStay International Bond Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $31,940,103) $36,932,135
Cash 1,681
Cash denominated in foreign currencies
(identified cost $539,100) 548,097
Receivables:
Dividends and interest 740,214
Investment securities sold 335,050
Fund shares sold 12,461
Unrealized appreciation on foreign currency
forward contracts 14,599
Other assets 13,651
-----------
Total assets 38,597,888
-----------
LIABILITIES:
Payables:
Fund shares redeemed 2,570,761
Investment securities purchased 404,255
Transfer agent 26,245
NYLIFE Distributors 21,139
Manager 18,028
Custodian 6,276
Trustees 480
Accrued expenses 54,427
Unrealized depreciation on foreign currency
forward contracts 281,250
Dividend payable 38,455
-----------
Total liabilities 3,421,316
-----------
Net assets $35,176,572
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 17,892
Class B 16,465
Class C 2,957
Additional paid-in capital 31,166,246
Accumulated undistributed net investment income 72,444
Accumulated net realized loss on investments
and written option transactions (857,540)
Net unrealized appreciation on investments 4,992,032
Net unrealized depreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts (233,924)
-----------
Net assets $35,176,572
===========
CLASS A
Net assets applicable to outstanding shares $16,927,654
===========
Shares of beneficial interest outstanding 1,789,177
===========
Net asset value per share outstanding $ 9.46
Maximum sales charge (4.50% of offering price) 0.45
-----------
Maximum offering price per share outstanding $ 9.91
===========
CLASS B
Net assets applicable to outstanding shares $15,470,375
===========
Shares of beneficial interest outstanding 1,646,534
===========
Net asset value and offering price per share
outstanding $ 9.40
===========
CLASS C
Net assets applicable to outstanding shares $ 2,778,543
===========
Shares of beneficial interest outstanding 295,702
===========
Net asset value and offering price per share
outstanding $ 9.40
===========
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 1,098
Interest (a) 1,594,630
----------
Total income 1,595,728
----------
EXPENSES:
Manager 256,577
Transfer agent 163,178
Distribution -- Class B 121,298
Distribution -- Class C 31,241
Professional 41,979
Service -- Class A 40,788
Service -- Class B 40,433
Service -- Class C 10,414
Registration 35,461
Shareholder communication 32,502
Custodian 22,512
Recordkeeping 15,549
Trustees 5,352
Miscellaneous 32,732
----------
Total expenses before reimbursement and
waiver 850,016
Expenses reimbursed by Manager (74,364)
----------
Net expenses 775,652
----------
Net investment income 820,076
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN
OPTION AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions 97,306
Written option transactions 34,578
Foreign currency transactions 26,036
----------
Net realized gain on investments, written option
and foreign currency transactions 157,920
----------
Net change in unrealized appreciation
(depreciation) on:
Security transactions 2,044,870
Translation of other assets and liabilities in
foreign currencies and foreign currency
forward contracts (10,091)
----------
Net unrealized gain on investments and foreign
currency transactions 2,034,779
----------
Net realized and unrealized gain on investments,
written option and foreign currency
transactions 2,192,699
----------
Net increase in net assets resulting from
operations $3,012,775
==========
</Table>
(a) Interest recorded net of foreign withholding taxes in the amount of $2,216.
14 MainStay International Bond Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 820,076 $ 644,153 $ 636,516
Net realized gain (loss)
on investments, written
option and foreign
currency transactions 157,920 1,423,250 (337,607)
Net change in unrealized
appreciation
(depreciation) on
investments and foreign
currency transactions 2,034,779 577,807 2,610,698
-----------------------------------------
Net increase in net assets
resulting from operations 3,012,775 2,645,210 2,909,607
-----------------------------------------
Dividends and distributions to
shareholders:
From net investment income
Class A (707,843) (408,805) (15,519)
Class B (600,903) (362,630) (12,207)
Class C (148,895) (41,303) (450)
Return of capital
Class A -- -- (393,282)
Class B -- -- (309,362)
Class C -- -- (11,394)
-----------------------------------------
Total dividends and
distributions to
shareholders (1,457,641) (812,738) (742,214)
-----------------------------------------
Capital share transactions:
Net proceeds from sale of
shares:
Class A 4,015,691 16,874,951 5,775,981
Class B 3,923,223 5,824,799 4,142,880
Class C 3,158,106 2,108,159 396,415
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A 281,058 158,854 133,541
Class B 486,835 314,013 285,085
Class C 54,194 29,640 9,673
-----------------------------------------
11,919,107 25,310,416 10,743,575
Cost of shares redeemed:
Class A (3,064,560) (14,317,905) (4,634,514)
Class B (4,637,994) (4,214,219) (1,661,666)
Class C (2,863,404) (476,818) (123,198)
-----------------------------------------
(10,565,958) (19,008,942) (6,419,378)
Increase in net assets
derived from capital
share transactions 1,353,149 6,301,474 4,324,197
-----------------------------------------
Net increase in net
assets 2,908,283 8,133,946 6,491,590
</Table>
<Table>
<Caption>
2004 2003* 2002
NET ASSETS:
Beginning of period $ 32,268,289 $ 24,134,343 $17,642,753
-----------------------------------------
End of period $ 35,176,572 $ 32,268,289 $24,134,343
=========================================
Accumulated undistributed
net investment income at
end of period $ 72,444 $ 649,395 $ 49,959
=========================================
</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. www.mainstayfunds.com
15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH --------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 9.04 $ 8.47 $ 7.61 $ 8.02 $ 9.07 $ 10.57
------- ------- ------- ------ ------- -------
Net investment income 0.24(a) 0.22(a) 0.29(a) 0.28(a)(d) 0.25(a) 0.36
Net realized and unrealized gain (loss) on
investments 0.57 0.41 1.23 0.04(d) (0.05) (0.89)
Net realized and unrealized gain (loss) on
foreign currency transactions 0.01 0.21 (0.33) (0.23) (0.71) (0.33)
------- ------- ------- ------ ------- -------
Total from investment operations 0.82 0.84 1.19 0.09 (0.51) (0.86)
------- ------- ------- ------ ------- -------
Less dividends and distributions:
From net investment income (0.40) (0.27) (0.01) -- -- (0.04)
From net realized gain on investments -- -- -- -- -- (0.09)
Return of capital -- -- (0.32) (0.50) (0.54) (0.51)
------- ------- ------- ------ ------- -------
Total dividends and distributions (0.40) (0.27) (0.33) (0.50) (0.54) (0.64)
------- ------- ------- ------ ------- -------
Net asset value at end of period $ 9.46 $ 9.04 $ 8.47 $ 7.61 $ 8.02 $ 9.07
======= ======= ======= ====== ======= =======
Total investment return (b) 9.28% 10.01%(c) 15.97% 1.15% (5.50%) (8.22%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 2.65% 3.02%+ 3.61% 3.51%(d) 3.17% 3.80%
Net expenses 1.70% 1.70%+ 1.75% 1.88% 1.86% 1.61%
Expenses (before waiver) 1.90% 2.11%+ 2.28% 2.18% 2.16% 1.91%
Portfolio turnover rate 55% 75% 54% 179% 197% 281%
Net assets at end of period (in 000's) $16,928 $14,957 $11,343 $9,006 $15,907 $12,326
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH --------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 8.99 $ 8.43 $ 7.58 $ 8.01 $ 9.08 $10.59
------ ------ ------ ------ ------ ------
Net investment income 0.17(a) 0.17(a) 0.22(a) 0.22(a)(d) 0.21(a) 0.29
Net realized and unrealized gain (loss) on
investments 0.57 0.40 1.21 0.04(d) (0.05) (0.90)
Net realized and unrealized gain (loss) on
foreign currency transactions 0.01 0.21 (0.32) (0.22) (0.73) (0.33)
------ ------ ------ ------ ------ ------
Total from investment operations 0.75 0.78 1.11 0.04 (0.57) (0.94)
------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income (0.34) (0.22) (0.01) -- -- (0.03)
From net realized gain on investments -- -- -- -- -- (0.09)
Return of capital -- -- (0.25) (0.47) (0.50) (0.45)
------ ------ ------ ------ ------ ------
Total dividends and distributions (0.34) (0.22) (0.26) (0.47) (0.50) (0.57)
------ ------ ------ ------ ------ ------
Net asset value at end of period $ 9.40 $ 8.99 $ 8.43 $ 7.58 $ 8.01 $ 9.08
====== ====== ====== ====== ====== ======
Total investment return (b) 8.51% 9.33%(c) 15.01% 0.48% (6.22%) (8.94%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.90% 2.27%+ 2.86% 2.76%(d) 2.42% 3.05%
Net expenses 2.45% 2.45%+ 2.50% 2.63% 2.61% 2.36%
Expenses (before waiver) 2.65% 2.86%+ 3.03% 2.93% 2.91% 2.66%
Portfolio turnover rate 55% 75% 54% 179% 197% 281%
Net assets at end of period (in 000's) $2,779 $2,293 $ 573 $ 249 $ 231 $ 48
</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.
(c) Total return is not annualized.
(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>
16 MainStay International Bond Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH --------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 8.99 $ 8.43 $ 7.58 $ 8.01 $ 9.08 $ 10.59
------- ------- ------- ------ ------ -------
0.17(a) 0.17(a) 0.22(a) 0.22(a)(d) 0.21(a) 0.29
0.57 0.40 1.21 0.04(d) (0.05) (0.90)
0.01 0.21 (0.32) (0.22) (0.73) (0.33)
------- ------- ------- ------ ------ -------
0.75 0.78 1.11 0.04 (0.57) (0.94)
------- ------- ------- ------ ------ -------
(0.34) (0.22) (0.01) -- -- (0.03)
-- -- -- -- -- (0.09)
-- -- (0.25) (0.47) (0.50) (0.45)
------- ------- ------- ------ ------ -------
(0.34) (0.22) (0.26) (0.47) (0.50) (0.57)
------- ------- ------- ------ ------ -------
$ 9.40 $ 8.99 $ 8.43 $ 7.58 $ 8.01 $ 9.08
======= ======= ======= ====== ====== =======
8.51% 9.33%(c) 15.01% 0.48% (6.22%) (8.94%)
1.90% 2.27%+ 2.86% 2.76%(d) 2.42% 3.05%
2.45% 2.45%+ 2.50% 2.63% 2.61% 2.36%
2.65% 2.86%+ 3.03% 2.93% 2.91% 2.66%
55% 75% 54% 179% 197% 281%
$15,470 $15,019 $12,219 $8,388 $9,546 $13,955
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
International Bond Fund (the "Fund").
The Fund currently offers three classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. 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 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. Reasons for which securities may be valued
in this manner include, but are not limited to, trading for a security has been
halted or suspended, a security has been de-listed from a national exchange, or
trading on a security's primary market is temporarily closed at a time when
under normal conditions it would be open. The Fund did not hold securities at
October 31, 2004, that were valued in such manner. 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. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. 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
18 MainStay International Bond Fund
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.
(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 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.
(D) LOAN PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
participations. Loan participations are agreements to make money available (a
"commitment") to a borrower in a specified amount, at a specified rate and
within a specified time. Such loan participations are typically senior, secured
and collateralized in nature. The Fund records an investment when the borrower
withdraws money and records interest as earned. These loans pay interest at
rates which are periodically reset by reference to a base lending rate plus a
spread. These base lending rates are generally the prime rate offered by a
designated U.S. bank or London InterBank Offered Rate (LIBOR).
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. The Fund may be contractually obligated
to receive approval from the agent bank and/or borrower prior to the sale of
these investments.
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"). In the event that the Borrower, Selling
Participant or Intermediate Participants becomes insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payments,
or may suffer a loss of principal and/or interest.
(E) 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.
(F) 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
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 accumulated net realized
loss on investments and written option transactions; net assets at October 31,
2004, are not effected.
<Table>
<Caption>
ACCUMULATED
NET REALIZED
ACCUMULATED LOSS ON
UNDISTRIBUTED INVESTMENTS
NET INVESTMENT AND WRITTEN OPTION
INCOME TRANSACTIONS
$60,614 $(60,614)
</Table>
The reclassifications for the Fund are primarily due to foreign currency gain
(loss).
(G) 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, 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.
(H) 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.
(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 unrealized changes in net assets arising from
fluctuations in exchange rates and market prices of securities are not
separately presented.
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.
(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.
Through July 31, 2004, 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 had
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. Effective August 1, 2004, the Trust pays the Manager an annual
rate of 0.70% of the Fund's average daily net assets on assets up to $500
million and 0.65% on assets over $500 million and effective on that date NYLIM
has voluntarily agreed to waive its management fee by
20 MainStay International Bond Fund
0.10% of the Fund's average net assets. In addition, effective December 1, 2004,
NYLIM has voluntarily agreed to reimburse the expenses of the Fund to the extent
that operating expenses would exceed on an annualized basis 1.40%, 2.15% and
2.15% of the average daily net assets of the Class A, Class B and Class C
shares, respectively. For the year ended October 31, 2004, the Manager earned
from the Fund $256,577, waived $9,421 and reimbursed the Fund $64,943. The fees
waived and reimbursed by the Manager total $74,364.
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 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 $4,151 for the year ended
October 31, 2004. 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 $59, $34,167 and $7,713, respectively, for the year ended October 31,
2004.
(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 for the year ended October 31, 2004 amounted
to $163,178.
(E) NON-INTERESTED TRUSTEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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, 2004, NYLIFE Distributors held shares of Class A
with a value of $7,429,453 which represents 43.9% of the Class A net assets and
21.1% of total fund net assets at year 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 $1,116 for the year ended October 31,
2004.
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 $15,549 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged to the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- 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, 2004:
<Table>
<Caption>
DATE OF PRINCIPAL 10/31/04 PERCENT 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 Y 20,263,160 $ 139,727 $187,958 0.5%
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
Y -- Japanese Yen
NOTE 6 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED CAPITAL AND TOTAL
NET ORDINARY OTHER UNREALIZED ACCUMULATED
INCOME LOSSES APPRECIATION GAIN
$2,805,078 $(849,404) $2,055,793 $4,011,467
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals, mark-to-market of foreign currency forward
transactions and straddle deferrals.
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $849,404 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)
2008 $511
2009 338
---------------------------------------------
$849
---------------------------------------------
</Table>
The tax character of distributions paid during the year ended October 31, 2004,
the ten months ended October 31, 2003 and the year ended December 31, 2002,
shown in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid from:
Ordinary Income $1,457,641 $812,738 $ 28,176
Return of Capital -- -- 714,038
- ---------------------------------------------------------
$1,457,641 $812,738 $742,214
- ---------------------------------------------------------
</Table>
NOTE 7 -- FOREIGN CURRENCY FORWARD CONTRACTS, FOREIGN CURRENCY AND WRITTEN
OPTIONS:
Foreign currency forward contracts open at October 31, 2004:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
SOLD PURCHASED (DEPRECIATION)
Foreign Currency Sale Contracts
- -----------------------------------------------------------------------------------------------------------------
Swedish Krona vs. U.S. Dollar, expiring 11/8/04 SK 8,156,936 $1,110,732 $(35,990)
- -----------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 11/17/04 E 2,054,966 $2,532,898 (80,964)
- -----------------------------------------------------------------------------------------------------------------
Canadian Dollar vs. U.S. Dollar, expiring 11/19/04 C$ 865,166 $666,266 (42,782)
- -----------------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 11/23/04 L 750,709 $1,350,526 (22,391)
- -----------------------------------------------------------------------------------------------------------------
Australian Dollar vs. U.S. Dollar, expiring 11/24/04 A$ 942,865 $690,177 (12,420)
- -----------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 12/1/04 E 116,039 $145,281 (2,313)
- -----------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 12/15/04 E 3,847,248 $4,809,061 (84,390)
- -----------------------------------------------------------------------------------------------------------------
</Table>
22 MainStay International Bond Fund
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
PURCHASED SOLD (DEPRECIATION)
Foreign Currency Buy Contracts
- -----------------------------------------------------------------------------------------------------------------
Canadian Dollar vs. U.S. Dollar, expiring 11/19/04 C$ 865,166 $694,448 14,599
- -----------------------------------------------------------------------------------------------------------------
Net unrealized depreciation on foreign currency forward
contracts: $(266,651)
- -----------------------------------------------------------------------------------------------------------------
</Table>
Foreign currency held at October 31, 2004:
<Table>
<Caption>
CURRENCY COST VALUE
Canadian Dollar C$ 77,155 $62,214 $63,254
Euro E 320,220 400,560 407,336
Japanese Yen Y 2,662,253 24,464 25,071
Pound Sterling L 28,618 51,862 52,436
- --------------------------------------------------
$539,100 $548,097
- --------------------------------------------------
</Table>
Written option activity for the year ended October 31, 2004 was as follows:
<Table>
<Caption>
NOTIONAL
AMOUNT PREMIUM
Options outstanding at October 31,
2003 -- $ --
- --------------------------------------------------------------
Options -- written (7,310,000) (48,004)
- --------------------------------------------------------------
Options -- buybacks 5,760,000 44,254
- --------------------------------------------------------------
Options -- expired 1,550,000 3,750
- --------------------------------------------------------------
Options outstanding at October 31,
2004 -- $ --
- --------------------------------------------------------------
</Table>
NOTE 8 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $22,415 and $19,195, respectively.
NOTE 9 -- 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 year ended October 31, 2004.
NOTE 10 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 435 427 342
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 30 53 6
- ---------------------------------------------------------
465 480 348
- ---------------------------------------------------------
Shares redeemed (331) (504) (307)
- ---------------------------------------------------------
Net increase (decrease) 134 (24) 41
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1, THROUGH
OCTOBER 3, 2003*
CLASS A CLASS B CLASS C
Shares sold 1,909 664 237
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 18 35 3
- ---------------------------------------------------------
1,927 699 240
- ---------------------------------------------------------
Shares redeemed (1,612) (477) (53)
- ---------------------------------------------------------
Net increase 315 222 187
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 731 518 50
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 17 36 1
- ---------------------------------------------------------
748 554 51
- ---------------------------------------------------------
Shares redeemed (591) (212) (16)
- ---------------------------------------------------------
Net increase 157 342 35
- ---------------------------------------------------------
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 11 -- SPECIAL MEETING OF SHAREHOLDERS:
The Board of Trustees of the Trust has called a special meeting of Shareholders
("Special Meeting") of the Fund,
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
scheduled to be held on January 18, 2005. At the Special Meeting, shareholders
will vote on a proposed reorganization of the Fund into the MainStay Global High
Income Fund, also a series of the Trust.
NOTE 12 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 13 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principals or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
24 MainStay International Bond Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay International Bond Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2004, and the related statement of operations, statement of changes in net
assets and the financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the period ended October 31, 2003 and the year ended December
31, 2002, and the financial highlights for the periods presented through October
31, 2003, were audited by other auditors, whose report dated December 18, 2003
expressed an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay International Bond Fund of The MainStay Funds as of October 31, 2004,
the results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
www.mainstayfunds.com 25
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
26 MainStay International Bond Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 27
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
28 MainStay International Bond Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
www.mainstayfunds.com 29
This page intentionally left blank
(NEW YORK LIFE LOGO)
- ------------------------------------------------
GNot FDIC insured. G No bank guarantee. G May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06361 RECYCLE LOGO MSIB11-12/04
09
(MAINSTAY LOGO)
MAINSTAY
INTERNATIONAL EQUITY FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay International Equity Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quar-
ter of 2004, and according to preliminary estimates from the Bureau of Economic
Analysis, gross domestic product grew at a seasonally adjusted annual rate of
3.9% in the third quarter of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 13
- ----------------------------------------------------
Notes to Financial Statements 18
Report of Independent Registered Public
Accounting Firm 24
- ----------------------------------------------------
Trustees and Officers 25
- ----------------------------------------------------
Proxy Voting Policies and Procedures 27
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 27
- ----------------------------------------------------
Federal Income Tax Information 28
- ----------------------------------------------------
MainStay Funds 29
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
A REDEMPTION FEE OF 2% WILL BE APPLIED TO SHARES THAT ARE REDEEMED WITHIN 60
DAYS OF PURCHASE.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 8.78% -0.81% 4.16%
Excluding sales charges 15.11 0.32 4.75
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/94 9450.00 10000.00
9035.00 9963.00
10201.00 11006.00
11024.00 11516.00
12143.00 12626.00
14790.00 15535.00
13206.00 15085.00
10779.00 11324.00
10915.00 9828.00
13053.00 12485.00
10/31/04 15025.00 14837.00
</Table>
<Table>
-- MainStay International Equity Fund -- MSCI EAFE Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 9.16% -0.76% 3.98%
Excluding sales charges 14.16 -0.41 3.98
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/94 10000.00 10000.00
9481.00 9963.00
10626.00 11006.00
11397.00 11516.00
12474.00 12626.00
15073.00 15535.00
13372.00 15085.00
10850.00 11324.00
10898.00 9828.00
12937.00 12485.00
10/31/04 14768.00 14837.00
</Table>
<Table>
-- MainStay International Equity Fund -- MSCI EAFE Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 13.16% -0.41% 3.98%
Excluding sales charges 14.16 -0.41 3.98
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/94 10000.00 10000.00
9481.00 9963.00
10626.00 11006.00
11397.00 11516.00
12474.00 12626.00
15073.00 15535.00
13372.00 15085.00
10837.00 11324.00
10898.00 9828.00
12937.00 12485.00
10/31/04 14769.00 14837.00
</Table>
<Table>
-- MainStay International Equity Fund -- MSCI EAFE Index
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee, and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Class R1 shares are sold with
no initial sales charge or CDSC, and have no annual 12b-1 fee. Class R2 shares
are sold with no initial sales charge or CDSC, and have an annual 12b-1 fee of
..25%. Class R1 and R2 shares are available only through corporate-sponsored
retirement programs, which include certain minimum program requirements. From
inception (9/13/94) through 12/31/94 (for Class A, first offered 1/3/95),
8/31/98 (for Class C, first offered 9/1/98), and 12/31/03 (for Class I, R1, and
R2, first offered 1/2/04), performance of Class A, C, I, R1, and R2 shares
includes the historical performance of Class B shares adjusted to reflect the
respective applicable sales charge (or CDSC) and fees and expenses for Class A,
C, I, R1, and R2 shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay International Equity Fund
CLASS I SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
15.72% 0.54% 4.92%
</Table>
(LINE GRAPH FOR CLASS I SHARES)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/94 10000.00 10000.00
9576.00 9963.00
10819.00 11006.00
11694.00 11516.00
12905.00 12626.00
15738.00 15535.00
14078.00 15085.00
11497.00 11324.00
11657.00 9828.00
13970.00 12485.00
10/31/04 16165.00 14837.00
</Table>
<Table>
-- MainStay International Equity Fund -- MSCI EAFE Index
</Table>
CLASS R1 SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
15.55% 0.43% 4.81%
</Table>
(LINE GRAPH FOR CLASS R1 SHARES)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/94 10000.00 10000.00
9566.00 9963.00
10807.00 11006.00
11669.00 11516.00
12854.00 12626.00
15664.00 15535.00
13998.00 15085.00
11416.00 11324.00
11564.00 9828.00
13848.00 12485.00
10/31/04 16001.00 14837.00
</Table>
<Table>
-- MainStay International Equity Fund -- MSCI EAFE Index
</Table>
CLASS R2 SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
15.41% 0.21% 4.58%
</Table>
(LINE GRAPH FOR CLASS R2 SHARES)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/94 10000.00 10000.00
9547.00 9963.00
10755.00 11006.00
11586.00 11516.00
12732.00 12626.00
15484.00 15535.00
13805.00 15085.00
11242.00 11324.00
11353.00 9828.00
13560.00 12485.00
10/31/04 15649.00 14837.00
</Table>
<Table>
-- MainStay International Equity Fund -- MSCI EAFE Index
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
MSCI EAFE Index(1) 18.84% -0.92% 4.02%
Average Lipper international multicap core
fund(2) 17.06 -0.12 4.88
</Table>
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. The MSCI EAFE(R) Index is considered to be
the Fund's broad-based securities-market index for comparison purposes. 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.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY INTERNATIONAL EQUITY FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,036.90 $ 9.73 $1,015.50 $ 9.63
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,033.05 $13.54 $1,011.75 $13.40
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,033.05 $13.54 $1,011.75 $13.40
- ------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,040.05 $ 6.00 $1,019.15 $ 5.94
- ------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,040.15 $ 6.51 $1,018.05 $ 6.44
- ------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,040.30 $ 7.80 $1,017.40 $ 7.71
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common
Stocks 86.3%
Short-Term Investments (Collateral from Securities lending 4.6
is 3.7%)
Preferred Stocks 0.9
Warrant 2.6
Cash and Other Assets (less liabilities) 5.6
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS.)
<Table>
1. Tesco PLC
2. Diageo PLC*
3. Deutsche Boerse AG
4. Nestle S.A. Registered
5. Canon, Inc.*
6. TPG N.V.
7. UBS AG Registered*
8. Ryanair Holdings PLC
9. Takeda Pharmaceutical Co., Ltd.
10. Snam Rete Gas S.p.A.
</Table>
* Security traded on more than one exchange.
6 MainStay International Equity Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Rupal J. Bhansali of MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund seeks to generate superior risk-adjusted returns by investing in
quality companies that we believe are currently undervalued. The Fund normally
invests at least 80% of its assets in equity securities of issuers, wherever
organized, who do business mainly outside the United States. Investments will be
made in a variety of countries with established economies as well as
emerging-market countries that we believe present favorable opportunities. In
implementing this strategy, we utilize a bottom-up, stock-picking investment
discipline. Proprietary quantitative and qualitative tools are used to identify
attractive companies. In-depth, original fundamental research is performed on
identified companies to assess their business and investment prospects.
Particular attention is paid to cash flow, return on invested capital, and
management's demonstrated ability to create shareholder value. Portfolios are
constructed by combining securities with low correlation. Quantitative tools are
used for risk control at the portfolio level. Country allocations in the
portfolio are a result of the bottom up, stock selection process. To reduce
risk, an attempt is made at the portfolio level to stay within a reasonable
range of the key constituents of the benchmark, unless the stock selection
process strongly argues against it.
WHAT MAJOR FACTORS INFLUENCED INTERNATIONAL EQUITIES DURING THE ONE YEAR
REPORTING PERIOD ENDED OCTOBER 31, 2004?
The international equity markets generated strong returns during the reporting
period. In Japan, both the government and the central bank officially maintain
that the economy is on course to enter a sustainable growth path. For this
optimistic scenario to occur, we believe that the strength seen in the corporate
sector needs to find its way to consumers. Household incomes, however, have
remained weak. In Europe, the economic news has been mixed. The euro rose
sharply versus the U.S. dollar and the European Central Bank has not expressed
concerns about the currency's strength. We believe that the European Central
Bank is content to let the euro appreciate, which could reduce pricing
pressures. This scenario, however, would likely have an adverse effect on the
region's exporters. During the reporting period, growth in U.S. corporate
profits, an increase in commodity prices, and the decline of the U.S. dollar
versus most major currencies have ignited inflation fears. During the 12 months
ended October 31, 2004, the Federal Open Market Committee raised the targeted
federal funds rate from 1.00% to 1.75%, and we anticipate rate hikes to continue
well into 2005.
WHAT WERE THE STRONGEST AND WEAKEST AREAS OF THE MARKET DURING THE REPORTING
PERIOD?
The equity market's advance was broadly based, with the utilities and energy
sectors both advancing more than 30% during the reporting period. Semiconductors
& semiconductor equipment and software & services were the two worst-performing
industry groups, both providing negative returns in U.S. dollars for the 12
months ended October 31, 2004.
WHICH FUND HOLDINGS PERFORMED PARTICULARLY WELL?
The Fund's European utility holdings generated strong results. Italian
gas-transmission company Snam Rete Gas was a case in point. We believe that the
company is well positioned to benefit from the need for gas infrastructure,
which stems from increased demand for gas by both consumers and generators of
electricity. Tesco, a U.K.-based food retailer, also enhanced results, as its
sales continued to grow and earnings surpassed expectations. Porsche is a
designer and manufacturer of sports cars and, more recently, the Cayenne sports
utility vehicle. Porsche has exceeded its sales targets for the Cayenne. In
addition, the sales mix of Porsche's highly profitable sports-car lineup has
shifted to higher-margin models. Looking ahead, we believe the company's sales
growth should slow until a fourth model line is announced. For this reason, we
have recently trimmed the Fund's position to capture profits.
WHAT STOCKS DETRACTED FROM RESULTS?
Weak performers included Rentokil Initial, a European global business-services
company with operations in over 40 countries. The company has been under
pressure as competition has forced profit margins lower. Another holding that
hurt results was Compass Group, an international food-services company that
provides contract and concession catering to more than 90 countries. The company
warned that
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.
www.mainstayfunds.com 7
earnings would fall short of expectations in the current year.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
NTT DoCoMo, a Japanese wireless telecommunication company, was added to the
Fund's portfolio in December 2003. We have since increased the size of the
position. As the Japanese economy improves, we believe that local companies,
such as NTT DoCoMo, should benefit from increased consumer spending and data
usage. In addition, we believe that negative news related to the competition in
Japan is already reflected in the company's share price and that at its current
valuation, the stock is attractively priced.
Venture, a Singapore-based contract manufacturing-services company, has
benefited from increased demand for printers and handheld computers. We began to
trim the Fund's position when valuations became stretched and the company faced
an increased risk of falling short of earnings expectations. Venture is a
leading company in its sector, and we will continue to look for opportunities to
increase the Fund's exposure to the stock.
HOW IS THE FUND POSITIONED RELATIVE TO THE BENCHMARK?(1)
The Fund's benchmark and the Fund's portfolio are primarily invested in stocks
of developed markets and the Fund tends to have limited exposure to emerging
markets. As always, we remain focused on the fundamental analysis of individual
businesses rather than on the market's perception. At the end of the reporting
period, the portfolio was overweighted in defensive sectors, such as consumer
staples and utilities, with a slightly overweighted position in financials. The
Fund's holdings in consumer staples and utilities provided the biggest positive
contribution to the Fund's absolute performance during the 12-month reporting
period. As of October 31, 2004, underweighted sectors included
telecommunications services and energy. The Fund's holdings in business services
were the prime detractor from the Fund's absolute performance.
WHERE ARE YOU FINDING THE MOST COMPELLING OPPORTUNITIES?
We are finding promising investments in Europe and Asian nations other than
Japan. As a result, the Fund is underweighted in Japan. Recently, however, we
have found businesses in Japan that meet all of our ownership criteria, and we
have reduced the amount by which the Fund is underweighted relative to its
benchmark Index.
WHAT DO YOU ANTICIPATE IN THE COMING MONTHS?
In light of the overall environment, we remain cautiously optimistic. The
portfolio holds companies that we believe are well positioned in their
respective sectors to generate returns above their capital costs. We believe
that the ability to manage capital efficiently is an important characteristic of
good management. As always, we remain alert and are willing to opportunistically
invest in businesses in challenged sectors, such as telecommunications and
media, if we feel they offer compelling values and the potential for a price
correction. By focusing on companies with strong fundamentals and long histories
of stable growth, we feel that we should be able to deliver solid results for
the Fund's shareholders over the long term.
1. See footnote on page 5 for more information on the MSCI EAFE(R) Index.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8 MainStay International Equity Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (86.3%)+
- --------------------------------------------------------------------------------
AUSTRALIA (1.0%)
Australian Gas Light Co., Ltd. (multi-utilities &
unregulated power) 181,700 $ 1,777,942
------------
BELGIUM (0.1%)
Belgacom S.A. (diversified telecommunication
services) (a) 6,000 219,810
------------
BERMUDA (0.3%)
RenaissanceRe Holdings Ltd. (insurance) 13,600 636,752
------------
DENMARK (1.5%)
Danske Bank A/S (commercial banks) 102,805 2,864,348
------------
FINLAND (1.5%)
Stora Enso Oyj (paper & forest products) 62,100 883,946
TietoEnator Oyj (IT services) 65,320 1,827,986
------------
2,711,932
------------
FRANCE (3.8%)
BNP Paribas, S.A. (diversified financial services) 44,880 3,045,729
Dexia (commercial banks) 75,900 1,518,709
M6 Metropole Television (broadcasting &
publishing) 5,605 145,591
Societe Generale, S.A. (commercial banks) 5,000 462,390
Total, S.A. (oil & gas) 8,900 1,845,362
------------
7,017,781
------------
GERMANY (8.0%)
BASF AG (chemicals) 23,400 1,460,020
Bayerische Motoren Werke AG (automobiles) 99,788 4,219,328
VDeutsche Boerse AG (diversified financial
services) 112,578 5,600,739
Hannover Rueckversicherung AG (insurance) 71,647 2,342,260
Siemens AG Registered (industrial conglomerates) 17,800 1,324,585
------------
14,946,932
------------
HONG KONG (1.3%)
Hongkong Electric Holdings, Ltd. (electric
utilities) 528,600 2,363,399
------------
</Table>
<Table>
<Caption>
SHARES VALUE
INDIA (0.6%)
ITC, Ltd. GDR (tobacco) (b)(d) 46,500 $ 1,114,758
------------
IRELAND (2.2%)
Bank of Ireland (commercial banks) 306,403 4,182,122
------------
ITALY (7.1%)
Banco Popolare di Verona e Novara Scrl (commercial
banks) 25,900 457,951
Enel S.p.A.
(utilities-electric & gas) (g) 338,600 3,053,776
Eni S.p.A. (oil & gas) 145,200 3,287,688
Eni S.p.A. ADR (oil & gas) (c) 3,000 343,290
Riunione Adriatica di Sicurta S.p.A. (insurance) 69,200 1,457,707
VSnam Rete Gas S.p.A. (gas utilities) 926,995 4,693,150
------------
13,293,562
------------
JAPAN (9.8%)
VCanon, Inc. (office electronics) 59,400 2,925,530
VCanon, Inc. ADR (office electronics) (c) 49,623 2,456,338
Fuji Photo Film Co., Ltd. (leisure equipment &
products) 31,400 1,070,421
Nitto Denko Corp. (chemicals) 14,600 691,572
NTT DoCoMo, Inc. (wireless telecommunication
services) 2,011 3,541,360
RICOH Co., Ltd. (data processing & reproduction) 7,000 130,521
Secom Co., Ltd. (commercial services & supplies) 25,800 935,399
Seven-Eleven Japan Co., Ltd. (food & staples
retailing) 29,800 861,531
Shin-Etsu Chemical Co., Ltd. (chemicals) 24,300 922,205
VTakeda Pharmaceutical Co., Ltd. (pharmaceuticals) 97,500 4,701,008
------------
18,235,885
------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. One of
the 10 largest holdings may be a security traded on more than one exchange.
May be subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
NETHERLANDS (6.9%)
Euronext N.V. (diversified financial services) 125,585 $ 3,626,332
Reed Elsevier N.V. (media) 143,270 1,877,139
Royal Dutch Petroleum Co. NY Shares (oil & gas) 40,600 2,202,144
VTPG N.V. (air freight & logistics) 209,646 5,050,921
------------
12,756,536
------------
SINGAPORE (0.9%)
SembCorp Logistics Ltd. (air freight & logistics) 328,000 454,995
Venture Corp., Ltd. (electronic equipment &
instruments) 136,200 1,292,274
------------
1,747,269
------------
SPAIN (4.0%)
Banco Popular Espanol, S.A. (commercial banks) (g) 81,634 4,618,913
Iberdrola, S.A. (multi-utilities & unregulated
power) 78,848 1,721,123
Indra Sistemas, S.A. (IT services) 31,708 468,683
Red Electrica de Espana (electric utilities) 32,000 595,523
------------
7,404,242
------------
SWEDEN (3.6%)
AB SKF B Shares (machinery) 49,400 1,909,843
Autoliv, Inc. (auto components) 21,500 919,125
Hennes & Mauritz AB B Shares (multiline retail) 66,300 1,924,738
Sandvik AB (machinery) 51,610 1,926,355
------------
6,680,061
------------
SWITZERLAND (10.1%)
Credit Suisse Group ADR (commercial banks) (a)(c) 36,437 1,248,696
VNestle, S.A. Registered (food products) 23,560 5,554,430
Novartis AG Registered (pharmaceuticals) 33,948 1,613,410
Novartis AG ADR (pharmaceuticals) (c) 55,000 2,640,550
Serono S.A. Class B (pharmaceuticals) 683 423,233
Swiss Re Registered (insurance) 31,100 1,902,576
Syngenta AG (chemicals) (a) 5,000 475,259
VUBS AG Registered (capital markets) 52,994 3,806,552
VUBS AG Registered (capital markets) (e) 17,008 1,232,910
------------
18,897,616
------------
</Table>
<Table>
<Caption>
SHARES VALUE
UNITED KINGDOM (23.6%)
AstraZeneca PLC ADR (pharmaceuticals) (c) 11,700 $ 482,040
BP PLC ADR (oil & gas) (c) 53,533 3,118,297
Capita Group PLC (IT services) 94,000 606,272
Compass Group PLC (hotels, restaurants & leisure) 561,800 2,318,693
VDiageo PLC (beverages) 405,661 5,418,605
VDiageo PLC ADR (beverages) (c) 20,640 1,110,019
Exel PLC (air freight & logistics) 218,940 2,842,246
GlaxoSmithKline PLC ADR (pharmaceuticals) (c) 87,900 3,726,960
iShares MSCI United Kingdom Index Fund (capital
markets) (f)(g) 109,900 1,846,320
Kingfisher PLC (merchandising) 32,900 182,506
Lloyds TSB Group PLC (diversified financial
services) 486,200 3,839,626
Lloyds TSB Group PLC ADR (diversified financial
services) (c) 9,910 316,426
Man Group PLC (diversified financial services) 163,710 3,923,554
Provident Financial PLC (consumer finance) 88,000 944,881
Reckitt Benckiser PLC (household products) 145,709 3,986,051
Rio Tinto PLC (metals & mining) 13,500 352,242
Scottish & Southern Energy PLC (multi-utilities &
unregulated power) 72,730 1,111,415
VTesco PLC (food & staples retailing) 1,461,673 7,693,199
------------
43,819,352
------------
Total Common Stocks (Cost $139,920,881) 160,670,299
------------
PREFERRED STOCK (0.9%)
- --------------------------------------------------------------------------------
GERMANY (0.9%)
Porsche AG E1.53 (automobiles) (k) 2,617 1,664,477
------------
Total Preferred Stock (Cost $1,217,977) 1,664,477
------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. One of
the 10 largest holdings may be a security traded on more than one exchange.
May be subject to change daily.
</Table>
10 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
WARRANT (2.6%)
- --------------------------------------------------------------------------------
IRELAND (2.6%)
VRyanair Holdings PLC
Strike Price E0.000001 Expire 3/21/08 (airlines)
(a)(b)(k) 908,375 $ 4,819,582
------------
Total Warrants (Cost $5,028,073) 4,819,582
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (4.6%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (0.9%)
UNITED STATES (0.9%)
UBS Finance Delaware LLC 1.84%, due 11/1/04
(capital markets) $ 1,630,000 1,630,000
------------
Total Commercial Paper (Cost $1,630,000) 1,630,000
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.8%)
UNITED STATES (0.8%)
AIM Institutional Funds Group (capital markets)
(h) 1,526,279 1,526,279
------------
Total Investment Company (Cost $1,526,279) 1,526,279
------------
<Caption>
PRINCIPAL
AMOUNT
MASTER NOTE (0.8%)
UNITED STATES (0.8%)
Banc of America Securities LLC 1.9549%, due
11/1/04 (capital markets) (h) $ 1,477,000 1,477,000
------------
Total Master Note (Cost $1,477,000) 1,477,000
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
REPURCHASE AGREEMENTS (2.1%)
UNITED STATES (2.1%)
Credit Suisse First Boston LLC 1.9249%, dated
10/29/04 due 11/1/04
Proceeds at Maturity $2,750,441 (capital
markets) (h)
(Collateralized by Various Bonds with a
Principal Amount of $2,757,692 and a Market
Value of $2,805,100) $ 2,750,000 $ 2,750,000
Lehman Brothers, Inc. 1.9249%, dated 10/29/04 due
11/1/04
Proceeds at Maturity $700,112 (capital markets)
(h)
(Collateralized by Various Bonds with a
Principal Amount of $1,394,733 and a Market
Value of $721,989) 700,000 700,000
Merrill Lynch Pierce Fenner & Smith, Inc.
1.9549%, dated 10/29/04
due 11/1/04
Proceeds at Maturity $500,081 (capital markets)
(h)
(Collateralized by Various Bonds with a
Principal Amount of $494,453 and a Market Value
of $525,017) 500,000 500,000
------------
Total Repurchase Agreements (Cost $3,950,000) 3,950,000
------------
Total Short-Term Investments (Cost $8,583,279) 8,583,279
------------
Total Investments
(Cost $154,750,210) (i) 94.4% 175,737,637(j)
Cash and Other Assets, Less Liabilities 5.6 10,382,616
------------- ------------
Net Assets 100.0% $186,120,253
============= ============
</Table>
<Table>
(a) Non-income producing security.
(b) May be sold to institutional investors only.
(c) ADR-American Depositary Receipt.
(d) GDR-Global Depositary Receipt.
(e) Security primarily trades on the New York Stock
Exchange.
(f) Exchange Traded Fund-represents a basket of securities
that are traded on an exchange.
(g) Represents a security, or a portion thereof, of which is
out on loan.
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term
investments. One of the 10 largest holdings may be a
security traded on more than one exchange. May be subject
to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
(h) Represents a security, or portion thereof, purchased
with cash collateral received for securities on loan.
(i) The cost for federal income tax purposes is
$154,978,811.
(j) At October 31, 2004 net unrealized appreciation for
securities was $20,758,826, 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
$22,922,285 and aggregate gross unrealized depreciation
for all investments on which there was an excess of cost
over market value of $2,163,459.
(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
- ---------------------------------------------------------
Air Freight & Logistics $ 8,348,162 4.5%
Airlines 4,819,582 2.6
Auto Components 919,125 0.5
Automobiles 5,883,805 3.2
Beverages 6,528,624 3.5
Broadcasting & Publishing 145,591 0.1
Capital Markets 15,469,061 8.3
Chemicals 3,549,056 1.9
Commercial Banks 15,353,129 8.2
Commercial Services & Supplies 935,399 0.5
Consumer Finance 944,881 0.5
Data Processing & Reproduction 130,521 0.1
Diversified Financial Services 20,352,406 10.9
Diversified Telecommunication
Services 219,810 0.1
Electric Utilities 2,958,922 1.6
Electronic Equipment &
Instruments 1,292,274 0.7
Food & Staples Retailing 8,554,730 4.6
Food Products 5,554,430 3.0
Gas Utilities 4,693,150 2.5
Hotels, Restaurants & Leisure 2,318,693 1.2
Household Products 3,986,051 2.1
Industrial Conglomerates 1,324,585 0.7
Insurance 6,339,295 3.4
IT Services 2,902,941 1.6
Leisure Equipment & Products 1,070,421 0.6
Machinery 3,836,198 2.1
Media 1,877,139 1.0
Merchandising 182,506 0.1
Metals & Mining 352,242 0.2
Multiline Retail 1,924,738 1.0
Multi-Utilities & Unregulated
Power 4,610,480 2.5
Office Electronics 5,381,868 2.9
Oil & Gas 10,796,781 5.8
Paper & Forest Products 883,946 0.5
Pharmaceuticals 13,587,201 7.3
Tobacco 1,114,758 0.6
Utilities-Electric & Gas 3,053,776 1.6
Wireless Telecommunication
Services 3,541,360 1.9
------------ -----
175,737,637 94.4
Cash and Other Assets, Less
Liabilities 10,382,616 5.6
------------ -----
Net Assets $186,120,253 100.0%
============ =====
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term
investments. One of the 10 largest holdings may be a
security traded on more than one exchange. May be subject to
change daily.
</Table>
12 MainStay International Equity Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $154,750,210) including
$6,696,326 market value of securities loaned $175,737,637
Cash denominated in foreign currencies
(identified cost $16,897,510) 17,347,721
Cash 21,631
Receivables:
Investment securities sold 3,661,882
Dividends and interest 320,031
Fund shares sold 265,309
Other assets 21,681
Unrealized appreciation on foreign currency
forward contracts 123,859
------------
Total assets 197,499,751
------------
LIABILITIES:
Securities lending collateral 6,953,279
Payables:
Investment securities purchased 3,694,123
Fund shares redeemed 167,072
Manager 142,602
Transfer agent 110,685
NYLIFE Distributors 78,310
Custodian 35,723
Accrued expenses 62,739
Unrealized depreciation on foreign currency
forward contracts 134,965
------------
Total liabilities 11,379,498
------------
Net assets $186,120,253
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 58,795
Class B 61,074
Class C 5,872
Class I 32,660
Class R1 1
Class R2 1
Additional paid-in capital 165,257,855
Accumulated undistributed net investment
income 451,999
Accumulated net realized loss on investments (1,208,902)
Net unrealized appreciation on investments 20,987,427
Net unrealized appreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts 473,471
------------
Net assets $186,120,253
============
CLASS A
Net assets applicable to outstanding shares $ 70,251,603
============
Shares of beneficial interest outstanding 5,879,496
============
Net asset value per share outstanding $ 11.95
Maximum sales charge (5.50% of offering price) 0.70
------------
Maximum offering price per share outstanding $ 12.65
============
CLASS B
Net assets applicable to outstanding shares $ 69,881,799
============
Shares of beneficial interest outstanding 6,107,358
============
Net asset value and offering price per share
outstanding $ 11.44
============
CLASS C
Net assets applicable to outstanding shares $ 6,718,451
============
Shares of beneficial interest outstanding 587,233
============
Net asset value and offering price per share
outstanding $ 11.44
============
CLASS I
Net assets applicable to outstanding shares $ 39,266,296
============
Shares of beneficial interest outstanding 3,265,954
============
Net asset value and offering price per share
outstanding $ 12.02
============
CLASS R1
Net assets applicable to outstanding shares $ 1,053
============
Shares of beneficial interest outstanding 88
============
Net asset value and offering price per share
outstanding $ 12.00
============
CLASS R2
Net assets applicable to outstanding shares $ 1,051
============
Shares of beneficial interest outstanding 88
============
Net asset value and offering price per share
outstanding $ 11.99
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 3,656,969
Income from securities loaned -- net 91,578
Interest 73,013
-----------
Total income 3,821,560
-----------
EXPENSES:
Manager 1,392,321
Transfer agent -- Classes A, B and C 660,447
Transfer agent -- Classes I, R1 and R2 5,087
Distribution -- Class B 489,427
Distribution -- Class C 37,917
Service -- Class A 152,430
Service -- Class B 163,143
Service -- Class C 12,639
Service -- Class R2 2
Custodian 106,370
Shareholder communication 65,760
Professional 53,832
Registration 48,622
Recordkeeping 41,937
Trustees 12,863
Shareholder Service -- Class R1 1
Shareholder Service -- Class R2 1
Miscellaneous 36,923
-----------
Total expenses 3,279,722
-----------
Net investment income 541,838
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions 8,581,825
Foreign currency transactions 328,372
-----------
Net realized gain on investments and foreign
currency transactions 8,910,197
-----------
Net increase from payment by affiliate for
loss on the disposal of investment in
violation of restrictions 29,551
-----------
Net change in unrealized appreciation on:
Security transactions 7,792,494
Translation of other assets and liabilities
in foreign currencies and foreign currency
forward contracts 71,617
-----------
Net unrealized gain on investments and foreign
currency transactions 7,864,111
-----------
Net realized and unrealized gain on
investments and foreign currency
transactions 16,803,859
-----------
Net increase in net assets resulting from
operations $17,345,697
===========
</Table>
(a) Dividends recorded net of foreign withholding taxes of $400,095.
14 MainStay International Equity Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE IN NET ASSETS:
Operations:
Net investment income
(loss) $ 541,838 $ 396,377 $ (405,768)
Net realized gain (loss)
on investments and
foreign currency
transactions 8,939,748 3,660,200 (2,901,969)
Net change in unrealized
appreciation
(depreciation) on
investments and foreign
currency transactions 7,864,111 12,297,226 (563,248)
-------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 17,345,697 16,353,803 (3,870,985)
-------------------------------------------
Dividends to shareholders:
From net investment income:
Class A (555,225) -- --
Class B (414,033) -- --
Class C (22,730) -- --
-------------------------------------------
Total dividends to
shareholders (991,988) -- --
-------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 33,536,680 47,829,220 92,489,033
Class B 14,390,516 8,237,192 7,219,163
Class C 4,309,233 2,705,299 4,458,095
Class I 43,940,803 -- --
Class R1 1,000 -- --
Class R2 1,000 -- --
Net asset value of shares issued to
shareholders in reinvestment of
dividends:
Class A 451,765 -- --
Class B 396,920 -- --
Class C 17,677 -- --
-------------------------------------------
97,045,594 58,771,711 104,166,291
</Table>
<Table>
<Caption>
2004 2003* 2002
Cost of shares redeemed+:
Class A $(14,451,562) $(41,284,589) $ (86,563,792)
Class B (9,181,696) (7,424,618) (9,803,245)
Class C (810,363) (1,610,072) (3,509,376)
Class I (5,788,084) -- --
-------------------------------------------
(30,231,705) (50,319,279) (99,876,413)
Increase in net
assets derived from
capital share
transactions 66,813,889 8,452,432 4,289,878
-------------------------------------------
Net increase in net
assets 83,167,598 24,806,235 418,893
NET ASSETS:
Beginning of period 102,952,655 78,146,420 77,727,527
-------------------------------------------
End of period $186,120,253 $102,952,655 $ 78,146,420
===========================================
Accumulated undistributed
net investment income at
end of period $ 451,999 $ 573,777 $ --
===========================================
</Table>
* The fund changed its fiscal year end from December 31 to October 31.
+ Cost of shares redeemed net of redemption fee of $2,886, $187,392 and $1,039
for the year ended October 31, 2004, the ten months ended October 31, 2003 and
year ended December 31, 2002, respectively.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH --------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 10.50 $ 8.73 $ 9.11 $ 10.98 $ 15.23 $ 12.21
------- ------- ------- ------- ------- -------
Net investment income (loss) 0.07(a) 0.08(a) (0.00)(a)(d) (0.01)(a) (0.08)(a) (0.07)
Net realized and unrealized gain (loss) on
investments 1.48 1.63 (0.43) (1.82) (3.07) 3.54
Net realized and unrealized gain (loss) on
foreign currency transactions 0.03 0.04 0.05 0.11 (0.12) (0.13)
------- ------- ------- ------- ------- -------
Total from investment operations 1.58 1.75 (0.38) (1.72) (3.27) 3.34
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income (0.13) -- -- (0.09) -- (0.03)
From net realized gain on investments
and foreign currency transactions -- -- -- (0.06) (0.98) (0.29)
------- ------- ------- ------- ------- -------
Total dividends and distributions (0.13) -- -- (0.15) (0.98) (0.32)
------- ------- ------- ------- ------- -------
Redemption fee (a) 0.00(d) 0.02 -- -- -- --
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 11.95 $ 10.50 $ 8.73 $ 9.11 $ 10.98 $ 15.23
======= ======= ======= ======= ======= =======
Total investment return (b) 15.11% 20.27%(c) (4.17%) (15.70%) (21.32%) 27.54%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.60% 0.99%+ (0.05%) (0.07%) (0.56%) (0.14%)
Expenses 1.90% 2.27%+ 2.26% 2.17% 2.15% 1.94%
Portfolio turnover rate 54% 71% 102% 129% 30% 38%
Net assets at end of period (in 000's) $70,252 $43,747 $30,084 $25,470 $29,730 $34,407
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -----------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $10.09 $ 8.44 $ 8.87 $10.70 $14.95 $12.08
------ ------ ------ ------ ------ ------
Net investment income (loss) (0.02)(a) 0.02(a) (0.08)(a) (0.07)(a) (0.17)(a) (0.09)
Net realized and unrealized gain (loss) on
investments 1.41 1.57 (0.40) (1.80) (2.98) 3.41
Net realized and unrealized gain (loss) on
foreign currency transactions 0.03 0.04 0.05 0.11 (0.12) (0.13)
------ ------ ------ ------ ------ ------
Total from investment operations 1.42 1.63 (0.43) (1.76) (3.27) 3.19
------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income (0.07) -- -- (0.01) -- (0.03)
From net realized gain on investments
and foreign currency transactions -- -- -- (0.06) (0.98) (0.29)
------ ------ ------ ------ ------ ------
Total dividends and distributions (0.07) -- -- (0.07) (0.98) (0.32)
------ ------ ------ ------ ------ ------
Redemption fee (a) 0.00(d) 0.02 -- -- -- --
------ ------ ------ ------ ------ ------
Net asset value at end of period $11.44 $10.09 $ 8.44 $ 8.87 $10.70 $14.95
====== ====== ====== ====== ====== ======
Total investment return (b) 14.16% 19.55%(c) (4.85%) (16.44%) (21.71%) 26.60%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.15%) 0.24%+ (0.80%) (0.82%) (1.31%) (0.89%)
Expenses 2.65% 3.02%+ 3.01% 2.92% 2.90% 2.69%
Portfolio turnover rate 54% 71% 102% 129% 30% 38%
Net assets at end of period (in 000's) $6,718 $2,715 $1,284 $ 371 $ 692 $ 343
</Table>
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
** First offered on January 2, 2004.
+ Annualized.
Per share data based on average shares outstanding during
(a) the period.
Total return is calculated exclusive of sales charges.
(b) Classes I, R1 and R2 are not subject to sales charges.
(c) Total return is not annualized.
(d) Less than one cent per share.
</Table>
16 MainStay International Equity Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH ------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 10.09 $ 8.44 $ 8.88 $ 10.70 $ 14.95 $ 12.08
------- ------- ------- ------- ------- -------
(0.02)(a) 0.02(a) (0.08)(a) (0.07)(a) (0.17)(a) (0.09)
1.41 1.57 (0.41) (1.79) (2.98) 3.41
0.03 0.04 0.05 0.11 (0.12) (0.13)
------- ------- ------- ------- ------- -------
1.42 1.63 (0.44) (1.75) (3.27) 3.19
------- ------- ------- ------- ------- -------
(0.07) -- -- (0.01) -- (0.03)
-- -- -- (0.06) (0.98) (0.29)
------- ------- ------- ------- ------- -------
(0.07) -- -- (0.07) (0.98) (0.32)
------- ------- ------- ------- ------- -------
0.00(d) 0.02 -- -- -- --
------- ------- ------- ------- ------- -------
$ 11.44 $ 10.09 $ 8.44 $ 8.88 $ 10.70 $ 14.95
======= ======= ======= ======= ======= =======
14.16% 19.55%(c) (4.95%) (16.34%) (21.71%) 26.60%
(0.15%) 0.24%+ (0.80%) (0.82%) (1.31%) (0.89%)
2.65% 3.02%+ 3.01% 2.92% 2.90% 2.69%
54% 71% 102% 129% 30% 38%
$69,882 $56,490 $46,779 $51,887 $70,182 $94,698
</Table>
<Table>
<Caption>
CLASS I CLASS R1 CLASS R2
------- -------- --------
JANUARY 2, 2004**
THROUGH
OCTOBER 31,
2004
$11.40 $11.40 $11.40
------- ------ ------
0.12(a) 0.12(a) 0.09(a)
0.49 0.47 0.49
0.01 0.01 0.01
------- ------ ------
0.62 0.60 0.59
------- ------ ------
-- -- --
-- -- --
------- ------ ------
-- -- --
------- ------ ------
0.00(d) 0.00(d) 0.00(d)
------- ------ ------
$12.02 $12.00 $11.99
======= ====== ======
5.44%(c) 5.26%(c) 5.18%(c)
1.33%+ 1.23%+ 0.98%+
1.17%+ 1.27%+ 1.52%+
54% 54% 54%
$39,266 $ 1 $ 1
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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 six classes of shares, Class A shares, Class B shares,
Class C shares, Class I shares, Class R1 shares and Class R2 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. Class I, Class R1 and Class R2 shares are not subject to
sales charge. Distribution of Class B shares and Class C shares commenced on
September 13, 1994 and September 1, 1998, respectively. Distribution of Class I
shares, Class R1 shares and Class R2 shares commenced on January 2, 2004. The
six 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 and Class R2 shares under a distribution plan pursuant to
Rule 12b-1 under the 1940 Act. Class I shares and Class R1 shares are not
subject to a distribution or service fee. Class R1 and Class R2 shares are
authorized to pay to New York Life Investment Management LLC, its affiliates, or
independent third-party service providers, as compensation for services rendered
to shareholders of Class R1 or Class R2 shares, a shareholder service fee.
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, 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. Reasons for which securities may be valued in this manner
include, but are not limited to, trading for a security has been halted or
suspended, a security has been de-listed from a national exchange, or trading on
a security's primary market is temporarily closed at a time when under normal
conditions it would be open. The Fund did not hold securities at October 31,
2004, that were valued in such manner. 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. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. 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
18 MainStay International Equity Fund
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. (See note 6.)
(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.
(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 and accumulated net realized loss on
investments arising from permanent differences; net assets at October 31, 2004,
are not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED NET REALIZED LOSS
NET INVESTMENT INCOME ON INVESTMENTS
$328,372 $(328,372)
</Table>
The reclassification for the Fund is primarily due to foreign currency 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. 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 unrealized changes in net assets arising from
fluctuations in exchange rates and market prices of securities are not
separately presented.
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
(I) REDEMPTION FEE. The Fund imposes a 2.00% redemption fee on redemptions
(including exchanges) of Fund shares made within 60 days of their date of
purchase of Class A, Class B, Class C and Class I shares. 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.
Prior to January 1, 2004, the Fund paid the Manager a monthly fee at an annual
rate of 1.00% of the Fund's average daily net assets up to $1 billion and 0.95%
on assets in excess of $1 billion. As of January 1, 2004, 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 0.90% of the Fund's average daily net
assets. Effective August 1, 2004, the Trust pays the Manager an annual rate of
0.90% of the Fund's average daily net assets on assets up to $500 million and
0.85% on assets over $500 million. In addition, effective December 1, 2004,
NYLIM has voluntarily agreed to reimburse the expenses of the Fund to the extent
that operating expenses would exceed on an annualized basis 1.95%, 2.70% and
2.70% of the average daily net assets of the Class A, Class B and Class C
shares, respectively and an equivalent reduction in the management fee for Class
I, Class R1 and Class R2 shares. For the year ended October 31, 2004, the
Manager earned from the Fund $1,392,321.
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. To the extent the Manager has
agreed to reimburse expenses of the Fund, the Subadvisor has voluntarily agreed
to do so proportionately.
Included in the Statement of Operations for the year ended October 31, 2004 is
an amount of approximately $29,551 that was reimbursed by the Subadvisor for a
loss on a security acquired in violation of investment restrictions.
(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, Class C and Class R2, has adopted distribution plans (the
"Plans") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A and Class R2 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 and Class R2 shares, which is an expense of the Class A and
Class R2 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 and Class R1 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.
The Fund has adopted a shareholder services plan with respect to Class R1 and R2
shares. Under the terms of this plan, Class R1 and Class R2 shares are
authorized to pay to NYLIM, its affiliates, or independent third-party
providers, as compensation for services rendered, a shareholder
20 MainStay International Equity Fund
service fee at the rate of 0.10% of the average daily net assets of the Fund's
Class R1 and R2 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $31,547 for the year ended
October 31, 2004. 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 $7,084, $53,085 and $1,745, respectively, for the year ended October
31, 2004.
(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 for the year ended October 31, 2004,
amounted to $665,534.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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, 2004, NYLIFE Distributors held shares of Class A
with a net value of $8,371,258. This represents 11.9% of Class A net assets and
4.5% of the Fund's total net assets at year 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 $4,991 for the year ended October 31,
2004.
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 $41,937 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged to the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED TOTAL
ORDINARY CAPITAL AND UNREALIZED ACCUMULATED
INCOME OTHER LOSSES APPRECIATION GAIN
$440,893 $(980,301) $21,243,403 $20,703,995
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals and mark-to-market of foreign currency
forward transactions.
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $980,301 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 $980
---------------------------------------------
</Table>
The Fund utilized $8,570,156 of capital loss carryforward during the year ended
October 31, 2004.
The tax character of distributions paid during the year ended October 31, 2004,
the ten months ended October 31, 2003 and the year ended December 31, 2002,
shown in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid from:
Ordinary income $991,988 $- $-
- -------------------------------------------------
</Table>
NOTE 6 -- PORTFOLIO SECURITIES LOANED, FOREIGN CURRENCY FORWARD CONTRACTS AND
FOREIGN CURRENCY:
As of October 31, 2004, the Fund had securities on loan with an aggregate market
value of $6,696,326. The Fund received $6,953,279 as collateral for securities
on loan which was used to purchase highly liquid short-term investments in
accordance with Fund's securities lending
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
procedures. Pursuant to Rule 2a-7, securities purchased with collateral received
are valued at amortized cost.
Foreign currency forward contracts open at October 31, 2004:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
SOLD PURCHASED (DEPRECIATION)
Foreign Currency Sale Contracts
- ----------------------------------------------------------------
Swiss Francs vs.
Japanese Yen
expiring 3/7/05 CF8,796,949 Y761,200,000 $(134,965)
- ----------------------------------------------------------------
Singapore Dollar vs.
Japanese Yen
expiring 2/7/05 S$7,011,500 Y449,475,610 $ 39,116
- ----------------------------------------------------------------
</Table>
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT
PURCHASED SOLD
Foreign Currency Buy Contracts
- -----------------------------------------------------------------
Australian Dollar vs.
U.S. Dollar
expiring 5/9/05 A$2,326,680 $1,625,000 $ 84,743
- -----------------------------------------------------------------
Net unrealized depreciation on foreign currency
forward contracts: $ (11,106)
- -----------------------------------------------------------------
</Table>
Foreign currency held at October 31, 2004:
<Table>
<Caption>
CURRENCY COST VALUE
Australian Dollar A$ 2,969,523 $ 2,183,786 $ 2,218,085
Euro E 2,700,751 3,354,708 3,435,488
Hong Kong Dollar HK$ 5,322,290 683,563 683,800
Japanese Yen Y 546,065,579 4,954,476 5,142,345
Pound Sterling L 1,270,366 2,298,804 2,327,692
Singapore Dollars S$ 2,038,441 1,211,302 1,224,105
Swedish Krona SK 5,670,237 769,942 797,149
Swiss Francs CF 1,825,071 1,440,929 1,519,057
- ------------------------------------------------------------------
$16,897,510 $17,347,721
- ------------------------------------------------------------------
</Table>
NOTE 7 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than U.S. Government securities and short-term securities, were $127,111 and
$76,714, respectively.
NOTE 8 -- 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 year ended October 31, 2004.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 2,924 1,303 389
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends 41 37 2
- -----------------------------------------------------------
2,965 1,340 391
- -----------------------------------------------------------
Shares redeemed (1,252) (834) (73)
- -----------------------------------------------------------
Net increase 1,713 506 318
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 2, 2004* THROUGH
OCTOBER 31, 2004
CLASS I CLASS R1 CLASS R2
Shares sold 3,762 --(a) --(a)
- -----------------------------------------------------------
Shares issued in
reinvestment of dividends -- -- --
- -----------------------------------------------------------
3,762 --(a) --(a)
- -----------------------------------------------------------
Shares redeemed (496) -- --
- -----------------------------------------------------------
Net increase 3,266 --(a) --(a)
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003**
CLASS A CLASS B CLASS C
Shares sold 5,418 912 299
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends -- -- --
- -----------------------------------------------------------
5,418 912 299
- -----------------------------------------------------------
Shares redeemed (4,699) (856) (182)
- -----------------------------------------------------------
Net increase 719 56 117
- -----------------------------------------------------------
</Table>
22 MainStay International Equity Fund
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 10,255 821 497
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends -- -- --
- -----------------------------------------------------------
10,255 821 497
- -----------------------------------------------------------
Shares redeemed (9,604) (1,119) (386)
- -----------------------------------------------------------
Net increase (decrease) 651 (298) 111
- -----------------------------------------------------------
</Table>
* First offered on January 2, 2004.
** The Fund changed its fiscal year end from December 31 to October 31.
(a) Less than one thousand.
NOTE 10 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 11 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, through the date of engagement of KPMG, there were
no disagreements between the Trust and the predecessor independent auditor on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
www.mainstayfunds.com 23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay International Equity Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2004, and the related statement of operations, statement of changes in net
assets and the financial highlights for the year or period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the period ended October 31, 2003 and the year
ended December 31, 2002, and the financial highlights for the periods presented
through October 31, 2003, were audited by other auditors, whose report dated
December 18, 2003 expressed an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay International Equity Fund of The MainStay Funds as of October 31, 2004,
the results of its operations, the changes in its net assets and its financial
highlights for the year or period then ended, in conformity with U.S. generally
accepted accounting principles.
KPMG SIG
Philadelphia, Pennsylvania
December 28, 2004
24 MainStay International Equity Fund
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 25
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
26 MainStay International Equity Fund
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 27
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
In accordance with federal tax law, the Fund elects to provide each shareholder
with their portion of the Fund's foreign taxes paid and the income sourced from
foreign countries. Accordingly, the Fund hereby makes the following designations
regarding its fiscal year ended October 31, 2004:
- -- the total amount of taxes paid to foreign countries was $400,095
- -- the total amount of income sourced from foreign countries was $4,057,064
As required by federal tax law rules, shareholders will receive notification of
their proportionate share of foreign taxes paid and foreign sourced income for
the 2004 calendar year with form 1099-DIV, which will be mailed during January
2005.
28 MainStay International Equity Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
www.mainstayfunds.com 29
This page intentionally left blank
(NEW YORK LIFE LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com
(C) 2004 by NYLIFE Distributors LLC. All rights reserved.
The MainStay Funds
SEC File Number: 811-04550
NYLIM-A06360 (RECYCLE LOGO) MSIE11-12/04
10
(MAINSTAY LOGO)
MAINSTAY
MID CAP GROWTH FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay Mid Cap Growth Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quar-ter of 2004, and according to
preliminary estimates
from the Bureau of Economic Analysis, gross domes-
tic product grew at a seasonally adjusted annual rate
of 3.9% in the third quarter of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 12
- ----------------------------------------------------
Notes to Financial Statements 18
Report of Independent Registered Public
Accounting Firm 22
- ----------------------------------------------------
Trustees and Officers 23
- ----------------------------------------------------
Proxy Voting Policies and Procedures 25
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 25
- ----------------------------------------------------
MainStay Funds 26
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE SINCE
TOTAL RETURNS YEAR INCEPTION
- ------------------------------------------
With sales charges 4.37% -3.88%
Excluding sales charges 10.45 -2.46
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY MID CAP RUSSELL 2500 GROWTH
GROWTH FUND INDEX S&P MIDCAP 400 INDEX
---------------- ------------------- --------------------
1/2/01 9450 10000 10000
7078 7781 8797
5916 6175 8377
7777 8938 10941
10/31/04 8590 9487 12148
</Table>
<Table>
-- MainStay Mid Cap Growth Fund -- S&P MidCap 400 Index
- - Russell 2500 Growth Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE SINCE
TOTAL RETURNS YEAR INCEPTION
- -----------------------------------------
With sales charges 4.57% -3.73%
Excluding sales charges 9.57 -3.22
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY MID CAP RUSSELL 2500 GROWTH
GROWTH FUND INDEX S&P MIDCAP 400 INDEX
---------------- ------------------- --------------------
1/2/01 10000 10000 10000
7440 7781 8797
6170 6175 8377
8050 8938 10941
10/31/04 8644 9487 12148
</Table>
<Table>
-- MainStay Mid Cap Growth Fund -- S&P MidCap 400 Index
- - Russell 2500 Growth Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE SINCE
TOTAL RETURNS YEAR INCEPTION
- -----------------------------------------
With sales charges 8.57% -3.22%
Excluding sales charges 9.57 -3.22
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY MID CAP RUSSELL 2500 GROWTH
GROWTH FUND INDEX S&P MIDCAP 400 INDEX
---------------- ------------------- --------------------
1/2/01 10000 10000 10000
7440 7781 8797
6170 6175 8377
8050 8938 10941
10/31/04 8820 9487 12148
</Table>
<Table>
-- MainStay Mid Cap Growth Fund -- S&P MidCap 400 Index
- - Russell 2500 Growth Index
</Table>
<Table>
<Caption>
ONE SINCE
BENCHMARK PERFORMANCE YEAR INCEPTION
Russell 2500(R) Growth Index(1) 6.14% -1.36%
S&P MidCap 400(R) Index(2) 11.04 5.23
Average Lipper mid-cap growth
fund(3) 5.26 -5.68
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. The fee waivers and/or expense
limitations are voluntary and may be discontinued at any time.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Mid Cap Growth Fund
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. The Russell 2500(TM) Growth Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. 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. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital-gain distributions reinvested.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MID CAP GROWTH FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,053.80 $ 7.74 $1,017.50 $ 7.61
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,049.45 $11.59 $1,013.75 $11.39
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,049.45 $11.59 $1,013.75 $11.39
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 99.8%
Short-Term Investments (Collateral From Securities Lending Is 4.9%) 6.0
Liabilities in Excess of Cash and Other Assets -5.8
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. D.R. Horton, Inc.
2. Harman International Industries, Inc.
3. Peabody Energy Corp.
4. Cooper Cos., Inc. (The)
5. Coach, Inc.
6. Mohawk Industries, Inc.
7. KB HOME
8. Cytyc Corp.
9. M.D.C. Holdings, Inc.
10. Garmin Ltd.
</Table>
6 MainStay Mid Cap Growth Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Rudolph C. Carryl and Edmund C. Spelman
of MacKay Shields LLC
WHAT MAJOR FACTORS AND RISKS INFLUENCED THE STOCK MARKET DURING THE 12 MONTHS
ENDED OCTOBER 31, 2004?
Among the most significant factors influencing the equity markets during the
reporting period were Federal Reserve interest-rate hikes, sharply higher oil
prices, the war in Iraq, and the uncertainty surrounding the presidential
election. Despite these concerns, the stock market managed to register a healthy
gain. Much of the market's advance occurred toward the end of the reporting
period, when investors began to refocus on those market fundamentals, such as
earnings growth, that appeared to be favorable.
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund invests primarily in common stocks and securities related to U.S.
common stocks of companies with market capitalizations similar to those market
capitalization of companies in the S&P MidCap 400(R) Index.(1) The Fund seeks to
participate primarily in expanding markets of technology, health care,
communications, and other high-growth industries. We also seek stocks with
above-average growth in earnings. We select investments according to the
economic environment and the attractiveness of particular markets and the
financial condition and competitiveness of individual companies. In implementing
this strategy, we use a flexible approach and may invest in various types of
companies and securities. We look for securities that we believe may be poised
for a rise in price or an acceleration in earnings growth--possibly because of
special factors, such as changes in management, products, consumer demand, or
the economy. We may sell a stock if its earnings growth rate decelerates, if it
appears overvalued in relation to its growth rate or peer group, or if the stock
no longer appears likely to help the Fund meet its investment objective.
WHAT FACTORS HAD THE GREATEST IMPACT ON THE FUND'S RELATIVE PERFORMANCE?
The Fund's strong performance relative to its peers during the reporting period
resulted primarily from individual security selection in the health care,
consumer discretionary, and information technology sectors. The Fund's
underweighted position in the energy sector, however, detracted from
performance. Although the Fund's energy stocks advanced in concert with the
rising price of oil, the portfolio's underweighted position in the sector held
back performance.
WHAT DECISIONS GUIDED THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
We increased the Fund's exposure to the consumer discretionary sector, which had
a positive impact on the Fund's performance during the reporting period. Our
move to reduce the Fund's weighting in the information technology sector also
proved beneficial. While our decision to increase the Fund's exposure in the
high-performing energy sector had a positive impact, the Fund remained
underweighted in the sector, which hurt relative performance.
WHICH STOCKS WERE THE STRONGEST POSITIVE CONTRIBUTORS TO THE FUND'S PERFORMANCE?
For the 12-months ended October 31, 2004, the holdings that made the greatest
positive contribution to the Fund's performance were Autodesk, Oxford Health
Plans and Harman International Industries. Autodesk, one of the world's leading
design-software and digital-content companies, recently received international
recognition for its flagship AutoCAD software. The stock also rose on news of a
75% gain in third-quarter earnings. Oxford Health Plans was acquired by
Minnesota-based UnitedHealth Group in April at a substantial premium. The stock
benefited strongly from the acquisition. Harman International, a manufacturer of
high-quality, high-fidelity audio and electronic products, is benefiting from
its solid long-term contracts with several major automakers. The company has
profited from its growing sales in the high-margin luxury auto category. New
Century Financial, a mortgage company, and Cytyc, a developer of medical
diagnostic products for cervical-cancer screening, also contributed strongly to
the Fund's performance.
WHICH STOCKS WERE THE LARGEST DETRACTORS FROM PERFORMANCE?
During the 12-month reporting period, the largest detractors from the Fund's
performance were Emulex, QLogic, New York Community Bancorp, JetBlue Airways,
and SPX. Emulex and Qlogic, which provide interface connections between computer
systems and their attached data-storage peripherals, announced disappointing
results for the fourth quarter of 2003. A majority of the companies' revenue
shortfall was related to a decline in expected orders
Mid-capitalization companies are generally less established and their stocks may
be more volatile and less liquid than the securities of larger companies.
1. See footnote on page 5 for more information on the S&P MidCap 400(R) Index.
www.mainstayfunds.com 7
from original-equipment manufacturers for host bus adapters (HBA's) at the end
of the quarter. We sold Emulex on the news but continue to own Qlogic. Since
then QLogic managed to avoid further losses by taking some market share from
Emulex. New York Community Bancorp's shares declined on the news of a
significant drop in earnings for 2004. After the company's merger with Roslyn
Bancorp, the big sell-off in bonds earlier in the year caught highly leveraged
New York Community Bancorp off guard. The company's thrift was forced to unload
some $5 billion of interest-rate sensitive securities, and incur steep losses.
We sold the shares on the news.
The rising price of oil has increased operating costs throughout the airline
industry, which was already suffering from thin profit margins. As the outlook
darkened, we sold the Fund's position in JetBlue.
SPX designs, manufactures, and markets equipment for networking, broadcast,
power, and fire-detection applications. The company's share price declined when
third-quarter 2004 earnings per share came in below expectations. The company
reported that various costs and expenses have had an impact on margins. Although
the Fund owned the stock at the end of the reporting period, we have since sold
the Fund's position.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
Yes. With energy prices at high levels, we purchased Chesapeake Energy,
National-Oilwell, and Newfield Exploration for the Fund. In the materials
sector, we purchased shares of coal company Peabody Energy. In the industrials
sector, we added construction and surface-mining equipment manufacturer Terex.
We added to the Fund's consumer discretionary holdings with the purchase of Penn
National Gaming, as well as The St. Joe Company. In health care, we added Sierra
Health Services.
WHICH STOCKS DID THE FUND SELL DURING THE REPORTING PERIOD?
In light of difficulties throughout the airline industry, we decided to sell the
Fund's position in SkyWest. In the consumer discretionary sector, we sold the
Fund's shares of mass merchandiser Fred's, which showed poor performance
throughout the reporting period. We also sold pharmaceutical-products
distributor AmerisourceBergen. In the financials sector, we sold New York
Community Bancorp, and in information technology, we sold Siebel Systems, which
faltered early in 2004 and showed poor performance through the remainder of the
reporting period.
HOW DID THE FUND'S WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
The Fund increased its exposure to the consumer discretionary sector from 27.5%
at the end of October 2003 to 29.8% at the end of October 2004. Over the same
period, we increased the Fund's weighting in the energy sector from 0.0% to
4.2%. We increased the Fund's financials sector weighting from 9.8% of net
assets at the beginning of the reporting period to 12.7% at the end. Over the
same period, the Fund's allocation to the materials sector grew from 0.1% to
6.4%.
From the beginning of the reporting period to the end of October 2004, the Fund
decreased its weighting in the industrials sector from 15.3% to 10.7% and
reduced its weighting in the information technology sector from 25.2% to 13.5%.
HOW DO THE FUND'S WEIGHTINGS COMPARE WITH THOSE OF THE RUSSELL 2500(R) GROWTH
INDEX?
As of October 31, 2004, the Fund was overweighted relative to the Russell
2500(R) Growth Index(2) in the consumer discretionary, financials, health care,
industrials, and materials sectors. At the same time, the Fund was underweighted
in the consumer staples, energy, industrials, and information technology
sectors. At the end of the reporting period, the Fund had no holdings in the
telecommunications services or utilities sectors.
WHAT IS YOUR OUTLOOK FOR THE FUND?
With the uncertainty of the presidential election now behind us, investors can
now focus their attention on market fundamentals. Although high energy prices
and terrorism concerns remain risk factors, we believe that the combination of
moderate economic growth and relatively low interest rates may help support
decent stock-price action going forward.
2. See footnote on page 5 for more information about the Russell 2500(R) Growth
Index.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8 MainStay Mid Cap Growth Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (99.8%)+
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (3.8%)
Alliant Techsystems, Inc. (a) 16,350 $ 939,962
L-3 Communications Holdings, Inc. 17,500 1,153,775
United Defense Industries, Inc. (a) 28,800 1,156,032
------------
3,249,769
------------
AUTOMOBILES (1.6%)
Winnebago Industries, Inc. 44,100 1,384,740
------------
BIOTECHNOLOGY (2.0%)
Gilead Sciences, Inc. (a) 28,800 997,344
Mannkind Corp. (a)(b) 42,600 746,352
------------
1,743,696
------------
CAPITAL MARKETS (2.9%)
Affiliated Managers
Group, Inc. (a)(b) 21,800 1,217,312
E*TRADE Financial Corp. (a) 95,300 1,229,370
------------
2,446,682
------------
COMMERCIAL BANKS (2.6%)
UCBH Holdings, Inc. 25,400 1,094,486
Westcorp 28,100 1,121,752
------------
2,216,238
------------
COMMERCIAL SERVICES & SUPPLIES (0.5%)
Corinthian Colleges, Inc. (a) 28,300 406,388
------------
COMMUNICATIONS EQUIPMENT (1.6%)
Avocent Corp. (a) 12,400 441,440
InterDigital
Communications Corp. (a) 25,900 411,810
QLogic Corp. (a) 16,900 549,250
------------
1,402,500
------------
CONSTRUCTION & ENGINEERING (1.3%)
Fluor Corp. 23,700 1,100,628
------------
CONSTRUCTION MATERIALS (1.8%)
Eagle Materials, Inc. 20,829 1,439,492
Eagle Materials, Inc. Class B 1,045 69,827
------------
1,509,319
------------
CONSUMER FINANCE (2.6%)
Capital One Financial Corp. 16,800 1,239,168
Providian Financial Corp. (a) 65,500 1,018,525
------------
2,257,693
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (2.8%)
Amphenol Corp. Class A (a) 10,100 346,733
CDW Corp. 10,000 620,300
V
#Garmin Ltd. (b) 29,100 1,455,000
------------
2,422,033
------------
ENERGY EQUIPMENT & SERVICES (1.5%)
National-Oilwell, Inc. (a)(b) 37,800 1,274,238
------------
</Table>
<Table>
<Caption>
SHARES VALUE
HEALTH CARE EQUIPMENT & SUPPLIES (7.9%)
V
#Cooper Cos., Inc. (The) 22,600 $ 1,589,910
V
#Cytyc Corp. (a) 57,100 1,489,739
Fisher Scientific
International, Inc. (a) 20,100 1,152,936
St. Jude Medical, Inc. (a) 15,100 1,156,207
Varian Medical Systems, Inc. (a) 33,800 1,357,070
------------
6,745,862
------------
HEALTH CARE PROVIDERS & SERVICES (11.3%)
Caremark Rx, Inc. (a) 30,000 899,100
Coventry Health Care, Inc. (a) 35,400 1,447,860
First Health Group Corp. (a) 36,200 576,304
Henry Schein, Inc. (a) 16,500 1,043,295
PacifiCare Health Systems, Inc. (a) 39,700 1,414,114
Patterson Cos., Inc. (a) 21,200 795,000
Pharmaceutical Product Development, Inc. (a) 24,800 1,047,304
Quest Diagnostics, Inc. 12,900 1,129,266
Sierra Health Services, Inc. (a) 9,400 448,568
WellChoice, Inc. (a) 21,200 885,312
------------
9,686,123
------------
HOTELS, RESTAURANTS & LEISURE (2.8%)
Boyd Gaming Corp. 39,500 1,322,855
Penn National Gaming, Inc. (a) 26,300 1,092,239
------------
2,415,094
------------
HOUSEHOLD DURABLES (17.4%)
Centex Corp. 21,800 1,132,292
V
#D.R. Horton, Inc. 59,000 1,770,000
V
#Harman International Industries, Inc. 13,900 1,670,502
Hovnanian Enterprises, Inc. Class A (a) 31,900 1,197,526
V
#KB HOME 18,200 1,496,950
Lennar Corp. Class A 27,800 1,250,444
Lennar Corp. Class B 3,300 136,224
V
#M.D.C. Holdings, Inc. 19,160 1,470,530
V
#Mohawk Industries, Inc. (a) 17,800 1,514,424
Ryland Group, Inc. (The) 11,700 1,116,063
Stanley Works (The) 19,000 845,880
Toro Co. (The) 18,700 1,276,275
------------
14,877,110
------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
# Among the Fund's 10 largest holdings, excluding short-term investments. May
be subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES (1.0%)
VeriSign, Inc. (a) 32,000 $ 858,560
------------
IT SERVICES (1.5%)
Acxiom Corp. 28,400 710,000
Affiliated Computer Services, Inc. Class A (a) 10,500 572,775
------------
1,282,775
------------
LEISURE EQUIPMENT & PRODUCTS (1.1%)
Brunswick Corp. 20,900 980,628
------------
MACHINERY (3.6%)
Oshkosh Truck Corp. 19,900 1,172,110
SPX Corp. 18,800 720,980
Terex Corp. (a) 31,000 1,178,000
------------
3,071,090
------------
METALS & MINING (4.6%)
Arch Coal, Inc. 41,200 1,339,824
Massey Energy Co. 35,700 961,401
V
#Peabody Energy Corp. 25,900 1,651,902
------------
3,953,127
------------
OIL & GAS (2.7%)
Chesapeake Energy Corp. 67,000 1,077,360
Newfield Exploration Co. (a) 21,200 1,233,840
------------
2,311,200
------------
PHARMACEUTICALS (1.4%)
Endo Pharmaceuticals
Holdings, Inc. (a) 34,400 749,920
Eon Labs, Inc. (a) 18,500 455,285
------------
1,205,205
------------
REAL ESTATE (1.0%)
St. Joe Co. (The) 16,500 839,850
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (2.2%)
Altera Corp. (a) 16,400 372,772
Integrated Circuit Systems, Inc. (a) 18,900 426,195
Novellus Systems, Inc. (a) 15,100 391,241
Semtech Corp. (a) 15,900 331,992
Silicon Laboratories, Inc. (a) 11,200 335,664
------------
1,857,864
------------
SOFTWARE (4.4%)
Activision, Inc. (a) 40,275 583,182
Amdocs Ltd. (a) 16,400 412,460
Autodesk, Inc. 16,300 859,825
FactSet Research Systems, Inc. 22,400 1,116,416
Symantec Corp. (a) 13,300 757,302
------------
3,729,185
------------
</Table>
<Table>
<Caption>
SHARES VALUE
SPECIALTY RETAIL (5.5%)
Chico's FAS, Inc. (a) 28,800 $ 1,152,864
Claire's Stores, Inc. 52,700 1,371,254
Michaels Stores, Inc. 44,600 1,297,860
Sherwin-Williams Co. (The) 20,100 858,672
------------
4,680,650
------------
TEXTILES, APPAREL & LUXURY GOODS (2.8%)
V
#Coach, Inc. (a) 32,700 1,524,801
Warnaco Group, Inc. (The) (a) 44,000 897,600
------------
2,422,401
------------
THRIFTS & MORTGAGE FINANCE (3.6%)
Doral Financial Corp. 27,850 1,169,143
IndyMac Bancorp, Inc. 44,800 1,445,248
PMI Group, Inc. (The) 11,500 446,430
------------
3,060,821
------------
Total Common Stocks (Cost $68,022,974) 85,391,469
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (6.0%)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (1.1%)
UBS Finance Delaware LLC
1.84%, due 11/1/04 $ 975,000 975,000
------------
Total Commercial Paper (Cost $975,000) 975,000
------------
<Caption>
SHARES
INVESTMENT COMPANY (2.0%)
AIM Institutional Funds Group (c) 1,682,563 1,682,563
------------
Total Investment Company (Cost $1,682,563) 1,682,563
------------
<Caption>
PRINCIPAL
AMOUNT
MASTER NOTE (0.5%)
Banc of America Securities LLC
1.9549%, due 11/1/04 (c) $ 400,000 400,000
------------
Total Master Note
(Cost $400,000) 400,000
------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
# Among the Fund's 10 largest holdings, excluding short-term investments. May
be subject to change daily.
</Table>
10 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- -----------------------------------------------------------------------------
REPURCHASE AGREEMENTS (2.4%)
Credit Suisse First Boston LLC
1.9249%, dated 10/29/04
due 11/1/04
Proceeds at Maturity
$700,112 (c)
(Collateralized by Various Bonds
with a Principal Amount of $701,958 and a Market
Value of $714,025) $ 700,000 $ 700,000
Lehman Brothers, Inc.
1.925%, dated 10/29/04
due 11/1/04
Proceeds at Maturity
$378,061 (c)
(Collateralized by Various Bonds with a
Principal Amount of $753,156 and a Market Value
of $389,874) 378,000 378,000
Merrill Lynch Pierce Fenner & Smith, Inc.
1.9549%, dated 10/29/04
due 11/1/04
Proceeds at Maturity $1,000,163 (c)
(Collateralized by Various Bonds with a
Principal Amount of $988,905 and a Market Value
of $1,050,035) 1,000,000 1,000,000
------------
Total Repurchase Agreements (Cost $2,078,000) 2,078,000
------------
Total Short-Term Investments (Cost $5,135,563) 5,135,563
------------
Total Investments (Cost $73,158,537) (d) 105.8% 90,527,032(e)
Liabilities in Excess of
Cash and Other Assets (5.8) (5,003,255)
---------- ------------
Net Assets 100.0% $ 85,523,777
========== ============
</Table>
<Table>
(a) Non-income producing security.
(b) Represents a security, or a portion thereof, which is
out on loan.
(c) Represents a security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(d) The cost for federal income tax purposes is $73,305,990.
(e) At October 31, 2004 net unrealized appreciation was
$17,221,042, 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 $18,725,666 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $1,504,624.
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
# Among the Fund's 10 largest holdings, excluding short-term
investments. May be subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
STATEMENT OF ASSETS AND LIABILITIES
AS OF OCTOBER 31, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $73,158,537), including
$4,076,230 market value of securities loaned $ 90,527,032
Cash 3,033
Receivables:
Investment securities sold 383,147
Fund shares sold 138,486
Dividends and interest 14,651
Other assets 11,411
------------
Total assets 91,077,760
------------
LIABILITIES:
Securities lending collateral 4,160,564
Payables:
Investment securities purchased 1,186,553
Transfer agent 57,899
NYLIFE Distributors 42,153
Fund shares redeemed 32,514
Manager 26,473
Custodian 2,252
Accrued expenses 45,575
------------
Total liabilities 5,553,983
------------
Net assets $ 85,523,777
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 50,886
Class B 40,482
Class C 4,058
Additional paid-in capital 78,648,492
Accumulated net realized loss on investments (10,588,636)
Net unrealized appreciation on investments 17,368,495
------------
Net assets $ 85,523,777
============
CLASS A
Net assets applicable to outstanding shares $ 46,234,255
============
Shares of beneficial interest outstanding 5,088,589
============
Net asset value per share outstanding $ 9.09
Maximum sales charge (5.50% of offering price) 0.53
------------
Maximum offering price per share outstanding $ 9.62
============
CLASS B
Net assets applicable to outstanding shares $ 35,709,852
============
Shares of beneficial interest outstanding 4,048,224
============
Net asset value and offering price per share
outstanding $ 8.82
============
CLASS C
Net assets applicable to outstanding shares $ 3,579,670
============
Shares of beneficial interest outstanding 405,818
============
Net asset value and offering price per share
outstanding $ 8.82
============
</Table>
12 MainStay Mid Cap Growth Fund 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 YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 361,396
Income from securities loaned -- net 17,209
Interest 8,434
-----------
Total income 387,039
-----------
EXPENSES:
Manager 573,781
Transfer agent 332,891
Distribution -- Class B 228,376
Distribution -- Class C 23,732
Service -- Class A 107,224
Service -- Class B 76,125
Service -- Class C 7,911
Shareholder communication 47,117
Registration 37,350
Professional 36,648
Recordkeeping 28,835
Custodian 17,047
Trustees 8,083
Pricing service 4,440
Miscellaneous 17,111
-----------
Total expenses before reimbursement 1,546,671
Expense reimbursement by Manager (147,001)
-----------
Net expenses 1,399,670
-----------
Net investment loss (1,012,631)
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 4,810,758
Net change in unrealized appreciation on
investments 2,792,206
-----------
Net realized and unrealized gain on
investments 7,602,964
-----------
Net increase in net assets resulting from
operations $ 6,590,333
===========
</Table>
(a) Dividends recorded net of foreign withholding taxes of $1,313.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment loss $ (1,012,631) $ (462,355) $ (425,908)
Net realized gain
(loss) on
investments 4,810,758 (1,756,946) (6,946,950)
Net change in
unrealized
appreciation
(depreciation) on
investments 2,792,206 15,761,181 (3,025,659)
-----------------------------------------
Net increase
(decrease) in net
assets resulting
from operations 6,590,333 13,541,880 (10,398,517)
-----------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 17,554,380 12,367,959 3,979,306
Class B 16,592,995 11,727,874 7,151,208
Class C 1,999,365 1,041,539 1,014,803
-----------------------------------------
36,146,740 25,137,372 12,145,317
Cost of shares
redeemed:
Class A (10,661,357) (4,281,113) (1,072,848)
Class B (4,547,932) (2,673,803) (1,794,153)
Class C (814,633) (207,215) (108,797)
-----------------------------------------
(16,023,922) (7,162,131) (2,975,798)
Increase in net
assets derived
from capital
share
transactions 20,122,818 17,975,241 9,169,519
-----------------------------------------
Net increase
(decrease) in
net assets 26,713,151 31,517,121 (1,228,998)
</Table>
<Table>
<Caption>
2004 2003* 2002
NET ASSETS:
Beginning of period 58,810,626 27,293,505 28,522,503
-----------------------------------------
End of period $ 85,523,777 $58,810,626 $ 27,293,505
=========================================
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
14 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
www.mainstayfunds.com 15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------
JANUARY 1,
2003
YEAR ENDED THROUGH YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31,
2004 2003** 2002 2001*
Net asset value at beginning of period $ 8.23 $ 5.86 $ 8.25 $ 10.00
------- ------- ------- -------
Net investment loss (a) (0.09) (0.07) (0.09) (0.09)
Net realized and unrealized gain (loss) on
investments 0.95 2.44 (2.30) (1.66)
------- ------- ------- -------
Total from investment operations 0.86 2.37 (2.39) (1.75)
------- ------- ------- -------
Net asset value at end of period $ 9.09 $ 8.23 $ 5.86 $ 8.25
======= ======= ======= =======
Total investment return (b) 10.45% 40.44%(c) (28.97%) (17.50%)
Ratios (to average net assets)/Supplemental Data:
Net investment loss (0.99%) (1.21%)+ (1.22%) (1.01%)
Net expenses 1.50% 1.50%+ 1.50% 1.50%
Expenses (before reimbursement) 1.69% 1.95%+ 1.81% 1.87%
Portfolio turnover rate 52% 42% 188% 127%
Net assets at end of period (in 000's) $46,234 $35,473 $18,523 $22,965
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------
JANUARY 1,
2003
YEAR ENDED THROUGH YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31,
2004 2003** 2002 2001*
Net asset value at beginning of period $ 8.05 $ 5.77 $ 8.18 $ 10.00
------ ------ ------- -------
Net investment loss (a) (0.15) (0.11) (0.13) (0.14)
Net realized and unrealized gain (loss) on
investments 0.92 2.39 (2.28) (1.68)
------ ------ ------- -------
Total from investment operations 0.77 2.28 (2.41) (1.82)
------ ------ ------- -------
Net asset value at end of period $ 8.82 $ 8.05 $ 5.77 $ 8.18
====== ====== ======= =======
Total investment return (b) 9.57% 39.51%(c) (29.46%) (18.20%)
Ratios (to average net assets)/Supplemental Data:
Net investment loss (1.74%) (1.96%)+ (1.97%) (1.76%)
Net expenses 2.25% 2.25%+ 2.25% 2.25%
Expenses (before reimbursement) 2.44% 2.70%+ 2.56% 2.62%
Portfolio turnover rate 52% 42% 188% 127%
Net assets at end of period (in 000's) $3,580 $2,148 $ 871 $ 258
</Table>
<Table>
* The Fund commenced operations on January 2, 2001.
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.
(b) Total return is calculated exclusive of sales charges.
(c) Total return is not annualized.
</Table>
16 MainStay Tax Free Bond Fund
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
------------------------------------------------
JANUARY 1,
2003
YEAR ENDED THROUGH YEAR ENDED
OCTOBER 31, OCTOBER 31, DECEMBER 31,
2004 2003** 2002 2001*
$ 8.05 $ 5.77 $ 8.18 $ 10.00
------- ------- ------- -------
(0.15) (0.11) (0.13) (0.14)
0.92 2.39 (2.28) (1.68)
------- ------- ------- -------
0.77 2.28 (2.41) (1.82)
------- ------- ------- -------
$ 8.82 $ 8.05 $ 5.77 $ 8.18
======= ======= ======= =======
9.57% 39.51%(c) (29.46%) (18.20%)
(1.74%) (1.96%)+ (1.97%) (1.76%)
2.25% 2.25%+ 2.25% 2.25%
2.44% 2.70%+ 2.56% 2.62%
52% 42% 188% 127%
$35,710 $21,189 $ 7,899 $ 5,299
</Table>
www.mainstayfunds.com 17
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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. Distribution of Class A
shares, Class B shares and Class C shares commenced 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 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 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. Reasons for
which securities may be valued in this manner include, but are not limited to,
trading for a security has been halted or suspended, a security has been
de-listed from a national exchange, or trading on a security's primary market is
temporarily closed at a time when under normal conditions it would be open. The
Fund did not hold securities at October 31, 2004, that were valued in such
manner.
(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. (See Note 7.)
(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
18 MainStay Mid Cap Growth Fund
additional paid-in capital arising from permanent differences; net assets at
October 31, 2004, are not affected.
<Table>
<Caption>
ACCUMULATED
NET INVESTMENT ADDITIONAL
LOSS PAID-IN CAPITAL
$1,012,631 $(1,012,631)
</Table>
The reclassification for the Fund is due to the fact that net operating losses
cannot be carried forward for federal income tax purposes.
(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 distributions 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. 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 July 31, 2004, 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 August 1, 2004,
the Trust pays the Manager an annual rate of 0.75% of the Fund's average daily
net assets on assets up to $500 million and 0.70% on assets over $500 million.
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 year ended October 31, 2004, the Manager earned
from the Fund $573,781 and reimbursed the Fund $147,001.
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 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 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 $26,560 for the year ended
October 31, 2004. 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 $5, $36,031 and $1,750, respectively, for the year ended October 31,
2004.
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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 for the year ended October 31, 2004,
amounted to $332,891.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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, 2004, New York Life held shares of Class A with a
value of $22,725,000 which represents 49.2% of the Class A net assets and 26.6%
of the Fund's total net assets at year 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 $2,446 for the year ended October 31,
2004.
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 $28,835 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged to the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
TOTAL
ACCUMULATED CAPITAL UNREALIZED ACCUMULATED
AND OTHER LOSSES APPRECIATION GAIN
$(10,441,183) $17,221,042 $6,779,859
</Table>
The difference between book-basis and tax-basis unrealized appreciation is due
to wash sale deferrals.
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $10,441,183 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 $ 1,132
2010 6,598
2011 2,711
- --------------------------------------------
$10,441
- --------------------------------------------
</Table>
The Fund utilized $4,746,141 of capital loss carryforward during the year ended
October 31, 2004.
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $58,914 and $39,832, respectively.
NOTE 7 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2004, the Fund had securities on loan with an aggregate market
value of $4,076,230. The Fund received $4,160,564 as collateral for securities
on loan which was used to purchase highly liquid short-term investments in
accordance with Fund's securities lending procedures. Pursuant to Rule 2a-7,
securities purchased with collateral received are valued at amortized cost.
NOTE 8 -- 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.
20 MainStay Mid Cap Growth Fund
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 year
ended October 31, 2004.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 2,018 1,954 236
- -----------------------------------------------------------
Shares redeemed (1,237) (537) (97)
- -----------------------------------------------------------
Net increase 781 1,417 139
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003*
CLASS A CLASS B CLASS C
Shares sold 1,724 1,670 149
- -----------------------------------------------------------
Shares redeemed (576) (408) (33)
- -----------------------------------------------------------
Net increase 1,148 1,262 116
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 528 976 136
- -----------------------------------------------------------
Shares redeemed (151) (255) (16)
- -----------------------------------------------------------
Net increase 377 721 120
- -----------------------------------------------------------
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 10 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 11 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's report on the Trust's financial statements
for the period ended October 31, 2003 and year ended December 31, 2002 did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. During such
fiscal periods, and through the date of engagement of KPMG, there were no
disagreements between the Trust and the predecessor independent auditor on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which such disagreements, if not resolved to the
satisfaction of the predecessor independent auditor, would have caused them to
make reference to the subject matter of the disagreement in connection with
their reports on the financial statements for such periods.
www.mainstayfunds.com 21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Mid Cap Growth Fund (the "Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2004, and
the related statement of operations, statement of changes in net assets and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the period ended October 31, 2003 and the year ended December 31, 2002, and
the financial highlights for the periods presented through October 31, 2003,
were audited by other auditors, whose report dated December 18, 2003 expressed
an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Mid Cap Growth Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
22 MainStay Mid Cap Growth Fund
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 23
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
24 MainStay Mid Cap Growth Fund
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 25
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
26 MainStay Mid Cap Growth Fund
(NEW YORK LIFE LOGO)
- ------------------------------------------------
GNot FDIC insured. G No bank guarantee. G May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06225 RECYCLE.LOGO MSMG11-12/04
11
(MAINSTAY LOGO)
MAINSTAY
MONEY MARKET FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay Money Market Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quarter of 2004, and according to
preliminary estimates from the Bureau of Economic Analysis, gross domestic
product grew at a seasonally adjusted annual rate of 3.9% in the third quarter
of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 6
- ----------------------------------------------------
Portfolio of Investments 8
- ----------------------------------------------------
Financial Statements 11
- ----------------------------------------------------
Notes to Financial Statements 16
Report of Independent Registered Public
Accounting Firm 19
- ----------------------------------------------------
Trustees and Officers 20
- ----------------------------------------------------
Proxy Voting Policies and Procedures 22
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 22
- ----------------------------------------------------
MainStay Funds 23
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES(2) -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
0.54% 2.51% 3.76%
7-DAY CURRENT YIELD -- 1.10%
</Table>
<Table>
</Table>
CLASS B SHARES(2) -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
0.54% 2.51% 3.76%
7-DAY CURRENT YIELD -- 1.10%
</Table>
<Table>
</Table>
CLASS C SHARES(2) -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
0.54% 2.51% 3.76%
7-DAY CURRENT YIELD -- 1.10%
</Table>
<Table>
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Average Lipper money market fund(1) 0.47% 2.35% 3.70%
</Table>
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 and reinvestment of dividend and capital-gain
distributions. Class A, B, and C shares are sold with no initial sales charge or
contingent deferred sales charge (CDSC) and have no annual 12b-1 fees.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. The fee waivers and/or expense
limitations are voluntary and may be discontinued at any time. From inception
(5/1/86) through 12/31/94 (for Class A, first offered 1/3/95) and 8/31/98 (for
Class C, first offered 9/1/98), performance of Class A and Class C shares
includes the historical performance of Class B shares.
1. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital-gain distributions reinvested.
2. As of 10/31/04, MainStay Money Market Fund had an effective 7-day yield of
1.10% and a 7-day current yield of 1.10% for Class A, B, and C shares. These
yields reflect certain expense limitations. Had these expense limitations not
been in effect, the effective 7-day yield and the current 7-day yield would
have been 0.69%. These expense limitations are voluntary and may be
terminated or revised at any time. The current yield is more reflective of
the Fund's earnings than the total return.
4 MainStay Money Market Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MONEY MARKET FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,003.40 $3.53 $1,021.50 $3.56
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,003.40 $3.53 $1,021.50 $3.56
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,003.40 $3.53 $1,021.50 $3.56
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
U.S. Government and Federal Agencies 44.9%
Commercial Paper 42.1
Medium Term Notes 7.0
Corporate Bonds 5.1
Certificates of Deposit 1.1
Liabilities in Excess of Cash and Other Assets -0.2
</Table>
See Portfolio of Investments on page 8 for specific holdings within these
categories.
www.mainstayfunds.com 5
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Claude Athaide, Ph.D., CFA, and
Christopher Harms of MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund invests in high-quality, short-term securities that are denominated in
U.S. dollars and mature in 13 months or less. The Fund's portfolio may include
obligations issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities. The Fund may also invest in bank and bank holding company
obligations, such as CDs and bankers' acceptances. The Fund may own commercial
paper, unsecured loans to corporations, and corporate debt securities. We may
sell a security if changes in the economy, the financial situation of the
issuer, the condition and outlook of the issuer's industry, or other factors
lead us to believe that the security will not contribute to meeting the Fund's
investment objective.
WHAT WAS THE ECONOMIC ENVIRONMENT DURING THE REPORTING PERIOD?
The Commerce Department estimated that the U.S. economy grew at a 3.9%
annualized rate during the four quarters ended September 30, 2004. Personal
consumption grew at a 3.5% pace during this period, while business fixed
investment grew at a 9.8% rate. Following the recession in 2001, the first two
years of the economic recovery were characterized by lackluster employment
gains. During March, April, and May of 2004, however, U.S. payrolls expanded
strongly, adding a total of nearly 900,000 jobs. In the next few months,
employment growth moderated. The most recent employment report showed that
337,000 new jobs were created in October 2004, and figures for jobs created
during August and September were revised upward. In all, payrolls have increased
by more than two million during the 12 months ended October 31, 2004.
HOW DID THE EXPANDING ECONOMY AFFECT INTEREST RATES?
During the spring of 2004, markets were surprised by higher-than-expected
inflation. This, combined with an improving employment picture, caused interest
rates to move sharply higher. From late March through June 2004, two-year
Treasury-note yields rose from 1.46% to 2.93%. During the summer, yields
declined as job growth slowed and inflation concerns were reduced. On October
31, 2004, two-year Treasury notes yielded 2.56%. During the 12-month reporting
period, yields on the three-month Treasury bill rose from 0.95% to 1.9% while
three-month LIBOR(1) increased from 1.17% to 2.17%.
WHAT WAS THE FEDERAL RESERVE'S RESPONSE TO THE ECONOMY?
The Federal Open Market Committee raised the targeted federal funds rate in
June, August, and September of 2004--by 25 basis points each time. (A basis
point is 1/100th of one percent.) These three rates hikes brought the targeted
federal funds rate from 1.00% to 1.75%.
HOW DID THE FUND INVEST DURING THE REPORTING PERIOD?
The duration of the Fund was longer than that of the average money-market fund
during the Fund's fiscal year. In the second half of the reporting period, this
stance had a negative impact on performance as securities in the portfolio were
reinvested into higher-yielding instruments at a slower rate.
The Fund's portfolio contained securities issued by the U.S. Treasury and
government-sponsored agencies. The Fund also held securities issued by finance,
insurance, brokerage, and industrial companies, as well as banks and bank
holding companies. These were first-tier securities, or generally those money
market instruments in the highest-rated category.
WHAT DO YOU ANTICIPATE GOING FORWARD?
Consumer spending grew at 4.6% in the third quarter of 2004, while the personal
savings rate declined to 0.4%. We do not believe that these trends are
sustainable. Earlier in the year, consumers received substantial stimulus from
tax cuts and mortgage refinancings but we are unlikely to see additional support
from these sources. Strong employment growth will be necessary for consumer
spending to remain at these levels without further deterioration in the savings
balance. In our opinion, personal spending is unlikely to grow faster than wages
during the next few quarters.
Activity in the futures market suggests an 80% probability that after the
February 2005 meeting of the Federal Open Market Committee, the targeted federal
funds rate will reach 2.5%. Since we believe
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.
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.
6 MainStay Money Market Fund
that the FOMC will be somewhat less aggressive, we will continue to purchase
securities maturing in February as long as they appear to offer attractive
opportunities.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
www.mainstayfunds.com 7
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (100.2%)+
- ------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (1.1%)
Citibank of North America
1.67%, due 11/23/04 (c) $ 6,000,000 $ 6,000,000
------------
COMMERCIAL PAPER (42.1%)
Abbey National North America
1.77%, due 12/8/04 6,000,000 5,989,084
ABN-Amro North America Finance, Inc.
1.91%, due 1/21/05 4,250,000 4,231,736
American General Finance Corp.
1.75%, due 12/9/04 5,000,000 4,990,763
ANZ Delaware, Inc.
1.63%, due 11/18/04 2,525,000 2,523,056
1.88%, due 12/17/04 1,250,000 1,246,997
2.07%, due 2/14/05 5,750,000 5,715,285
Atlantis One Funding Corp.
1.44%, due 11/10/04 (a) 5,300,000 5,298,092
Bank of America Corp.
1.75%, due 12/29/04 5,700,000 5,683,929
Barclays U.S. Funding Corp.
1.85%, due 12/6/04 6,100,000 6,089,028
1.95%, due 12/20/04 4,100,000 4,089,118
BellSouth Corp.
2.05%, due 2/8/05 (a) 6,100,000 6,065,611
Deutsche Bank Financial LLC
1.61%, due 12/6/04 5,000,000 4,992,174
Dexia Delaware LLC
1.93%, due 12/20/04 1,200,000 1,196,848
European Investment Bank
1.695%, due 12/13/04 6,000,000 5,987,610
1.85%, due 12/13/04 625,000 623,651
General Electric Capital Corp.
1.70%, due 12/13/04 3,800,000 3,792,463
2.01%, due 3/21/05 5,350,000 5,308,181
2.04%, due 1/24/05 5,000,000 4,976,200
Goldman Sachs Group, Inc.
1.62%, due 11/19/04 5,000,000 4,995,950
Harvard University
1.85%, due 2/10/05 2,625,000 2,611,376
HBOS Treasury Services
1.69%, due 12/20/04 4,450,000 4,439,764
Ing America Insurance Holdings
1.75%, due 12/17/04 6,000,000 5,986,583
Ing Funding LLC
2.10%, due 2/28/05 4,600,000 4,568,068
International Bank for Reconstruction &
Development
1.60%, due 11/12/04 5,600,000 5,597,262
KfW International Finance, Inc.
1.98%, due 3/9/05 (a) 3,900,000 3,872,544
</Table>
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
COMMERCIAL PAPER (CONTINUED)
Lloyds Bank PLC
1.97%, due 3/17/05 $ 5,000,000 $ 4,962,600
2.05%, due 3/10/05 4,650,000 4,615,842
Merrill Lynch & Co., Inc.
1.58%, due 11/2/04 5,500,000 5,499,759
National Australia Funding
1.76%, due 11/4/04 5,300,000 5,299,222
1.77%, due 11/10/04 4,150,000 4,148,164
Nestle Capital Corp.
1.95%, due 1/18/05 (a) 5,000,000 4,978,875
Pfizer, Inc.
1.62%, due 11/3/04 (a) 5,375,000 5,374,516
1.695%, due 12/14/04 (a) 6,000,000 5,987,852
Prudential Funding LLC
1.80%, due 2/4/05 6,350,000 6,319,838
1.82%, due 12/16/04 5,000,000 4,988,625
Rabobank USA Financial Corp.
2.098%, due 4/12/05 5,000,000 4,952,525
Receivables Capital Corp.
1.73%, due 12/1/04 (a) 6,000,000 5,991,350
SBC Communications Inc.
2.06%, due 1/19/05 (a) 6,000,000 5,972,877
Santander Hispano Finance Delaware, Inc.
2.04%, due 3/21/05 6,600,000 6,547,640
Shell Finance (UK) PLC
2.00%, due 1/28/05 6,000,000 5,970,667
Societe Generale N.A., Inc.
1.64%, due 11/17/04 5,000,000 4,996,357
2.00%, due 1/27/05 4,950,000 4,926,075
Svenska Handelsbanken AB, Inc.
1.97%, due 1/31/05 5,000,000 4,975,101
Swiss Reinsurance Financial Products
1.43%, due 11/8/04 (a) 6,000,000 5,998,332
UBS Finance Delaware LLC
1.70%, due 11/16/04 2,500,000 2,498,229
1.76%, due 12/7/04 5,025,000 5,016,156
------------
220,891,975
------------
CORPORATE BONDS (5.1%)
Bank of America Corp.
7.875%, due 5/16/05 (c) 5,000,000 5,151,777
Metropolitan Life Insurance Co.
Series EXL
1.999%, due 4/28/08 (a)(b)(c) 6,000,000 6,000,000
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
</Table>
8 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (CONTINUED)
- ------------------------------------------------------------------------------
CORPORATE BONDS (CONTINUED)
Morgan Stanley
7.75%, due 6/15/05 (c) $ 5,500,000 $ 5,687,539
Wachovia Corp.
2.23%, due 3/31/05 (c) 5,000,000 5,008,295
6.95%, due 11/1/04 (c) 5,000,000 5,000,000
------------
26,847,611
------------
MEDIUM TERM NOTES (7.0%)
American Express Credit Corp.
Series B
1.89%, due 3/5/08 (b)(c) 6,000,000 6,000,000
1.97%, due 9/30/05 (b)(c) 5,000,000 5,001,769
Bank One Corp.
Series C
2.30%, due 7/25/05 (b)(c) 5,300,000 5,309,685
Household Finance Corp.
1.82%, due 8/18/05 (b)(c) 6,000,000 6,006,127
J.P. Morgan Chase & Co.
Series C
1.99%, due 2/24/05 (b)(c) 5,000,000 5,004,319
Merrill Lynch & Co.
Series B
1.95%, due 2/3/05 (b)(c) 3,200,000 3,202,215
Morgan Stanley
Series C
1.99%, due 8/15/05 (b)(c) 6,000,000 6,007,048
------------
36,531,163
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (44.9%)
Federal Home Loan Banks
1.36%, due 4/1/05 (c) 5,000,000 4,999,596
1.60%, due 3/1/05 (c) 5,000,000 5,000,000
4.625%, due 4/15/05 (c) 4,000,000 4,044,175
Federal Home Loan Banks (Discount Notes)
1.60%, due 11/5/04 6,000,000 5,998,933
1.75%, due 12/10/04 6,000,000 5,988,625
1.925%, due 3/11/05 4,500,000 4,468,719
1.94%, due 3/18/05 5,900,000 5,856,442
1.95%, due 1/14/05 6,400,000 6,374,347
1.98%, due 1/21/05 3,650,000 3,633,780
</Table>
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
Federal Mortgage Corporation (Discount Notes)
1.54%, due 11/9/04 $ 6,000,000 $ 5,997,880
1.57%, due 11/12/04 5,000,000 4,997,597
1.60%, due 11/22/04 4,500,000 4,495,800
1.62%, due 11/16/04 6,000,000 5,995,950
1.70%, due 12/21/04 5,150,000 5,137,840
1.71%, due 12/13/04-12/28/04 9,675,000 9,651,423
1.72%, due 12/27/04 4,000,000 3,989,298
1.84%, due 1/10/05 6,000,000 5,978,533
1.85%, due 12/2/04 5,900,000 5,890,601
1.87%, due 12/14/04 4,165,000 4,155,697
1.99%, due 2/14/05 5,000,000 4,970,979
2.00%, due 2/1/05-2/22/05 13,350,000 13,273,017
2.02%, due 3/7/05 5,000,000 4,964,650
2.05%, due 3/8/05-3/22/05 7,050,000 6,996,304
2.06%, due 3/14/05 4,000,000 3,969,558
2.07%, due 3/29/05 5,630,000 5,582,089
2.11%, due 3/22/05 5,559,000 5,513,060
Federal National Mortgage Association (Discount
Notes)
1.60%, due 1/1/04-11/3/04 10,000,000 9,999,556
1.64%, due 11/22/04 4,550,000 4,545,647
1.80%, due 1/7/05-2/2/05 14,500,000 14,441,544
1.82%, due 1/25/05 4,000,000 3,982,811
1.87%, due 2/7/05 4,425,000 4,402,474
1.90%, due 12/22/04 6,025,000 6,008,783
2.00%, due 1/26/05-2/4/05 8,932,000 8,887,359
United States Treasury Notes
(zero coupon), due 11/15/04 8,625,000 8,621,340
1.50%, due 2/28/05 (c) 9,500,000 9,490,098
1.625%, due 3/31/05 (c) 8,200,000 8,188,755
2.00%, due 11/30/04 (c) 5,000,000 5,003,067
5.875%, due 11/15/04 (c) 3,800,000 3,806,800
------------
235,303,127
------------
Total Short-Term Investments
(Amortized Cost $525,573,876) (d) 100.2% 525,573,876
Liabilities in Excess of Cash and Other Assets (0.2) (1,027,458)
----------- ------------
Net Assets 100.0% $524,546,418
=========== ============
</Table>
<Table>
(a) May be sold to institutional investors only.
(b) Floating rate. Rate shown is the rate in effect at
October 31, 2004.
(c) Coupon interest bearing security.
(d) The cost stated also represents the aggregate cost for
federal income tax purposes.
</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. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31 (CONTINUED)
The table below sets forth the diversification of the Money Market Fund
investments by industry.
<Table>
<Caption>
AMORTIZED
COST PERCENT+
INDUSTRY DIVERSIFICATION
Banks # $149,407,281 28.5%
Consumer Financial Services 12,004,458 2.3
Diversified Financial Services 14,076,844 2.7
Finance 33,284,382 6.3
Health Care -- Medical Products 11,362,369 2.2
Insurance 23,295,046 4.4
Investment Bank/Brokerage 8,701,974 1.7
Education 2,611,375 0.5
Oil -- Integrated Domestic 5,970,667 1.1
Special Purpose Finance 17,517,865 3.3
Telecommunication Services 5,972,877 1.1
Telephone 6,065,611 1.2
U.S. Government & Federal Agencies 235,303,127 44.9
------------ --------
525,573,876 100.2
Liabilities in Excess of Cash and
Other Assets (1,027,458) (0.2)
------------ --------
Net Assets $524,546,418 100.0%
============ ========
</Table>
<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.
</Table>
10 MainStay Money Market Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(amortized cost $525,573,876) $525,573,876
Cash 73,531
Receivables:
Fund shares sold 1,109,170
Interest 825,880
Other assets 52,699
------------
Total assets 527,635,156
------------
LIABILITIES:
Payables:
Fund shares redeemed 2,252,915
Transfer agent 363,905
Manager 333,997
Custodian 10,105
Trustees 8,364
Accrued expenses 94,725
Dividend payable 24,727
------------
Total liabilities 3,088,738
------------
Net assets $524,546,418
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 1,973,113
Class B 2,959,578
Class C 312,728
Additional paid-in capital 519,299,432
Accumulated net realized gain on investments 1,567
------------
Net assets $524,546,418
============
CLASS A
Net assets applicable to outstanding shares $197,309,828
============
Shares of beneficial interest outstanding 197,311,274
============
Net asset value and offering price per share
outstanding $ 1.00
============
CLASS B
Net assets applicable to outstanding shares $295,963,312
============
Shares of beneficial interest outstanding 295,957,845
============
Net asset value and offering price per share
outstanding $ 1.00
============
CLASS C
Net assets applicable to outstanding shares $ 31,273,278
============
Shares of beneficial interest outstanding 31,272,780
============
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. www.mainstayfunds.com
11
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 6,917,259
-----------
EXPENSES:
Manager 2,670,028
Transfer agent 2,528,884
Shareholder communication 128,843
Registration 90,223
Recordkeeping 82,668
Professional 78,674
Custodian 57,125
Trustees 41,438
Miscellaneous 28,711
-----------
Total expenses before reimbursement 5,706,594
Expense reimbursement from Manager (1,786,551)
-----------
Net expenses 3,920,043
-----------
Net investment income 2,997,216
-----------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 1,567
-----------
Net increase in net assets resulting from
operations $ 2,998,783
===========
</Table>
12 MainStay Money Market Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
DECREASE IN NET ASSETS:
Operations:
Net investment
income $ 2,997,216 $ 2,934,382 $ 8,361,500
Net realized gain on
investments 1,567 6,339 26,655
-------------------------------------------------
Net increase in net
assets resulting
from operations 2,998,783 2,940,721 8,388,155
-------------------------------------------------
Dividends and
distributions to
shareholders:
From net investment income:
Class A (1,068,534) (1,046,256) (2,899,885)
Class B (1,761,806) (1,805,015) (5,265,499)
Class C (166,876) (83,111) (196,116)
From net realized gain on
investments:
Class A (3,186) -- (5,184)
Class B (6,353) -- (8,975)
Class C (182) -- (233)
-------------------------------------------------
Total dividends and
distributions to
shareholders (3,006,937) (2,934,382) (8,375,892)
-------------------------------------------------
Capital share
transactions:
Net proceeds from sales of shares:
Class A 363,227,648 662,753,783 1,088,735,323
Class B 247,003,398 302,617,702 471,236,622
Class C 69,985,669 87,517,076 55,296,456
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A 1,007,768 898,678 2,527,921
Class B 1,629,596 1,667,763 4,902,168
Class C 141,425 60,857 152,853
-------------------------------------------------
682,995,504 1,055,515,859 1,622,851,343
</Table>
<Table>
<Caption>
2004 2003* 2002
Cost of shares
redeemed:
Class A $ (340,901,067) $ (710,782,198) $(1,093,968,714)
Class B (306,879,438) (379,562,407) (486,584,778)
Class C (55,811,227) (81,828,038) (60,948,200)
-------------------------------------------------
(703,591,732) (1,172,172,643) (1,641,501,692)
Decrease in net
assets derived
from capital
share
transactions (20,596,228) (116,656,784) (18,650,349)
-------------------------------------------------
Net decrease in
net assets (20,604,382) (116,650,445) (18,638,086)
NET ASSETS:
Beginning of year $ 545,150,800 $ 661,801,245 $ 680,439,331
-------------------------------------------------
End of year $ 524,546,418 $ 545,150,800 $ 661,801,245
=================================================
</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. www.mainstayfunds.com
13
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Net investment income 0.01 0.00(b) 0.01 0.04 0.06 0.05
Net realized gain on investments 0.00(b) -- 0.00(b) -- -- --
-------- -------- -------- -------- -------- --------
Total from investment operations 0.01 0.00(b) 0.01 0.04 0.06 0.05
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.01) (0.00)(b) (0.01) (0.04) (0.06) (0.05)
From net realized gain on investments (0.00)(b) -- (0.00)(b) -- -- --
-------- -------- -------- -------- -------- --------
Total dividends and distributions (0.01) (0.00)(b) (0.01) (0.04) (0.06) (0.05)
-------- -------- -------- -------- -------- --------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
Total investment return 0.54% 0.44%(a) 1.22% 3.72% 5.87% 4.65%
Ratios (to average net assets)/
Supplemental Data:
Net investment income 0.54% 0.53%+ 1.20% 3.59% 5.71% 4.56%
Net expenses 0.70% 0.70%+ 0.70% 0.70% 0.70% 0.70%
Expenses (before reimbursement) 1.02% 1.01%+ 0.94% 0.90% 0.89% 0.85%
Net assets at end of period (in 000's) $197,310 $173,978 $221,106 $223,807 $167,720 $189,336
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------ ------
Net investment income 0.01 0.00(b) 0.01 0.04 0.06 0.05
Net realized gain on investments 0.00(b) -- 0.00(b) -- -- --
------- ------- ------- ------- ------ ------
Total from investment operations 0.01 0.00(b) 0.01 0.04 0.06 0.05
------- ------- ------- ------- ------ ------
Less dividends and distributions:
From net investment income (0.01) (0.00)(b) (0.01) (0.04) (0.06) (0.05)
From net realized gain on investments (0.00)(b) -- (0.00)(b) -- -- --
------- ------- ------- ------- ------ ------
Total dividends and distributions (0.01) (0.00)(b) (0.01) (0.04) (0.06) (0.05)
------- ------- ------- ------- ------ ------
Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ====== ======
Total investment return 0.54% 0.44%(a) 1.22% 3.72% 5.87% 4.65%
Ratios (to average net assets)/
Supplemental Data:
Net investment income 0.54% 0.53%+ 1.20% 3.59% 5.71% 4.56%
Net expenses 0.70% 0.70%+ 0.70% 0.70% 0.70% 0.70%
Expenses (before reimbursement) 1.02% 1.01%+ 0.94% 0.90% 0.89% 0.85%
Net assets at end of period (in 000's) $31,273 $16,958 $11,207 $16,706 $9,364 $2,154
</Table>
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
+ Annualized.
(a) Total return is not annualized.
(b) Less than one cent per share.
</Table>
14 MainStay Money Market Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
0.01 0.00(b) 0.01 0.04 0.06 0.05
0.00(b) -- 0.00(b) -- -- --
-------- -------- -------- -------- -------- --------
0.01 0.00(b) 0.01 0.04 0.06 0.05
-------- -------- -------- -------- -------- --------
(0.01) (0.00)(b) (0.01) (0.04) (0.06) (0.05)
(0.00)(b) -- (0.00)(b) -- -- --
-------- -------- -------- -------- -------- --------
(0.01) (0.00)(b) (0.01) (0.04) (0.06) (0.05)
-------- -------- -------- -------- -------- --------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
0.54% 0.44%(a) 1.22% 3.72% 5.87% 4.65%
0.54% 0.53%+ 1.20% 3.59% 5.71% 4.56%
0.70% 0.70%+ 0.70% 0.70% 0.70% 0.70%
1.02% 1.01%+ 0.94% 0.90% 0.89% 0.85%
$295,963 $354,215 $429,488 $439,927 $408,275 $458,391
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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. Pursuant to Rule 2a-7 securities are valued at their
amortized cost. The amortized cost method involves valuing a security at its
cost on the date of purchase and thereafter assuming a constant amortization to
maturity of the difference between such cost and the value on maturity date.
(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.
The following table discloses the current year reclassifications between
accumulated net realized gain and undistributed net investment income. Net
assets at October 31, 2004 were not affected.
<Table>
<Caption>
ACCUMULATED NET UNDISTRIBUTED NET
REALIZED GAIN INVESTMENT INCOME
$(9,721) $9,721
- ---------------------------------------
</Table>
(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.
16 MainStay Money Market Fund
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 the Fund's average
daily net assets of 0.50% up to $300 million, 0.45% on assets from $300 million
to $700 million, 0.40% on assets from $700 million to $1 billion and 0.35% on
assets in excess of $1 billion. The Manager has voluntarily agreed to assume the
expenses of the Fund to the extent that such expenses would exceed on an annual
basis 0.70% of the average daily net assets of the Fund. For the year ended
October 31, 2004 the Manager earned from the Fund $2,670,028 and reimbursed the
Fund $1,786,551.
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 year ended October 31, 2004, in the
amount of $783,723.
(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 for the year ended October 31, 2004
amounted to $2,528,884.
(D) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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 $16,837 for the year ended October 31,
2004.
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 $82,668 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
State Street Bank and Trust Company is custodian of cash and securities of the
Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated net realized gain on a tax
basis were as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
NET REALIZED UNREALIZED ACCUMULATED
GAIN APPRECIATION GAIN
$1,567 -- $1,567
- ------------------------------------------
</Table>
www.mainstayfunds.com 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. Accumulated
realized gains of $9,721 were paid to shareholders as ordinary income during the
year.
NOTE 6 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 363,227 247,003 69,986
- -----------------------------------------------------------
Shares issued in
reinvestment of dividends
and distributions 1,008 1,630 141
- -----------------------------------------------------------
364,235 248,633 70,127
- -----------------------------------------------------------
Shares redeemed (340,901) (306,879) (55,811)
- -----------------------------------------------------------
Net increase (decrease) 23,334 (58,246) 14,316
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1, THROUGH
OCTOBER 31, 2003*
CLASS A CLASS B CLASS C
Shares sold 662,754 302,618 87,517
- -----------------------------------------------------------
Shares issued in
reinvestment of dividends
and distributions 899 1,667 61
- -----------------------------------------------------------
663,653 304,285 87,578
- -----------------------------------------------------------
Shares redeemed (710,776) (379,565) (81,828)
- -----------------------------------------------------------
Net increase (decrease) (47,123) (75,280) 5,750
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 1,088,735 471,237 55,296
- -----------------------------------------------------------
Shares issued in
reinvestment of
dividends and
distributions 2,528 4,902 153
- -----------------------------------------------------------
1,091,263 476,139 55,449
- -----------------------------------------------------------
Shares redeemed (1,093,969) (486,585) (60,948)
- -----------------------------------------------------------
Net decrease (2,706) (10,446) (5,499)
- -----------------------------------------------------------
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 7 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 8 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
18 MainStay Money Market Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Money Market Fund (the "Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2004, and
the related statement of operations, statement of changes in net assets and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the period ended October 31, 2003 and the year ended December 31, 2002, and
the financial highlights for the periods presented through October 31, 2003,
were audited by other auditors, whose report dated December 18, 2003 expressed
an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Money Market Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
www.mainstayfunds.com 19
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
20 MainStay Money Market Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 21
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
22 MainStay Money Market Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
www.mainstayfunds.com 23
(MAINSTAY LOGO)
- ------------------------------------------------
GNot FDIC insured. G No bank guarantee. G May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com
(C) 2004 by NYLIFE Distributors LLC. All rights reserved.
The MainStay Funds
SEC File Number: 811-04550
NYLIM-A06350 RECYCLE.LOGO MSMM11-12/04
12
(MAINSTAY LOGO)
MAINSTAY
TAX FREE BOND FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay Tax Free Bond Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quar-ter of 2004, and according to
preliminary estimates
from the Bureau of Economic Analysis, gross domes-
tic product grew at a seasonally adjusted annual rate
of 3.9% in the third quarter of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 15
- ----------------------------------------------------
Notes to Financial Statements 20
Report of Independent Registered Public
Accounting Firm 24
- ----------------------------------------------------
Trustees and Officers 25
- ----------------------------------------------------
Proxy Voting Policies and Procedures 27
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 27
- ----------------------------------------------------
MainStay Funds 28
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 0.00% 4.98% 4.94%
Excluding sales charges 4.71 5.96 5.43
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY TAX FREE BOND TAX FREE BOND LEHMAN BROTHERS
FUND COMPOSITE INDEX MUNICIPAL BOND INDEX
---------------------- --------------- --------------------
10/31/94 9550.00 10000.00 10000.00
10675.00 11540.00 11484.00
11213.00 12198.00 12139.00
12148.00 13244.00 13169.00
12971.00 14338.00 14225.00
12131.00 13994.00 13973.00
13128.00 15257.00 15162.00
14480.00 16908.00 16755.00
15075.00 17925.00 17738.00
15472.00 18878.00 18646.00
10/31/04 16200.00 20034.00 19771.00
</Table>
<Table>
-- MainStay Tax Free Bond Fund -- Tax Free Bond
- - Lehman Brothers Municipal Bond Index
Composite Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -0.45% 5.37% 5.18%
Excluding sales charges 4.55 5.69 5.18
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY TAX FREE BOND TAX FREE BOND LEHMAN BROTHERS
FUND COMPOSITE INDEX MUNICIPAL BOND INDEX
---------------------- --------------- --------------------
10/31/94 10000.00 10000.00 10000.00
11152.00 11540.00 11484.00
11688.00 12198.00 12139.00
12639.00 13244.00 13169.00
13467.00 14338.00 14225.00
12564.00 13994.00 13973.00
13550.00 15257.00 15162.00
14909.00 16908.00 16755.00
15481.00 17925.00 17738.00
15849.00 18878.00 18646.00
10/31/04 16569.00 20034.00 19771.00
</Table>
<Table>
-- MainStay Tax Free Bond Fund -- Tax Free Bond
- - Lehman Brothers Municipal Bond Index
Composite Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 3.55% 5.69% 5.18%
Excluding sales charges 4.55 5.69 5.18
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY TAX FREE BOND TAX FREE BOND LEHMAN BROTHERS
FUND COMPOSITE INDEX MUNICIPAL BOND INDEX
---------------------- --------------- --------------------
10/31/94 10000.00 10000.00 10000.00
11152.00 11540.00 11484.00
11688.00 12198.00 12139.00
12639.00 13244.00 13169.00
13467.00 14338.00 14225.00
12564.00 13994.00 13973.00
13550.00 15257.00 15162.00
14909.00 16908.00 16755.00
15481.00 17925.00 17738.00
15849.00 18878.00 18646.00
10/31/04 16569.00 20034.00 19771.00
</Table>
<Table>
-- MainStay Tax Free Bond Fund -- Tax Free Bond
- - Lehman Brothers Municipal Bond Index
Composite Index
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Lehman Brothers(R) Municipal Bond Index(1) 6.03% 7.19% 7.05%
Tax Free Bond Composite Index(2) 6.12 7.44 7.20
Average Lipper general municipal debt
fund(3) 5.23 6.17 6.07
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 4.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 0.5%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 0.5%. From
inception (5/1/86) through 12/31/94 (for Class A, first offered 1/3/95) and
8/31/98 (for Class C, first offered 9/1/98), performance of Class A and C shares
includes the historical performance of Class B shares adjusted to reflect the
applicable sales charge (or CDSC) and fees and expenses for Class A and C
shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Tax Free Bond Fund
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.
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. The Tax Free Bond
Composite Index is considered to be the Fund's broad-based securities-market
index for comparison purposes. An investment cannot be made directly into an
index or a composite.
3. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital-gain distributions reinvested.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY TAX FREE BOND FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,037.80 $5.22 $1,019.90 $5.18
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,037.65 $6.50 $1,018.65 $6.44
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,037.65 $6.50 $1,018.65 $6.44
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Municipal Bonds 95.1%
Cumulative Preferred Stocks 3.3
Cash and Other Assets (Less Liabilities) 1.6
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. New York City General Obligation Series E
5.875%, due 8/1/13
2. Metropolitan Transportation Authority New York
Commuter Facilities Revenue Series A 5.625%,
due 7/1/27
3. Puerto Rico Public Buildings Authority Revenue
Guaranteed Gov't Facilities Series I 5.00%,
due 7/1/36
4. Charter Mac Equity Issuer Trust Series A-1
7.10%, due 6/30/09
5. New Jersey Economic Development Authority
Revenue Transportation Project Series A 5.875%,
due 5/1/14
6. Valdez, Alaska Marine Term Revenue ExxonMobil
Project 1.63%, due 12/1/29
7. North Carolina Municipal Power Agency N1 Catawba
Electric Revenue Series B 6.50%, due 1/1/20
8. Seattle Washington Municipal Light & Power
Revenue 6.00%, due 10/1/15
9. Los Angeles California Unified School District
5.75%, due 7/1/16
10. Clark County Nevada Bond Bank 5.50%, due 7/1/14
</Table>
6 MainStay Tax Free Bond Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers John Fitzgerald and Laurie Walters of
MacKay Shields LLC
WHAT MAJOR FACTORS INFLUENCED THE BOND MARKET DURING THE 12 MONTHS ENDED OCTOBER
31, 2004?
The Federal Reserve maintained the targeted federal funds rate at an
accommodative 1.00% through the first half of the Fund's fiscal year, but for
much of that period, economic signals were mixed. With slack in the labor
markets, slack in manufacturing capacity, and little pricing power in most
industries, it initially appeared that there was little risk of the economy
overheating. In April 2004, however, uniformly firm economic releases challenged
that view. The risk of deflation appeared to be waning, while trend-level growth
appeared sustainable. The consensus was that the Federal Reserve's cautionary
stance would be relatively short-lived. Consistent with market expectations, the
Federal Open Market Committee tightened monetary policy at its June 30, 2004,
meeting by raising the targeted federal funds rate to 1.25%. Another
25-basis-point rate hike followed in August, and yet another in September. These
moves brought the targeted federal funds rate to 1.75% at the end of October
2004.
HOW DID THESE FACTORS AFFECT MUNICIPAL BONDS?
Yields on shorter-maturity municipal bonds rose in lockstep with the rise in the
targeted federal funds rate, while yields on longer-maturity municipal bonds had
mixed performance. Two-year municipal yields rose from 1.3% to 1.9% during the
reporting period, and five-year municipal yields increased from 2.4% to 2.6%.
Yields on 10-year municipal bonds fell from 3.7% to 3.4%, and 30-year municipal
yields dropped from 4.8% to 4.6%.
WHAT EFFECT DID SUPPLY AND DEMAND HAVE ON THE MUNICIPAL BOND MARKET?
Municipal bond issuance totaled $301 million for the first 10 months of 2004--8%
less than the same period a year ago. Issuers had largely exhausted refunding
opportunities during previous waves of issuance, and new-money issuance tapered
off as municipal budgets rebounded from record deficits. At the same time,
demand was fragmented. Many institutional accounts increased their holdings,
finding value in municipal bonds versus other asset classes. Retail investors,
however, appeared reluctant to add to their municipal-bond holdings at
relatively low absolute yield levels. As a result, municipal bonds lagged U.S.
Treasury performance. Still, yields on long-term municipals ended the period at
96% of the yield on long-term Treasury bonds, an attractive valuation from an
historical perspective.
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests at least 80% of its net assets in U.S. tax-exempt
securities of any maturity that are, at the time of purchase, rated in one of
the top four categories (or in short-term tax-exempt securities rated in one of
the top three categories) by Moody's or S&P. Not more than 20% of the Fund's net
assets may be invested in unrated tax-exempt securities that we deem to be of
comparable quality. In implementing this strategy, we use a combined approach to
investing that analyzes economic trends and factors pertinent to particular
issuers and securities. We seek to anticipate changes in the general direction
of interest rates, the municipal market as a whole, and specific securities held
by the Fund. Based upon our analysis, we determine optimal duration strategy,
sector weightings, yield curve positioning, and security selection.
WHAT WAS THE FUND'S DURATION STRATEGY DURING THE REPORTING PERIOD?
Overall, the Fund's short-duration bias, held for much of the 12-month reporting
period, detracted from performance, as yields on long-term municipal bonds fell,
even though the Federal Reserve was moving to increase short-term interest
rates. For the first few months of the reporting period, we believed that the
Federal Reserve's accommodative policy would eventually spark job growth and
lead to higher interest rates. Instead, employment growth languished through
March 2004 and interest rates fell moderately. The Fund's short-duration bias
detracted during these months, but it helped when interest rates increased
during April and May. We lengthened the Fund's duration to a neutral position in
June, as 10-year municipal yields had risen to 4.25%, a 100 basis-point increase
from the March lows. We felt that the market was susceptible to retracing part
of this yield spike on any slowdown in economic growth. Yields subsequently did
reverse course, and we returned to a short-duration bias in August, as 10-year
municipal yields fell to 3.8% on inconclusive economic data. Ten-year municipal
yields continued to fall through the end of the 12-month reporting period. As a
result, our duration positioning hurt the Fund's relative results.
Funds that invest in bonds are subject to interest rate, credit, and inflation
risk and can lose principal value when interest rates rise. A portion of income
may be subject to state and local taxes or the alternative minimum tax. 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.
www.mainstayfunds.com 7
WHAT POSITIONING DECISIONS SIGNIFICANTLY AFFECTED THE FUND'S PERFORMANCE?
The Fund's overweighted position in tobacco settlement asset-backed securities
strengthened performance during the reporting period. Yield spreads in this
sector tightened in response to reduced litigation risk, investors' increased
appetite for higher-yielding credits, stabilized shipment trends, and moribund
issuance. The Fund's overweighted positions in the hospital and housing sectors
also added to the Fund's performance, as yield-starved investors gravitated
toward sectors that offered attractive yields relative to high-grade credits.
HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
We reduced the Fund's exposure to tobacco settlement bonds from 5.3% to 1.0% of
net assets, bringing the Fund from an overweighted to an underweighted position
as credit spreads began to reflect several positive developments. Although
litigation uncertainties remain, a preliminary ruling in favor of the New York
attorney general in a lawsuit filed by Freedom Holdings increased the likelihood
that the Master Settlement Agreement will not be found to have violated
antitrust law. The amount of litigation risk priced into these securities was
reduced by the Illinois Supreme Court's decision to hear the Miles litigation
appeal and a U.S. Supreme Court ruling limiting punitive damages.
We also reduced the Fund's holdings in zero-coupon securities from a 3.8%
weighting to a 0.5% weighting in December 2003 and January 2004, when interest
rates were still declining and yield spreads were tighter. This move proved to
be highly beneficial for the Fund, as yield spreads later widened and liquidity
dried up when interest rates rose in April and May of 2004.
ARE STATE BUDGET DEFICITS STILL A CONCERN?
The improving economy has led to a sharp turnaround in state finances. According
to the National Conference of State Legislators, state budgets for the 2005
fiscal year, which began in July 2004, now collectively have a projected deficit
of $36 billion, a 54% decrease from the previous fiscal year. Although there is
still work to be done, service and payroll reductions and higher taxes have
helped. The National Conference of State Legislators reports that more than half
of the states are recording increased corporate income taxes, and the
Rockefeller Institute of Government reported an 8% increase in sales-tax
collections in the quarter ended September 30, 2004, compared with the same
period last year.
WHAT DO YOU ANTICIPATE FOR THE ECONOMY AND INTEREST RATES GOING FORWARD?
The U.S. economy continues to post solid numbers, both on the demand and supply
sides, although recent data has been decelerating from earlier high
post-recession levels. We expect the sum total of the economic data will lead
the Federal Open Market Committee to raise the targeted federal funds rate to 2%
by year-end 2004 and to 2.5% by March 2005. As we move toward 2005, we feel that
a pickup in economic growth is a reasonable assumption given low interest rates,
lower marginal tax rates, low inflation, firm consumer spending patterns, and
improved corporate confidence.
HOW WILL YOU POSITION THE FUND GOING FORWARD?
Given our view of the economy and interest rates, as well as the need for
increased Treasury issuance to fund the federal budget imbalance, we intend to
maintain the Fund's shorter-than-benchmark duration for the near term. We
currently favor callable premium bonds in the 15-year maturity range that offer
attractive yields relative to their risks and that are expected to outperform in
a rising rate environment. Of course, we will continue to monitor key economic
data over the next few months to determine whether our defensive Fund posture is
justified.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8 MainStay Tax Free Bond Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM MUNICIPAL BONDS (88.2%)+
- ------------------------------------------------------------------------------------
ALABAMA (4.1%)
Huntsville Alabama Health Care Authority, Series A
5.75%, due 6/1/31 $ 2,500,000 $ 2,609,850
Phoenix County Alabama Industrial Development
Board Environmental Improvement Revenue
6.35%, due 5/15/35 (b) 3,000,000 3,153,750
University of Alabama-Birmingham University
Revenues
6.00%, due 10/1/16-10/1/17 5,995,000 6,834,240
----------------
12,597,840
----------------
ALASKA (1.0%)
Northern Tobacco Securitization Corp. Alaska
Tobacco Settlements Asset-Backed Bonds
6.50%, due 6/1/31 3,055,000 2,887,342
----------------
CALIFORNIA (5.9%)
California Infrastructure & Economic Development
Bank Revenue Kaiser Hospital Asset I-LLC Series
A
5.55%, due 8/1/31 2,000,000 2,086,860
California State Economic Recovery
Series A
5.00%, due 7/1/17 2,000,000 2,145,660
California State Various Purposes
5.25%, due 4/1/34 2,040,000 2,136,104
California Statewide Communities Development
Authority Certificates Partnership Catholic
Healthcare West
6.50%, due 7/1/20 2,000,000 2,229,080
Los Angeles California Unified School District
Series D
5.625%, due 7/1/17 (d) 2,000,000 2,299,440
V 5.75%, due 7/1/16 6,000,000 7,185,360
----------------
18,082,504
----------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COLORADO (0.2%)
Denver Colorado Health & Hospital Authority,
Healthcare Revenue Series A
6.00%, due 12/1/23 $ 500,000 $ 522,110
----------------
DELAWARE (0.8%)
Delaware State Economic Development Authority
Revenue Pollution Control Delmarva Power
Series C
4.90%, due 5/1/26 2,250,000 2,450,295
----------------
FLORIDA (5.2%)
Capital Trust Agency Florida Multi-family Revenue
Housing Shadow Run Project Series A
5.15%, due 11/1/10 2,190,000 2,377,157
Highlands County Florida Health Facilities
Authority Revenue Hospital Adventist Health
Systems D
5.375%, due 11/15/35 5,000,000 5,177,250
Meadow Pointe Community Development District of
Florida Capital Improvement Revenue Series B
5.25%, due 11/1/07 (f) 1,740,000 1,749,883
Oakstead Florida Community Development District
Capital Improvement Revenue
Series B
5.90%, due 5/1/07 1,215,000 1,225,242
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<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 $ 3,164,641
Tampa Florida Utility Tax & Special Revenue
Refunding
6.00%, due 10/1/08 1,500,000 1,699,455
Waterchase Community Development District of
Florida Capital Improvement Revenue Series B
5.90%, due 5/1/08 (f) 610,000 614,057
----------------
16,007,685
----------------
ILLINOIS (8.1%)
Chicago Illinois Board of Education
5.875%, due 12/1/14 (d) 3,130,000 3,640,722
Chicago Illinois Park District Harbor Facility
Revenue
5.50%, due 1/1/09 2,085,000 2,327,340
Chicago Illinois Water Revenue
6.50%, due 11/1/15 3,005,000 3,770,854
Illinois Health Facilities Authority Revenue OSF
Healthcare System
6.25%, due 11/15/29 4,000,000 4,225,040
Illinois Health Facilities Authority Revenue Lake
Forest Hospital
Series A
5.75%, due 7/1/29 2,000,000 2,079,600
Illinois State Sales Tax Revenue Second Series
5.50%, due 6/15/17 4,000,000 4,683,400
State of Illinois First Series 5.75%, due 6/1/14
(d) 3,450,000 3,964,395
----------------
24,691,351
----------------
LOUISIANA (1.4%)
State of Louisiana Offshore Terminal Authority,
Deepwater Port Revenue Series C
5.25%, due 9/1/16 3,970,000 4,270,370
----------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MASSACHUSETTS (2.7%)
Massachusetts Bay Transportation Authority Revenue
Assessment Series A
5.75%, due 7/1/18 (d) $ 2,290,000 $ 2,637,393
5.75%, due 7/1/18 210,000 237,857
Massachusetts State Health & Educational
Facilities Authority Revenue Partners Healthcare
Systems Series C
5.75%, due 7/1/32 5,000,000 5,466,150
----------------
8,341,400
----------------
MICHIGAN (1.9%)
South Redford Michigan School District
5.25%, due 5/1/16 5,500,000 5,874,110
----------------
NEBRASKA (0.3%)
Nebraska Investment Finance Authority, Single
Family Housing Revenue Series C
6.30%, due 9/1/28 (b) 915,000 949,248
----------------
NEVADA (2.6%)
VClark County Nevada Bond Bank
5.50%, due 7/1/14 5,460,000 6,129,014
Clark County Nevada Pollution Control Revenue
Nevada Power Co. Project Series B
6.60%, due 6/1/19 1,925,000 1,947,503
----------------
8,076,517
----------------
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
</Table>
10 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM MUNICIPAL BONDS (CONTINUED)
- ------------------------------------------------------------------------------------
NEW JERSEY (4.4%)
VNew Jersey Economic Development Authority Revenue
Transportation Project
Series A
5.875%, due 5/1/14 (d)(f) $ 8,000,000 $ 9,116,320
New Jersey State Trust Fund Transportation
Authority System
Series C
5.50%, due 12/15/17 3,810,000 4,463,644
----------------
13,579,964
----------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM MUNICIPAL BONDS (CONTINUED)
- ------------------------------------------------------------------------------------
NEW MEXICO (1.0%)
New Mexico Finance Authority State Transportation
Revenue Series Lien
Series A
5.00%, due 6/15/22 $ 2,750,000 $ 2,934,965
----------------
NEW YORK (16.9%)
Long Island Power Authority New York Electric
System Revenue
Series A
5.50%, due 12/1/12 (d) 2,470,000 2,877,352
VMetropolitan Transportation Authority New York
Commuter Facilities Revenue
Series A
5.625%, due 7/1/27 (d) 9,500,000 10,647,695
Metropolitan Transportation Authority of New York
Revenue
Series A
5.00%, due 11/15/25 1,500,000 1,566,075
Nassau County New York
Interim Finance Authority Sales Tax Secured
Series A
5.75%, due 11/15/12 (d) 1,000,000 1,159,960
VNew York City General Obligation
Series E
5.875%, due 8/1/13 (f) 10,000,000 10,728,700
New York State Dormitory Authority Lease Revenue
Court Facilities City of New York
5.75%, due 5/15/30 2,000,000 2,242,000
New York State Environmental Facilities Corp.
Pollution Control Revenue, State Water Revolving
Fund
Series A
7.50%, due 6/15/12 295,000 297,809
Series B
7.50%, due 3/15/11 35,000 35,164
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
NEW YORK (CONTINUED)
New York State Thruway Authority Highway & Bridge
Trust Fund Series B-1
5.75%, due 4/1/16 $ 2,500,000 $ 2,856,675
New York University Series A
6.00%, due 7/1/19 3,700,000 4,568,686
Series B
7.50%, due 5/15/11 2,870,000 3,365,936
7.50%, due 5/15/11 (d) 1,740,000 2,113,717
Series C
7.375%, due 5/15/10 4,720,000 5,442,915
Service Contract Revenue Local Highway & Bridge
Series B-1
5.75%, due 4/1/16 (d) 100,000 107,537
Triborough Bridge & Tunnel Authority New York
Revenues
5.00%, due 11/15/32 3,500,000 3,599,085
----------------
51,609,306
----------------
NORTH CAROLINA (5.3%)
North Carolina Eastern Municipal Power Agency
Systems Revenue Series A
5.50%, due 1/1/12 (d) 2,000,000 2,203,020
Series D
6.75%, due 1/1/26 2,000,000 2,229,640
North Carolina Housing Finance Agency Home
Ownership Series 13-A
4.25%, due 1/1/28 (b) 3,705,000 3,792,846
VNorth Carolina Municipal Power
Power Agency N1 Catawba Electric Revenue Series
B
6.50%, due 1/1/20 (f) 7,000,000 7,819,980
----------------
16,045,486
----------------
OHIO (0.8%)
Lorain County Ohio Hospital Revenue Catholic
Healthcare
5.375%, due 10/1/30 2,300,000 2,374,727
----------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
</Table>
12 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM MUNICIPAL BONDS (CONTINUED)
- ------------------------------------------------------------------------------------
PENNSYLVANIA (3.8%)
Allegheny County Port Authority Special Revenue
Transportation
6.25%, due 3/1/16 (d)(f) $ 3,750,000 $ 4,352,475
6.375%, due 3/1/15 (d)(f) 3,120,000 3,637,171
Philadelphia Pennsylvania School District
Series A
5.75%, due 2/1/11 3,000,000 3,459,990
----------------
11,449,636
----------------
PUERTO RICO (4.8%)
Puerto Rico Commonwealth Infrastructure Financing
Special Authority
Series A
5.50%, due 10/1/17 1,500,000 1,712,430
VPuerto Rico Public Buildings Authority Revenue
Guaranteed Gov't Facilities Series I
5.00%, due 7/1/36 10,000,000 10,165,800
Puerto Rico Electric Power Authority Revenue
Series HH
5.25%, due 7/1/29 2,750,000 2,918,107
----------------
14,796,337
----------------
SOUTH CAROLINA (2.4%)
Charleston County
South Carolina Public Improvement
6.125%, due 9/1/11 2,425,000 2,802,039
South Carolina Jobs Economic Development Authority
Revenue Bon Secours Health Systems Incorporated
5.625%, due 11/15/30 4,500,000 4,640,715
----------------
7,442,754
----------------
TEXAS (8.7%)
Austin Texas Water & Wastewater System Revenue
5.75%, due 5/15/15 2,900,000 3,287,875
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TEXAS (CONTINUED)
Dallas Fort Worth Texas International Airport
Facilities Improvement Revenue
Series A
6.00%, due 11/1/28 (b) $ 4,000,000 $ 4,394,080
El Paso Texas General Obligation
5.875%, due 8/15/11 1,000,000 1,093,510
Harris County Texas Health Facilities Development
Hospital Corp. Revenue Memorial Hermann
Healthcare
Series A
6.375%, due 6/1/29 1,500,000 1,648,350
Saint Luke's Episcopal Hospital
5.375%, due 2/15/26 3,500,000 3,636,815
Jefferson County Texas Health Facility Development
Corporation Texas Baptist Hospitals
5.20%, due 8/15/21 1,100,000 1,163,239
Leander Texas School District General Obligation
Bond
5.375%, due 8/15/19 1,000,000 1,089,590
San Antonio Texas
Electric & Gas
Series 2000
5.00%, due 2/1/17 (d)(f) 5,040,000 5,596,517
Tarrant Regional Water District Texas Water
Revenue
5.25%, due 3/1/17 2,500,000 2,754,050
Texas State College Student Loan
5.50%, due 8/1/10 (b) 1,760,000 1,960,675
----------------
26,624,701
----------------
WASHINGTON (2.4%)
VSeattle Washington Municipal Light & Power
Revenue
6.00%, due 10/1/15 (f) 6,500,000 7,300,410
----------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM MUNICIPAL BONDS (CONTINUED)
- ------------------------------------------------------------------------------------
WEST VIRGINIA (0.5%)
Kanawha Mercer Nicholas Counties West Virginia
Single Family Mortgage Revenue
(zero coupon), due 2/1/15 (d)(e) $ 2,230,000 $ 1,369,911
----------------
WISCONSIN (3.0%)
State of Wisconsin
Series C
6.00%, due 5/1/12 (d) 4,590,000 5,325,685
Series F
5.50%, due 5/1/13 (d) 1,030,000 1,188,589
State of Wisconsin Health & Education Facilities
Authority Revenue Wheaton Franciscan Services
5.75%, due 8/15/25 2,500,000 2,632,575
----------------
9,146,849
----------------
Total Long-Term Municipal Bonds (Cost
$247,432,423) 269,425,818
----------------
CUMULATIVE PREFERRED STOCK (3.3%)
- ------------------------------------------------------------------------------------
VCharter Mac Equity Issuer Trust
Series A-1
7.10%, due 6/30/09 (a) 9,000,000 10,180,710
----------------
Total Cumulative Preferred Stock
(Cost $9,019,370) 10,180,710
----------------
SHORT-TERM INVESTMENTS (6.9%) (F)
- ------------------------------------------------------------------------------------
ALASKA (2.6%)
VValdez, Alaska Marine Term Revenue ExxonMobil
Project
1.63%, due 12/1/29 (c) 8,000,000 8,000,000
----------------
NEW YORK (1.3%)
New York City Municipal Water Finance Authority
Water & Sewer
Series C
1.66%, due 6/15/33 (c) 2,320,000 2,320,000
New York, New York
Subseries A-7
1.66%, due 11/1/24 (c) 1,700,000 1,700,000
----------------
4,020,000
----------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
NORTH CAROLINA (1.2%)
University of North Carolina at Chapel Hill
Revenue Series A
1.69%, due 2/15/31 (c) $ 3,500,000 $ 3,500,000
----------------
PENNSYLVANIA (1.8%)
Delaware County Pennsylvania Industrial
Development Authority UTD Parcel Service Project
1.63%, due 12/1/15 (c) 5,500,000 5,500,000
----------------
Total Short-Term Investments
(Cost $21,020,000) 21,020,000 21,020,000
----------------
Total Investments
(Cost $277,471,793) (g) 98.4% 300,626,528(h)
Cash and Other Assets, Less Liabilities 1.6 4,927,862
------------- ----------------
Net Assets 100.0% $ 305,554,390
============= ================
<Caption>
CONTRACTS UNREALIZED
SHORT DEPRECIATION (I)
FUTURES CONTRACTS (-0.1%)
- ------------------------------------------------------------------------------------
United States Treasury Note December 2004 (10
Year) (150) (300,000)
----------------
Total Future Contracts
(Settlement Value $16,734,375) (300,000)
----------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
</Table>
14 MainStay Tax Free Bond Fund 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, 2004 (CONTINUED)
<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) Non-income producing security.
(f) Segregated, partially segregated or designated as
collateral for futures contracts.
(g) The cost stated also represents the aggregate cost for
federal income tax purposes.
(h) At October 31, 2004, net unrealized appreciation was
$23,154,735 based on cost for federal tax purposes. This
consisted of aggregate gross unrealized appreciation for
all investments on which there was an excess of market
value over cost of $23,319,174 and aggregate gross
unrealized depreciation for all investments on which
there was an excess of cost over market value of
$164,439.
(i) Represents the difference between the value of the con-
tracts at the time they were opened and the value at
October 31, 2004.
</Table>
14 MainStay Tax Free Bond Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $277,471,793) $300,626,528
Cash 42,604
Receivables:
Interest 5,023,743
Fund shares sold 820,340
Other assets 18,350
------------
Total assets 306,531,565
------------
LIABILITIES:
Payables:
Fund shares redeemed 260,714
NYLIFE Distributors 121,497
Manager 121,285
Variation margin on futures contracts 56,250
Transfer agent 49,874
Shareholder communications 24,599
Custodian 5,153
Trustees 4,095
Accrued expenses 40,665
Dividends payable 293,043
------------
Total liabilities 977,175
------------
Net assets $305,554,390
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 38,534
Class B 265,699
Class C 6,086
Additional paid-in capital 318,216,655
Distributions in excess of net investment
income (42,304)
Accumulated net realized loss on investments (35,785,015)
Net unrealized appreciation on investments 22,854,735
------------
Net assets $305,554,390
============
CLASS A
Net assets applicable to outstanding shares $ 37,936,776
============
Shares of beneficial interest outstanding 3,853,460
============
Net asset value per share outstanding $ 9.84
Maximum sales charge (4.50% of offering price) 0.47
------------
Maximum offering price per share outstanding $ 10.31
============
CLASS B
Net assets applicable to outstanding shares $261,625,821
============
Shares of beneficial interest outstanding 26,569,906
============
Net asset value and offering price per share
outstanding $ 9.85
============
CLASS C
Net assets applicable to outstanding shares $ 5,991,793
============
Shares of beneficial interest outstanding 608,543
============
Net asset value and offering price per share
outstanding $ 9.85
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Interest $15,875,638
-----------
EXPENSES:
Manager 1,944,180
Service -- Class A 97,824
Service -- Class B 697,158
Service -- Class C 15,093
Distribution -- Class B 697,158
Distribution -- Class C 15,093
Transfer agent 313,032
Shareholder communication 67,054
Professional 66,387
Recordkeeping 59,078
Registration 42,991
Custodian 32,291
Trustees 24,283
Miscellaneous 48,944
-----------
Total expenses before waiver 4,120,566
-----------
Expense waiver from Manager (115,751)
-----------
Net expenses 4,004,815
-----------
Net investment income 11,870,823
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions 1,919,944
Futures transactions (1,525,464)
-----------
Net realized gain on investments 394,480
-----------
Net change in unrealized appreciation
(depreciation) on investments:
Security transactions 2,337,118
Futures transactions (300,000)
-----------
Net unrealized gain on investments 2,037,118
-----------
Net realized and unrealized gain on investments 2,431,598
-----------
Net increase in net assets resulting from
operations $14,302,421
===========
</Table>
16 MainStay Tax Free Bond Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment income $ 11,870,823 $ 10,495,766 $ 14,525,418
Net realized gain (loss)
on investments 394,480 (8,645,255) 47,808
Net change in unrealized
appreciation
(depreciation) on
investments 2,037,118 (500,577) 14,860,165
------------------------------------------
Net increase in net
assets resulting from
operations 14,302,421 1,349,934 29,433,391
------------------------------------------
Dividends to shareholders:
From net investment income:
Class A (1,429,015) (1,594,540) (1,815,005)
Class B (9,458,140) (9,525,277) (12,523,554)
Class C (206,425) (196,992) (192,828)
------------------------------------------
Total dividends to
shareholders (11,093,580) (11,316,809) (14,531,387)
------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 8,876,885 54,870,922 89,117,501
Class B 7,514,402 12,874,397 23,954,794
Class C 2,753,234 2,895,325 12,490,411
Net asset value of shares issued to
shareholders in reinvestment of
dividends:
Class A 876,910 982,515 1,202,975
Class B 6,318,515 6,221,055 8,110,690
Class C 149,746 147,034 142,364
------------------------------------------
26,489,692 77,991,248 135,018,735
Cost of shares redeemed:
Class A (14,876,471) (57,989,235) (85,708,671)
Class B (52,455,683) (36,460,278) (36,553,847)
Class C (2,821,719) (4,600,575) (6,835,348)
------------------------------------------
(70,153,873) (99,050,088) (129,097,866)
Increase (decrease) in
net assets derived
from capital share
transactions (43,664,181) (21,058,840) 5,920,869
------------------------------------------
Net increase
(decrease) in net
assets (40,455,340) (31,025,715) 20,822,873
</Table>
<Table>
<Caption>
2004 2003* 2002
NET ASSETS:
Beginning of year 346,009,730 377,035,445 356,212,572
------------------------------------------
End of year $305,554,390 $346,009,730 $377,035,445
==========================================
Distributions in excess of
net investment income at
end of year $ (42,304) $ (821,043) $ --
==========================================
</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. www.mainstayfunds.com
17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH --------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of year $ 9.75 $ 10.02 $ 9.62 $ 9.68 $ 9.08 $ 10.20
------- ------- ------- ------- ------- -------
Net investment income 0.38 0.30 0.41 0.45 0.47 0.45
Net realized and unrealized gain (loss) on
investments 0.07 (0.25) 0.40 (0.06) 0.60 (1.12)
------- ------- ------- ------- ------- -------
Total from investment operations 0.45 0.05 0.81 0.39 1.07 (0.67)
------- ------- ------- ------- ------- -------
Less dividends:
From net investment income (0.36) (0.32) (0.41) (0.45) (0.47) (0.45)
------- ------- ------- ------- ------- -------
Net asset value at end of year $ 9.84 $ 9.75 $ 10.02 $ 9.62 $ 9.68 $ 9.08
======= ======= ======= ======= ======= =======
Total investment return (a) 4.71% 0.54%(b) 8.61% 4.04% 12.15% (6.75%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.88% 3.64%+ 4.19% 4.59% 5.05% 4.62%
Expenses 1.02% 1.04%+ 1.03% 1.03% 1.03% 1.02%
Expenses (before waiver) 1.06% -- -- -- -- --
Portfolio turnover rate 18% 34% 39% 57% 56% 101%
Net assets at end of period (in 000's) $37,936 $42,712 $46,131 $39,760 $22,495 $13,676
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of year $ 9.75 $10.02 $ 9.62 $ 9.68 $ 9.09 $10.21
------ ------ ------ ------ ------ ------
Net investment income 0.36 0.28 0.39 0.42 0.45 0.43
Net realized and unrealized gain (loss) on
investments 0.08 (0.25) 0.40 (0.06) 0.59 (1.12)
------ ------ ------ ------ ------ ------
Total from investment operations 0.44 0.03 0.79 0.36 1.04 (0.69)
------ ------ ------ ------ ------ ------
Less dividends:
From net investment income (0.34) (0.30) (0.39) (0.42) (0.45) (0.43)
------ ------ ------ ------ ------ ------
Net asset value at end of year $ 9.85 $ 9.75 $10.02 $ 9.62 $ 9.68 $ 9.09
====== ====== ====== ====== ====== ======
Total investment return (a) 4.55% 0.32%(b) 8.34% 3.79% 11.75% (6.96%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.63% 3.39%+ 3.94% 4.34% 4.80% 4.37%
Expenses 1.27% 1.29%+ 1.28% 1.28% 1.28% 1.27%
Expenses (before waiver) 1.31% -- -- -- -- --
Portfolio turnover rate 18% 34% 39% 57% 56% 101%
Net assets at end of period (in 000's) $5,992 $5,840 $7,555 $1,586 $1,130 $ 490
</Table>
<Table>
* The Fund changed its fiscal year end from December 31, to
October 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges.
(b) Total return is not annualized.
</Table>
18 MainStay Tax Free Bond Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 9.75 $ 10.02 $ 9.62 $ 9.68 $ 9.09 $ 10.21
-------- -------- -------- -------- -------- --------
0.36 0.28 0.39 0.42 0.45 0.43
0.08 (0.25) 0.40 (0.06) 0.59 (1.12)
-------- -------- -------- -------- -------- --------
0.44 0.03 0.79 0.36 1.04 (0.69)
-------- -------- -------- -------- -------- --------
(0.34) (0.30) (0.39) (0.42) (0.45) (0.43)
-------- -------- -------- -------- -------- --------
$ 9.85 $ 9.75 $ 10.02 $ 9.62 $ 9.68 $ 9.09
======== ======== ======== ======== ======== ========
4.55% 0.32%(b) 8.34% 3.79% 11.75% (6.96%)
3.63% 3.39%+ 3.94% 4.34% 4.80% 4.37%
1.27% 1.29%+ 1.28% 1.28% 1.28% 1.27%
1.31% -- -- -- -- --
18% 34% 39% 57% 56% 101%
$261,626 $297,458 $323,349 $314,867 $321,230 $358,417
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
19
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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 market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value. Reasons for
which securities may be valued in this manner include, but are not limited to,
trading for a security has been halted or suspended, a security has been
de-listed from a national exchange, or trading on a security's primary market is
temporarily closed at a time when under normal conditions it would be open. The
Fund did not hold securities at October 31, 2004, that were valued in such
manner.
(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.
20 MainStay Tax Free Bond Fund
(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.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated realized loss and
additional paid-in-capital arising from permanent differences; net assets at
October 31, 2004 are not affected.
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED ADDITIONAL
NET INVESTMENT NET REALIZED PAID-IN
INCOME LOSS CAPITAL
$1,496 $3,256,249 $(3,257,745)
</Table>
The reclassifications for the Fund are primarily due to a reclassification of
distributions and expiration of capital loss carryforward.
(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 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.
Through July 31, 2004, 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 on assets up to $1 billion
and 0.55% on assets in excess of $1 billion. Effective as of August 1, 2004,
NYLIM has voluntarily agreed to waive its management fee by 0.15% of the Fund's
average daily net assets. In addition, effective December 1, 2004, NYLIM has
voluntarily agreed to reimburse the expenses of the Fund to the extent that
operating expenses would exceed on an annualized basis 0.89%, 1.14% and 1.14% of
the average daily net assets of the Class A, Class B and Class C shares,
respectively. For the year ended October 31, 2004, the Manager earned from the
Fund $1,944,180 and waived $115,751 of its management fee.
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. 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"). 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
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $13,056 for the year ended
October 31, 2004. 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 $468, $103,635 and $3,255, respectively, for the year ended October
31, 2004.
(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 for the year ended October 31, 2004 amounted
to $313,032.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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 $9,481 for the year ended October 31,
2004.
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 $59,078 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
State Street Bank and Trust Company is custodian of cash and securities of the
Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
The Fund has maintained its year end of December 31 for federal income tax
purposes.
At October 31, 2004, the components of accumulated loss on a tax basis were as
follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED TOTAL
TAX EXEMPT CAPITAL AND UNREALIZED ACCUMULATED
INCOME OTHER LOSSES APPRECIATION LOSS
$250,739 $(36,085,014) $23,154,735 $(12,679,540)
</Table>
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $36,085,014 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)
2007 12,037
2008 15,453
2011 8,117
2012 478
---------------------------------------
$36,085
---------------------------------------
</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.
22 MainStay Tax Free Bond Fund
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $57,010 and $104,677, respectively.
NOTE 7 -- 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 year ended October 31, 2004.
NOTE 8 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 907 763 282
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends 89 645 15
- ---------------------------------------------------------
996 1,408 297
- ---------------------------------------------------------
Shares redeemed (1,524) (5,350) (287)
- ---------------------------------------------------------
Net increase (decrease) (528) (3,942) 10
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003*
CLASS A CLASS B CLASS C
Shares sold 5,511 1,289 291
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends 99 628 15
- ---------------------------------------------------------
5,610 1,917 306
- ---------------------------------------------------------
Shares redeemed (5,834) (3,683) (461)
- ---------------------------------------------------------
Net decrease (224) (1,766) (155)
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 9,102 2,432 1,271
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends 123 826 14
- ---------------------------------------------------------
9,225 3,258 1,285
- ---------------------------------------------------------
Shares redeemed (8,753) (3,721) (696)
- ---------------------------------------------------------
Net increase (decrease) 472 (463) 589
- ---------------------------------------------------------
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 9 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 10 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's report on the Trust's financial statements
for the period ended October 31, 2003 and year ended December 31, 2002 did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. During such
fiscal periods, and through the date of engagement of KPMG, there were no
disagreements between the Trust and the predecessor independent auditor on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which such disagreements, if not resolved to the
satisfaction of the predecessor independent auditor, would have caused them to
make reference to the subject matter of the disagreement in connection with
their reports on the financial statements for such periods.
www.mainstayfunds.com 23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Tax Free Bond Fund (the "Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2004, and
the related statement of operations, statement of changes in net assets and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the period ended October 31, 2003 and the year ended December 31, 2002, and
the financial highlights for the periods presented through October 31, 2003,
were audited by other auditors, whose report dated December 18, 2003 expressed
an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Tax Free Bond Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
24 MainStay Tax Free Bond Fund
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 25
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
26 MainStay Tax Free Bond Fund
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 27
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MacKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
28 MainStay Tax Free Bond Fund
This page intentionally left blank
This page intentionally left blank
(NY LIFE MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com
(C) 2004 by NYLIFE Distributors LLC. All rights reserved.
The MainStay Funds
SEC File Number: 811-04550
NYLIM-A06226 (RECYCLE LOGO) MST11-12/04
13
(MAINSTAY LOGO)
MAINSTAY
TOTAL RETURN FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay Total Return Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quarter of 2004, and according to
preliminary estimates from the Bureau of Economic Analysis, gross domestic
product grew at a seasonally adjusted annual rate of 3.9% in the third quarter
of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
- -s- GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 10
- ----------------------------------------------------
Financial Statements 22
- ----------------------------------------------------
Notes to Financial Statements 28
Report of Independent Registered Public
Accounting Firm 33
- ----------------------------------------------------
Trustees and Officers 34
- ----------------------------------------------------
Proxy Voting Policies and Procedures 36
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 36
- ----------------------------------------------------
Federal Income Tax Information 37
- ----------------------------------------------------
MainStay Funds 38
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -1.67% -3.08% 6.98%
Excluding sales charges 4.05 -1.98 7.59
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN GROWTH TOTAL RETURN CORE
RETURN FUND COMPOSITE INDEX COMPOSITE INDEX S&P 500 INDEX
-------------- ------------------- ----------------- -------------
10/31/94 9450 10000 10000 10000
11703 12370 12242 12644
13294 14283 14189 15691
15737 17390 17371 20729
18019 20702 20178 25288
21697 24843 23235 31779
23940 27119 25238 33715
18881 21423 22381 25319
16553 19389 20976 21494
18871 22320 24205 25965
10/31/04 19635 23286 26108 28411
</Table>
<Table>
-- MainStay Total Return Fund - - Total Return Core Composite Index
-- Total Return Growth Composite Index -- S&P 500 Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -1.73% -2.99% 6.88%
Excluding sales charges 3.27 -2.69 6.88
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN GROWTH TOTAL RETURN CORE
RETURN FUND COMPOSITE INDEX COMPOSITE INDEX S&P 500 INDEX
-------------- ------------------- ----------------- -------------
10/31/94 10000 10000 10000 10000
12314 12370 12242 12644
13927 14283 14189 15691
16413 17390 17371 20729
18642 20702 20178 25288
22286 24843 23235 31779
24435 27119 25238 33715
19136 21423 22381 25319
16639 19389 20976 21494
18832 22320 24205 25965
10/31/04 19447 23286 26108 28411
</Table>
<Table>
-- MainStay Total Return Fund - - Total Return Core Composite Index
-- Total Return Growth Composite Index -- S&P 500 Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 2.27% -2.69% 6.88%
Excluding sales charges 3.27 -2.69 6.88
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN GROWTH TOTAL RETURN CORE
RETURN FUND COMPOSITE INDEX COMPOSITE INDEX S&P 500 INDEX
-------------- ------------------- ----------------- -------------
10/31/94 10000 10000 10000 10000
12314 12370 12242 12644
13927 14283 14189 15691
16413 17390 17371 20729
18642 20702 20178 25288
22286 24843 23235 31779
24435 27119 25238 33715
19136 21423 22381 25319
16639 19389 20976 21494
18832 22320 24205 25965
10/31/04 19447 23286 26108 28411
</Table>
<Table>
-- MainStay Total Return Fund - - Total Return Core Composite Index
-- Total Return Growth Composite Index -- S&P 500 Index
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee, and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. From inception (12/19/97)
through 12/31/94 (for Class A, first offered 1/3/95), 8/31/98 (for Class C,
first offered 9/1/98), and 12/31/03 (for Class I, R1, and R2, first offered
1/2/04), performance of Class A, C, I, R1, and R2 shares includes the historical
performance of Class B shares adjusted to reflect the applicable sales charge
(or CDSC) and fees and expenses for Class A, C, I, R1, and R2 shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Total Return Fund
CLASS I SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
4.28% -1.71% 7.95%
</Table>
(LINE GRAPH FOR CLASS I SHARES IN $)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN GROWTH TOTAL RETURN CORE
RETURN FUND COMPOSITE INDEX COMPOSITE INDEX S&P 500 INDEX
-------------- ------------------- ----------------- -------------
10/31/94 10000 10000 10000 10000
12433 12370 12242 12644
14204 14283 14189 15691
16909 17390 17371 20729
19404 20702 20178 25288
23427 24843 23235 31779
25941 27119 25238 33715
20521 21423 22381 25319
18016 19389 20976 21494
20607 22320 24205 25965
10/31/04 21488 23286 26108 28411
</Table>
<Table>
-- MainStay Total Return Fund - - Total Return Core Composite Index
-- Total Return Growth Composite Index -- S&P 500 Index
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Total Return Growth Composite
Index(1) 4.33% -1.29% 8.82%
Total Return Core Composite Index(2) 7.86 2.36 10.07
S&P 500(R) Index(3) 9.42 -2.22 11.01
Average Lipper balanced fund(4) 7.03 2.01 8.36
</Table>
1. The Total Return Growth 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 includes fixed-rate debt issues rated
investment grade or higher by Moody's, S&P, or Fitch. All issues must have at
least one year left to maturity and have an outstanding par value of at least
$100 million. The Index is comprised of the Lehman Brothers(R)
Government/Corporate, the Mortgage-Back Securities, and the Asset-Backed
Securities Indices. Results assume that all income and capital gains are
reinvested in the index that produced them. An investment cannot be made
directly into an index.
2. The Total Return Core Composite Index is comprised of the Russell 1000(R)
Index and the Lehman Brothers(R) Aggregate Bond Index weighted 60%/40%,
respectively. 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. See footnote 1 for more information about the Lehman
Brothers(R) Aggregate Bond Index. Results assume that all income and capital
gains are reinvested in the index that produced them. The Total Return Core
Composite Index is considered to be the Fund's broad-based securities-market
index for comparison purposes. An investment cannot be made directly into an
index.
3. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
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.
4. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY TOTAL RETURN FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,012.00 $ 6.57 $1,018.50 $ 6.60
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,008.25 $10.35 $1,014.75 $10.38
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,008.25 $10.35 $1,014.75 $10.38
- ------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,013.30 $ 4.25 $1,020.80 $ 4.27
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
<Table>
U.S. Common Stocks 64.9%
U.S. Government & Federal Agencies 14.5
Short-Term Investments (collateral from securities lending
is 3.8%) 13.6
U.S. Corporate Bonds 9.9
Asset- and Mortgage-Backed Securities 2.0
U.S. Treasury Notes and Bonds 1.7
Foreign Corporate Bonds 1.4
Convertible Preferred Stocks 0.7
Foreign Government Bonds 0.4
Yankee Bonds 0.3
Municipal Bond 0.1
Preferred Stock 0.1
Liabilities in Excess of Cash and Other Assets -9.6
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Federal National Mortgage Association 6.00%, due
12/13/34 TBA
2. Federal National Mortgage Association 5.50%, due
11/18/19 TBA
3. Citigroup, Inc.
4. Transocean, Inc.
5. Pride International, Inc.
6. Bank of America Corp.
7. Federal National Mortgage Association 5.50%, due
12/13/34 TBA
8. BMC Software, Inc.
9. Rowan Cos., Inc.
10. International Business Machines Corp.
</Table>
6 MainStay Total Return Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Rudolph C. Carryl, Gary Goodenough,
Christopher Harms, Richard A. Rosen, and Edmund C. Spelman of MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund invests a minimum of 30% of its assets in U.S. equity securities and a
minimum of 30% in U.S. debt securities. In implementing this investment
strategy, about half of the equity portion of the Fund's portfolio is invested
in growth-oriented stocks and about half in stocks that the Fund believes to be
undervalued. The bond portion of the Fund's portfolio may purchase high-yield
bonds and other debt securities rated below investment grade that we believe may
provide capital appreciation in addition to income. Both the stock and bond
portions of the Fund's portfolio may take a flexible approach by investing in a
variety of securities, industries, and issuers.
HOW HAS THE FUND'S PORTFOLIO-MANAGEMENT MANDATE CHANGED?
As of January 1, 2004, Richard A. Rosen joined the Fund's portfolio-management
team. From January through April 2004, the equity portion of the Fund's
portfolio gradually shifted to include both growth and value stocks. As outlined
in the prospectus supplement dated May 17, 2004, the Fund's ability to invest in
high-yield securities has been enhanced.
WHAT FACTORS AFFECTED THE STOCK MARKET DURING THE 12 MONTHS ENDED OCTOBER 31,
2004?
Arguably the biggest factor was the 78% rise in the price of crude oil, since it
stoked inflation fears and could put a damper on consumer spending. Middle
Eastern tensions, news from Iraq, and concerns about another domestic terrorist
attack all had an impact on the markets. Equities finished the reporting period
on a strong note as the national elections approached, energy prices eased
somewhat, and investors appeared to view valuations more positively.
WHICH SECTORS WERE STRONG PERFORMERS FOR THE EQUITY PORTION OF THE PORTFOLIO?
The equity portion of the portfolio includes growth and value components. The
value component was added to the Fund's portfolio beginning in January 2004. In
the growth component, overweighted positions in energy and industrials and good
stock selection in these sectors helped performance. Security selection in the
consumer staples and consumer discretionary sectors and an underweighted
position in the information technology sector detracted from performance. In the
value component of the Fund's portfolio, mediocre individual-stock performance
in the materials, financials, and health care sectors offset positive
contributions from holdings in energy and information technology.
WHICH INDIVIDUAL STOCKS WERE STRONG PERFORMERS?
Among growth stocks, Symantec, UnitedHealth Group, Danaher, Illinois Tool Works,
and Harley-Davidson all made substantial positive contributions to performance.
In the value component of the equity portion of the portfolio, we saw strong
performance from Burlington Northern Santa Fe, Boeing, and Coopers Industries,
and we reduced these positions as they approached our price targets. CVS
advanced on strong sales trends and the acquisition of Eckerd stores in Texas
and Florida. In the energy sector, we saw strong results from ConocoPhillips,
Transocean, Kerr-McGee, and Diamond Offshore Drilling. We reduced the Fund's
positions in Kerr-McGee and Diamond Offshore Drilling as they approached our
price targets. Other value-oriented stocks that did well in the Fund included
Computer Sciences, Motorola, and Sprint.
WHICH STOCKS PROVIDED POOR PERFORMANCE?
On the growth side, VERITAS Software, New York Community Bancorp, Intel, Applied
Materials, and Texas Instruments all detracted from performance. On the value
side, Marsh & McLennan, St. Paul Travelers, Merck, Pfizer, HCA, and Bowater all
hurt performance. Truck manufacturer Navistar International also took a toll on
performance.
WERE THERE SIGNIFICANT PURCHASES IN THE EQUITY PORTION OF THE PORTFOLIO?
On the growth side, we purchased Harmon International in October for the
company's improving sales and earnings growth and market penetration. Other
significant purchases included L-3 Communications Holdings, NIKE, Best Buy, and
Capital One Financial. All of these stocks had a positive impact on the Fund's
performance for the portion of the reporting period they were held in the Fund.
The entire value component of the equity portion of the portfolio was initiated
during the reporting period.
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 Fund's net asset value and may result in a
loss to the Fund. Funds that invest in bonds are subject to credit, inflation,
and interest-rate risk and can lose principal value when interest rates rise.
www.mainstayfunds.com 7
WHICH EQUITY POSITIONS DID YOU SELL OR REDUCE DURING THE REPORTING PERIOD?
In the growth component, we began selling Marsh & McLennan in December of 2003
because of slowing growth and losses in the company's Putnam mutual fund unit.
When the New York attorney general began an investigation of the company, the
sale proved timely. We sold the Fund's position in New York Community Bancorp in
October. Other growth-oriented stock sales included Clear Channel
Communications, Coca-Cola, Forrest Laboratories, and Fifth Third Bancorp. In the
value component, we reduced several positions that showed weak performance,
including Marsh & McLennan, Pfizer, HCA, and Navistar International. Other
holdings--such as Burlington Northern Santa Fe, Boeing, Cooper Industries,
ConocoPhillips, Diamond Offshore Drilling, and Kerr-McGee--were reduced as they
advanced and approached our price targets.
HOW WAS THE EQUITY PORTION OF THE PORTFOLIO POSITIONED AS OF OCTOBER 31, 2004?
At the end of October, the growth-equity component of the Fund's portfolio was
overweighted relative to the Russell 1000(R) Growth Index(1) in the consumer
discretionary, energy, industrials, and materials sectors. The growth component
was underweighted relative to the Russell 1000(R) Growth Index in consumer
staples, financials, health care, and information technology, and it held no
positions in the telecommunications services or utilities sectors. At the end of
the reporting period, the value-equity component of the Fund's portfolio was
overweighted in the consumer staples, energy, health care, and materials
sectors, and underweighted in the consumer discretionary, financials, and
utilities sectors.
WHAT MAJOR FACTORS AFFECTED THE BOND MARKET DURING THE 12 MONTHS ENDED OCTOBER
31, 2004?
From November 2003 through early April 2004, the Federal Reserve's accommodative
1.00% target for the federal funds rate kept the market relatively benign.
Positive economic reports in April, however, suggested that the Federal Open
Market Committee might move to tighten the money supply. In line with
expectations, the Federal Open Market Committee raised the targeted federal
funds rate by 25 basis points on each of three occasions--in June, August, and
September. This raised the targeted federal funds rate to 1.75%. During the
reporting period, inflation remained subdued, despite high oil prices. Default
rates declined, which helped attract investors to higher-yielding instruments.
Several foreign central banks purchased large blocks of U.S. Treasuries in an
effort to keep their currencies from rising aggressively against the dollar.
HOW DID THE BOND PORTION OF THE FUND'S PORTFOLIO PERFORM DURING THE REPORTING
PERIOD?
Quite well. The bond portion of the portfolio outperformed the Lehman
Brothers(R) Aggregate Bond Index(2) (the bond component of the Fund's composite
benchmarks) by a substantial margin. Much of the strong performance came from
asset allocation. As of October 31, 2004, the bond portion of the Fund held 5%
of its assets in Treasuries, 13% in agency debentures, 26% in investment-grade
corporates, 14% in high-yield corporates, 33% in residential mortgage-backed
securities, 3% in commercial mortgage-backed securities, 4% in asset-backed
securities, and 2% in money-market instruments. Relative to the Lehman
Brothers(R) Aggregate Bond Index, the Fund was heavily overweighted in
high-yield corporates and heavily underweighted in Treasuries.
HOW HAVE YOU POSITIONED THE BOND PORTION OF THE FUND?
The portfolio is positioned to reflect our forward-looking views. We are seeking
the yield advantages of moderate- and lower-quality corporate bonds relative to
Treasuries and agency securities. Within residential mortgage-backed securities,
we favor lower-coupon securities and 15-year loan terms for their less-volatile
cash flow profiles. Among asset-backed securities, we prefer
non-mortgage-related collateral such as auto loans, credit-card receivables, and
electric-utility tariffs. We are cautious about agency debentures in light of
their small yield advantages and potential vulnerability to additional
regulation. During the reporting period, we took profits on 3% of the Fund's
high-yield position and rotated the proceeds into higher-quality commercial
mortgage-backed securities and corporate bonds.
HOW DID YOU POSITION THE BOND PORTION OF THE FUND'S PORTFOLIO IN TERMS OF
DURATION?
For much of the reporting period, the bond portion of the Fund's duration was
slightly shorter than that of the Lehman Brothers(R) Aggregate Bond Index. This
seemed reasonable since interest rates were expected to rise, but it worked
against the Fund when foreign central banks began purchasing large blocks of
1. See footnote 1 on page 5 for more information on the Russell 1000(R) Growth
Index.
2. See footnote 1 on page 5 for more information on the Lehman Brothers(R)
Aggregate Bond Index.
8 MainStay Total Return Fund
U.S. Treasuries to protect their local economies against unfavorable currency
movements.
DID THE RESHAPING OF THE YIELD CURVE AFFECT THE PERFORMANCE OF THE BOND PORTION
OF THE FUND'S PORTFOLIO?
Not significantly. Although the yield curve flattened slightly over the course
of the reporting period, we maintained a relatively neutral yield-curve posture,
so the reshaping had a minimal impact.
WHICH BOND SECTORS PROVIDED THE GREATEST CONTRIBUTIONS TO THE FUND'S RETURN?
The bond portion of the Fund's portfolio was able to harvest strong excess
returns from prudent risk-taking and savvy issue selection in triple-B rated
corporates, high-yield corporates, and emerging-market credits. During the
period, the Fund's positions in credit-related product contributed the majority
of the excess return in the bond portion of the portfolio. The balance of the
excess return came from mortgage-backed and asset-backed securities, which
showed strong performance while Treasury yields remained range bound.
WHAT DO YOU SEE GOING FORWARD?
With the uncertainty of the presidential election now behind us, we expect
investors to refocus their attention on company and market fundamentals, which
on balance remain fairly strong. Although high energy prices and the threat of
terrorism remain risk factors, we believe that the combination of a low
interest-rate environment, moderate economic growth, and strengthening
employment should help to drive stocks higher in the coming year. From a bond
perspective, we expect that the Federal Open Market Committee will continue to
raise the targeted federal funds rate well into the coming year and that
additional Treasury issuance will be needed to fund the federal budget
imbalance. We may maintain a short-of-neutral duration in the bond portion of
the Fund's portfolio. If our outlook changes, it would likely be reflected in
our duration positioning. We will likely maintain a generous exposure to
corporate bonds and securitized product as long as we see robust demand for
products that offer yield advantages relative to Treasuries.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (30.3%)+
ASSET-BACKED SECURITIES (1.3%)
- --------------------------------------------------------------------------------
CONSUMER FINANCE (0.7%)
BMW Vehicle Owner Trust
Series A3 Class 2003-A
1.94%, due 2/25/07 $ 1,389,392 $ 1,385,997
Harley-Davidson Motorcycle Trust
Series 2004-1 Class A2
2.53%, due 11/15/11 2,675,000 2,647,520
Volkswagen Auto Loan Enhanced Trust
Series 2003-2 Class A3
2.27%, due 10/22/07 2,415,000 2,405,742
------------
6,439,259
------------
CONSUMER LOANS (0.2%)
Atlantic City Electric Transition Funding LLC
Series 2002-1 Class A4
5.55%, due 10/20/23 1,600,000 1,702,603
------------
DIVERSIFIED FINANCIAL SERVICES (0.1%)
Capital One Master Trust
Series 2001-5 Class A
5.30%, due 6/15/09 910,000 948,104
------------
MULTI-UTILITIES & UNREGULATED POWER (0.2%)
Public Service of New Hampshire Funding LLC
Pass-Through Certificates
Series 2002-1 Class A
4.58%, due 2/1/08 1,323,637 1,360,252
------------
THRIFTS & MORTGAGE FINANCE (0.1%)
Vanderbilt Mortgage Finance
Series 1999-B Class 1A4
6.545%, due 4/7/18 474,391 484,559
------------
Total Asset-Backed Securities
(Cost $10,855,593) 10,934,777
------------
CONVERTIBLE BONDS (0.0%) (b)
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES (0.0%) (b)
Laboratory Corp. of America Holdings
(zero coupon), due 9/11/21 150,000 112,688
Lincare Holdings, Inc.
3.00%, due 6/15/33 160,000 165,400
------------
Total Convertible Bonds
(Cost $273,058) 278,088
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (9.9%)
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.2%)
General Dynamics Corp.
4.50%, due 8/15/10 (g) $ 1,030,000 $ 1,059,478
Sequa Corp. Series B
8.875%, due 4/1/08 635,000 693,738
------------
1,753,216
------------
AIRLINES (0.1%)
Delta Air Lines, Inc.
8.30%, due 12/15/29 660,000 237,600
9.75%, due 5/15/21 125,000 45,000
10.00%, due 8/15/08 25,000 13,125
10.375%, due 12/15/22 100,000 37,000
Southwest Airlines Co.
5.25%, due 10/1/14 465,000 466,741
------------
799,466
------------
AUTO COMPONENTS (0.3%)
ArvinMeritor, Inc.
6.625%, due 6/15/07 195,000 200,850
Collins & Aikman Products
12.875%, due 8/24/12 (c)(g) 290,000 250,850
Dana Corp.
7.00%, due 3/1/29 290,000 284,200
9.00%, due 8/15/11 340,000 404,600
Goodyear Tire & Rubber Co. (The)
6.375%, due 3/15/08 234,000 226,980
2nd Lien Note
11.00%, due 3/1/11 (c)(k) 360,000 403,200
Visteon Corp.
7.00%, due 3/10/14 120,000 112,800
8.25%, due 8/1/10 (g) 560,000 582,400
------------
2,465,880
------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Funds 10 largest holdings, excluding short-term investments. May be
subject to change daily.
</Table>
10 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- --------------------------------------------------------------------------------
AUTOMOBILES (0.1%)
DaimlerChrysler North America Holdings, Inc.
6.50%, due 11/15/13 $ 1,170,000 $ 1,277,625
General Motors Corp.
8.375%, due 7/15/33 247,000 257,025
------------
1,534,650
------------
CAPITAL MARKETS (0.5%)
Bear Stearns Cos., Inc. (The)
4.00%, due 1/31/08 1,080,000 1,097,537
Goldman Sachs Group, Inc. (The)
6.345%, due 2/15/34 1,340,000 1,365,671
LaBranche & Co., Inc.
11.00%, due 5/15/12 (c) 435,000 446,419
Morgan Stanley
3.625%, due 4/1/08 1,740,000 1,749,627
4.75%, due 4/1/14 255,000 249,806
------------
4,909,060
------------
CHEMICALS (0.4%)
Crompton Corp.
9.875%, due 8/1/12 (c) 410,000 452,025
Equistar Chemicals, L.P.
7.55%, due 2/15/26 285,000 272,175
FMC Corp.
10.25%, due 11/1/09 380,000 440,800
Lyondell Chemical Co.
9.50%, due 12/15/08 255,000 277,950
10.50%, due 6/1/13 260,000 306,800
Millennium America, Inc.
7.625%, due 11/15/26 1,065,000 1,022,400
Terra Capital, Inc.
12.875%, due 10/15/08 390,000 483,600
------------
3,255,750
------------
COMMERCIAL BANKS (0.3%)
BankBoston NA
7.00%, due 9/15/07 1,140,000 1,259,544
PNC Funding Corp.
7.50%, due 11/1/09 1,127,000 1,302,811
------------
2,562,355
------------
COMMERCIAL SERVICES & SUPPLIES (0.0%) (B)
Geo Sub Corp.
11.00%, due 5/15/12 (c) 265,000 254,400
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONSUMER FINANCE (0.3%)
Ford Motor Credit Co.
7.00%, due 10/1/13 (g) $ 1,160,000 $ 1,225,023
General Motors Acceptance Corp.
6.875%, due 9/15/11 630,000 655,820
6.875%, due 8/28/12 265,000 275,878
MBNA Corp.
6.25%, due 1/17/07 555,000 589,714
------------
2,746,435
------------
CONTAINERS & PACKAGING (0.3%)
Owens-Brockway Glass Container, Inc.
7.75%, due 5/15/11 430,000 467,625
8.875%, due 2/15/09 340,000 373,150
Owens-Illinois, Inc.
8.10%, due 5/15/07 260,000 275,600
Rock-Tenn Co.
8.20%, due 8/15/11 1,059,000 1,252,289
Tekni-Plex, Inc.
8.75%, due 11/15/13 (c) 55,000 52,456
Series B
12.75%, due 6/15/10 40,000 30,000
------------
2,451,120
------------
DIVERSIFIED FINANCIAL SERVICES (0.5%)
Citigroup, Inc.
5.00%, due 9/15/14 (c) 1,585,000 1,608,135
FGIC Corp.
6.00%, due 1/15/34 (c) 1,180,000 1,230,942
J Paul Getty Trust Series 2003
5.875%, due 10/1/33 755,000 791,292
Rainbow National Services LLC
8.75%, due 9/1/12 (c) 485,000 518,950
------------
4,149,319
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.6%)
Citizens Communications Co.
9.00%, due 8/15/31 500,000 533,750
MCI, Inc.
5.908%, due 5/1/07 401,000 399,998
6.688%, due 5/1/09 401,000 395,486
7.735%, due 5/1/14 343,000 330,566
Qwest Capital Funding, Inc.
7.75%, due 8/15/06 320,000 328,800
Qwest Communications International, Inc.
7.25%, due 2/15/11 (c) 565,000 560,763
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- --------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES (CONTINUED)
Qwest Corp.
5.625%, due 11/15/08 $ 20,000 $ 20,000
7.125%, due 11/15/43 100,000 83,000
7.25%, due 9/15/25 190,000 173,850
9.125%, due 3/15/12 (c) 140,000 157,850
SBC Communications, Inc.
4.125%, due 9/15/09 615,000 618,074
Sprint Capital Corp.
8.75%, due 3/15/32 1,070,000 1,402,034
------------
5,004,171
------------
ELECTRIC UTILITIES (0.3%)
Cedar Brakes II LLC
9.875%, due 9/1/13 475,308 539,474
Consumers Energy Co.
6.25%, due 9/15/06 460,000 485,685
PPL Energy Supply LLC
5.40%, due 8/15/14 535,000 548,483
Southern California Edison Co.
8.00%, due 2/15/07 390,000 431,248
Tenaska Virginia Partners L.P.
6.119%, due 3/30/24 (c) 606,372 641,857
------------
2,646,747
------------
ELECTRICAL EQUIPMENT (0.1%)
Emerson Electric Co.
6.00%, due 8/15/32 970,000 1,040,002
------------
ENERGY EQUIPMENT & SERVICES (0.4%)
Entergy-Koch, L.P.
3.65%, due 8/20/06 (c) 3,330,000 3,383,473
Pride International, Inc.
7.375%, due 7/15/14 (c) 210,000 236,250
------------
3,619,723
------------
FOOD & STAPLES RETAILING (0.2%)
CVS Corp.
5.789%, due 1/10/26 (c) 1,566,791 1,632,126
------------
FOOD PRODUCTS (0.2%)
Cargill, Inc.
5.00%, due 11/15/13 (c) 1,630,000 1,668,039
Smithfield Foods, Inc.
7.625%, due 2/15/08 (g) 305,000 325,588
------------
1,993,627
------------
HEALTH CARE EQUIPMENT & SUPPLIES (0.0%) (B)
Fisher Scientific International, Inc.
6.75%, due 8/15/14 (c) 195,000 208,650
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
HEALTH CARE PROVIDERS & SERVICES (0.4%)
AmeriPath, Inc.
10.50%, due 4/1/13 $ 275,000 $ 269,500
Anthem, Inc.
3.50%, due 9/1/07 425,000 422,102
Caremark Rx, Inc.
7.375%, due 10/1/06 640,000 685,428
HCA, Inc.
7.50%, due 11/15/95 330,000 307,837
8.36%, due 4/15/24 210,000 225,840
8.75%, due 9/1/10 335,000 386,282
Manor Care, Inc.
6.25%, due 5/1/13 420,000 450,567
8.00%, due 3/1/08 357,000 404,052
Medco Health Solutions, Inc.
7.25%, due 8/15/13 375,000 416,599
Service Corp. International
6.50%, due 3/15/08 70,000 73,500
7.20%, due 6/1/06 220,000 229,900
------------
3,871,607
------------
HOTELS, RESTAURANTS & LEISURE (0.3%)
Caesars Entertainment, Inc.
8.125%, due 5/15/11 210,000 245,438
9.375%, due 2/15/07 925,000 1,033,688
Chumash Casino & Resort Enterprise
9.00%, due 7/15/10 (c)(f) 215,000 240,262
ITT Corp.
7.375%, due 11/15/15 460,000 519,800
Mandalay Resort Group
7.00%, due 11/15/36 200,000 212,000
MGM Mirage, Inc.
6.75%, due 9/1/12 (c) 585,000 620,100
------------
2,871,288
------------
HOUSEHOLD PRODUCTS (0.1%)
Procter & Gamble Co. (The)
5.80%, due 8/15/34 720,000 762,348
------------
INSURANCE (0.3%)
Crum & Forster
10.375%, due 6/15/13 210,000 224,700
Fund American Cos., Inc.
5.875%, due 5/15/13 1,300,000 1,325,576
Marsh & McLennan Cos., Inc.
7.125%, due 6/15/09 350,000 378,951
Provident Cos., Inc.
7.25%, due 3/15/28 95,000 88,825
UnumProvident Corp.
6.75%, due 12/15/28 220,000 196,900
------------
2,214,952
------------
</Table>
12 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- --------------------------------------------------------------------------------
IT SERVICES (0.0%) (B)
Electronic Data Systems Corp.
Series B
6.00%, due 8/1/13 $ 15,000 $ 15,320
7.125%, due 10/15/09 35,000 38,001
7.45%, due 10/15/29 30,000 30,356
Unisys Corp.
6.875%, due 3/15/10 210,000 224,700
------------
308,377
------------
MACHINERY (0.0%) (B)
Cummins, Inc.
6.45%, due 3/1/05 205,000 206,537
------------
MARINE (0.0%) (B)
Gulfmark Offshore, Inc.
7.75%, due 7/15/14 (c) 235,000 246,750
------------
MEDIA (0.9%)
Clear Channel Communications, Inc.
5.50%, due 9/15/14 750,000 756,825
Houghton Mifflin Co.
7.20%, due 3/15/11 365,000 387,356
Morris Publishing Group LLC
7.00%, due 8/1/13 285,000 290,700
PanAmSat Corp.
9.00%, due 8/15/14 (c) 180,000 190,800
PRIMEDIA, Inc.
8.00%, due 5/15/13 (c) 105,000 105,262
Reader's Digest Association, Inc. (The)
6.50%, due 3/1/11 375,000 389,063
Tele-Communications, Inc.
9.80%, due 2/1/12 1,600,000 2,061,661
10.125%, due 4/15/22 375,000 532,615
Time Warner, Inc.
8.05%, due 1/15/16 400,000 480,339
Time Warner Entertainment Co. L.P.
8.375%, due 3/15/23 765,000 936,701
10.15%, due 5/1/12 965,000 1,264,757
------------
7,396,079
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
METALS & MINING (0.1%)
Allegheny Ludlum Corp.
6.95%, due 12/15/25 $ 620,000 $ 592,100
Foundation PA Coal Co.
7.25%, due 8/1/14 (c) 295,000 315,281
United States Steel LLC
10.75%, due 8/1/08 176,000 208,560
------------
1,115,941
------------
MULTILINE RETAIL (0.4%)
Kohl's Corp.
6.00%, due 1/15/33 1,135,000 1,174,255
Target Corp.
6.35%, due 11/1/32 1,275,000 1,430,869
8.60%, due 1/15/12 675,000 851,975
------------
3,457,099
------------
MULTI-UTILITIES & UNREGULATED POWER (0.5%)
AES Corp. (The)
9.00%, due 5/15/15 (c) 520,000 605,800
AES Eastern Energy L.P.
Series 1999-A
9.00%, due 1/2/17 382,183 429,956
Series 1999-B
9.67%, due 1/2/29 45,000 52,650
Calpine Corp.
8.50%, due 7/15/10 (c) 128,000 94,080
NRG Energy, Inc.
8.00%, due 12/15/13 (c) 645,000 710,306
PSE&G Power LLC
6.875%, due 4/15/06 1,180,000 1,243,106
Tiverton/Rumford Power Associates Ltd., L.P.
9.00%, due 7/15/18 (c) 675,495 479,601
Westar Energy, Inc.
7.125%, due 8/1/09 425,000 473,796
7.875%, due 5/1/07 430,000 476,105
------------
4,565,400
------------
OIL & GAS (0.7%)
El Paso Corp.
7.80%, due 8/1/31 100,000 91,750
Enterprise Products Partners L.P.
5.60%, due 10/15/14 (c) 430,000 438,179
Forest Oil Corp.
8.00%, due 12/15/11 455,000 518,700
Goldman Sachs Group, Inc. (The)
5.00%, due 10/1/14 (g) 2,485,000 2,484,302
Tesoro Petroleum Corp.
8.00%, due 4/15/08 430,000 467,625
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- --------------------------------------------------------------------------------
OIL & GAS (CONTINUED)
Tosco Corp.
8.125%, due 2/15/30 $ 984,000 $ 1,299,788
Vintage Petroleum, Inc.
8.25%, due 5/1/12 425,000 476,000
------------
5,776,344
------------
PAPER & FOREST PRODUCTS (0.4%)
Appleton Papers, Inc.
8.125%, due 6/15/11 730,000 768,325
Bowater, Inc.
9.00%, due 8/1/09 355,000 398,447
Georgia-Pacific Corp.
8.875%, due 2/1/10 400,000 471,000
8.875%, due 5/15/31 250,000 308,125
9.375%, due 2/1/13 250,000 294,375
Pope & Talbot, Inc.
8.375%, due 6/1/13 985,000 1,034,250
------------
3,274,522
------------
PERSONAL PRODUCTS (0.2%)
Estee Lauder Cos., Inc.
5.75%, due 10/15/33 1,388,000 1,429,750
------------
PHARMACEUTICALS (0.1%)
Wyeth
5.50%, due 2/1/14 675,000 691,646
------------
REAL ESTATE (0.5%)
American Real Estate Partners L.P./American Real
Estate Financial
8.125%, due 6/1/12 (c) 455,000 480,025
CB Richard Ellis Services, Inc.
9.75%, due 5/15/10 169,000 192,660
HRPT Properties Trust
6.25%, due 8/15/16 740,000 779,234
Hospitality Properties Trust
7.00%, due 3/1/08 270,000 292,010
Host Marriot L.P.
7.00%, due 8/15/12 (c) 550,000 594,000
iStar Financial, Inc.
6.00%, due 12/15/10 1,045,000 1,108,680
OMEGA Healthcare Investors, Inc.
7.00%, due 4/1/14 405,000 415,125
------------
3,861,734
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TOBACCO (0.1%)
DIMON, Inc.
7.75%, due 6/1/13 $ 350,000 $ 348,250
Series B
9.625%, due 10/15/11 160,000 170,800
------------
519,050
------------
TRANSPORTATION INFRASTRUCTURE (0.0%) (B)
Great Lakes Dredge & Dock Corp.
7.75%, due 12/15/13 110,000 98,450
------------
WIRELESS TELECOMMUNICATION SERVICES (0.1%)
AirGate PCS, Inc.
5.85%, due 10/15/11 (c)(f) 175,000 179,375
Dobson Cellular Systems
(zero coupon), due 11/1/11
6.96%, beginning 11/8/04 (c)(f) 80,000 82,200
8.375%, due 11/1/11 (c) 80,000 82,500
Dobson Communications Corp.
8.875%, due 10/1/13 40,000 26,900
10.875%, due 7/1/10 60,000 46,200
Triton PCS, Inc.
8.50%, due 6/1/13 225,000 206,437
US Unwired, Inc.
10.00%, due 6/15/12 130,000 140,725
------------
764,337
------------
Total Corporate Bonds
(Cost $83,137,247) 86,458,908
------------
FOREIGN CORPORATE BONDS (1.4%)
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.0%) (B)
Heckler & Koch GmbH
9.25%, due 7/15/11 (c) 165,000 223,531
------------
BEVERAGES (0.1%)
Coca-Cola HBC Finance BV
5.125%, due 9/17/13 430,000 443,425
------------
CHEMICALS (0.1%)
Acetex Corp.
10.875%, due 8/1/09 450,000 495,000
Invista
9.25%, due 5/1/12 (c) 580,000 638,000
------------
1,133,000
------------
COMMERCIAL BANKS (0.0%) (B)
Banco Nacional de Comercio Exterior S.N.C.
11.25%, due 5/30/06 (c)(g) 205,000 232,162
------------
</Table>
14 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN CORPORATE BONDS (CONTINUED)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES (0.1%)
Hutchison Whamp International Ltd.
5.45%, due 11/24/10 (c) $ 1,105,000 $ 1,137,656
------------
CONTAINERS & PACKAGING (0.1%)
Crown Euro Holdings S.A.
10.875%, due 3/1/13 740,000 878,750
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%)
Telefonos de Mexico, S.A. de C.V.
4.50%, due 11/19/08 545,000 549,802
8.25%, due 1/26/06 655,000 696,428
------------
1,246,230
------------
ELECTRIC UTILITIES (0.1%)
Singapore Powerassets Ltd.
5.00%, due 10/22/13 (c) 625,000 640,009
------------
INDUSTRIAL CONGLOMERATES (0.1%)
Stena AB
9.625%, due 12/1/12 560,000 630,700
------------
METALS & MINING (0.1%)
Corporacion Nacional del Cobre-Codelco, Inc.
5.50%, due 10/15/13 (c) 1,000,000 1,046,787
------------
OIL & GAS (0.1%)
Gazprom International S.A.
7.201%, due 2/1/20 (c) 625,000 656,250
------------
PAPER & FOREST PRODUCTS (0.1%)
Norske Skog Canada Ltd.
7.375%, due 3/1/14 100,000 104,000
Series D
8.625%, due 6/15/11 255,000 275,400
Tembec Industries, Inc.
8.50%, due 2/1/11 335,000 342,537
------------
721,937
------------
TRANSPORTATION INFRASTRUCTURE (0.2%)
PSA Corp. Ltd.
7.125%, due 8/1/05 (c) 1,750,000 1,804,049
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
WIRELESS TELECOMMUNICATION SERVICES (0.2%)
Vodafone Group PLC
3.95%, due 1/30/08 $ 1,350,000 $ 1,373,883
------------
Total Foreign Corporate Bonds
(Cost $11,794,841) 12,168,369
------------
MORTGAGE-BACKED SECURITIES (0.7%)
- --------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (0.7%)
Banc of America Commercial Mortgage, Inc.
Series 2001-PB1 Class A1
4.907%, due 5/11/35 1,439,337 1,486,981
LB-UBS Commercial Mortgage Trust
Series 2004-C7 Class A1
3.625%, due 10/15/29 1,620,000 1,629,072
Merrill Lynch Mortgage Trust
Series 2004-MKB1 Class A1
3.563%, due 2/12/42 1,441,147 1,443,293
Morgan Stanley Capital I
Series 2003-IQ5 Class A1
3.02%, due 4/15/38 1,140,046 1,131,200
Wachovia Bank National Association
Series 2004-C14 Class A1
3.477%, due 8/15/41 588,144 589,093
------------
Total Mortgage-Backed Securities
(Cost $6,280,289) 6,279,639
------------
MUNICIPAL BOND (0.1%)
- --------------------------------------------------------------------------------
TEXAS (0.1%)
Harris County Texas Industrial Development Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 660,000 673,002
------------
Total Municipal Bond
(Cost $660,000) 673,002
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (16.2%)
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (0.1%)
3.625%, due 9/15/08 1,205,000 1,218,049
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (0.6%)
3.00%, due 8/1/10 792,192 768,304
5.00%, due 8/1/33 (e) 2,128,877 2,128,542
5.50%, due 12/13/34 TBA (d) 1,695,000 1,722,015
------------
4,618,861
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
- --------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (3.8%)
4.625%, due 5/1/13 $ 5,715,000 $ 5,704,850
4.75%, due 1/2/07 5,760,000 5,970,828
5.125%, due 1/2/2014 810,000 832,236
5.25%, due 8/1/12 1,865,000 1,950,439
5.50%, due 5/2/06 5,945,000 6,186,569
6.25%, due 2/1/11 (g) 7,165,000 7,955,472
6.625%, due 9/15/09 3,845,000 4,352,317
------------
32,952,711
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(COLLATERALIZED MORTGAGE OBLIGATIONS) (0.1%)
Series 1998-M6 Class AZ
6.32%, due 8/15/08 1,045,305 1,125,464
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (8.7%)
4.50%, due 7/1/18-11/1/18 (e) 16,266,059 16,352,357
V 5.50%, due 11/18/19 TBA (d) 16,340,000 16,916,998
5.50%, due 11/1/33 (e) 5,189,565 5,294,305
V 5.50%, due 12/13/34 TBA (d) 10,635,000 10,797,843
V 6.00%, due 12/13/34 TBA (d) 17,910,000 18,514,463
6.50%, due 6/1/31-10/1/31 (e) 3,194,679 3,365,689
7.00%, due 2/1/32 (e) 1,614,812 1,716,086
7.50%, due 8/1/31 (e) 2,794,814 2,997,394
------------
75,955,135
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (1.2%)
6.00%, due 4/15/29-8/15/32 (e) 6,649,716 6,937,079
7.50%, due 12/15/23-12/15/28 (e) 3,111,773 3,361,452
------------
10,298,531
------------
UNITED STATES TREASURY BONDS (0.2%)
5.375%, due 2/15/31 1,445,000 1,569,462
8.75%, due 8/15/20 2,000 2,925
------------
1,572,387
------------
UNITED STATES TREASURY NOTES (1.5%)
3.00%, due 2/15/08 (g) 4,415,000 4,428,969
4.375%, due 5/15/07 811,000 844,105
4.75%, due 5/15/14 5,335,000 5,640,930
4.875%, due 2/15/12 5,000 5,359
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
UNITED STATES TREASURY NOTES (CONTINUED)
5.75%, due 8/15/10 $ 850,000 $ 950,572
6.00%, due 8/15/09 (g) 1,505,000 1,686,599
------------
13,556,534
------------
Total U.S. Government & Federal Agencies
(Cost $139,542,568) 141,297,672
------------
FOREIGN GOVERNMENT BONDS (0.4%)
- --------------------------------------------------------------------------------
FOREIGN GOVERNMENTS (0.4%)
Province of Quebec
5.00%, due 7/17/09 1,720,000 1,815,663
Russian Federation
5.00%, due 3/31/30 960,000 960,000
United Mexican States
6.625%, due 3/3/15 530,000 568,160
------------
3,343,823
------------
GOVERNMENT AGENCIES (0.0%) (B)
Aries Vermogensverwaltungs GmbH
9.60%, due 10/25/14 (c) 250,000 291,875
------------
Total Foreign Government Bonds
(Cost $3,304,543) 3,635,698
------------
YANKEE BONDS (0.3%) (I)
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES (0.1%)
Petroleum Geo-Services ASA
10.00%, due 11/5/10 505,000 575,700
------------
INSURANCE (0.1%)
Fairfax Financial Holdings Ltd.
7.375%, due 4/15/18 25,000 22,061
7.75%, due 7/15/37 60,000 50,400
8.30%, due 4/15/26 25,000 22,563
Montpelier Re Holdings Ltd.
6.125%, due 8/15/13 1,341,000 1,397,683
------------
1,492,707
------------
MARINE (0.0%) (B)
Sea Containers Ltd.
10.75%, due 10/15/06 160,000 166,400
------------
MEDIA (0.1%)
Rogers Cablesystem, Ltd.
11.00%, due 12/1/15 490,000 553,700
------------
</Table>
16 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
- --------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS (0.0%) (B)
Tembec Industries, Inc.
8.625%, due 6/30/09 $ 115,000 $ 117,012
------------
Total Yankee Bonds
(Cost $2,833,281) 2,905,519
------------
Total Long-Term Bonds
(Cost $258,681,420) 264,631,672
------------
<Caption>
SHARES
COMMON STOCKS (64.9%)
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.4%)
Boeing Co. (The) 44,200 2,205,580
L-3 Communications Holdings, Inc. 69,500 4,582,135
Northrop Grumman Corp. 96,900 5,014,575
Raytheon Co. 89,400 3,261,312
United Technologies Corp. 62,200 5,773,404
------------
20,837,006
------------
AIR FREIGHT & LOGISTICS (0.8%)
FedEx Corp. 73,300 6,679,096
------------
AUTOMOBILES (0.6%)
Harley-Davidson, Inc. 86,100 4,956,777
------------
BEVERAGES (0.3%)
PepsiCo, Inc. 57,200 2,835,976
------------
BIOTECHNOLOGY (1.2%)
Amgen, Inc. (a) 90,800 5,157,440
Genentech, Inc. (a) 48,400 2,203,652
Gilead Sciences, Inc. (a) 81,500 2,822,345
------------
10,183,437
------------
BUILDING PRODUCTS (0.2%)
American Standard Cos., Inc. (a) 61,500 2,249,055
------------
CAPITAL MARKETS (1.5%)
Goldman Sachs Group, Inc. (The) 39,500 3,886,010
Merrill Lynch & Co., Inc. 36,800 1,984,992
Morgan Stanley 91,300 4,664,517
State Street Corp. 62,000 2,793,100
------------
13,328,619
------------
</Table>
<Table>
<Caption>
SHARES VALUE
CHEMICALS (0.8%)
Air Products & Chemicals, Inc. 16,500 $ 877,470
Praxair, Inc. 141,300 5,962,860
------------
6,840,330
------------
COMMERCIAL BANKS (2.8%)
VBank of America Corp. 246,304 11,031,956
PNC Financial Services Group, Inc. (The) 68,800 3,598,240
U.S. Bancorp 109,500 3,132,795
Wachovia Corp. 128,200 6,308,722
------------
24,071,713
------------
COMMERCIAL SERVICES & SUPPLIES (0.5%)
Cendant Corp. 213,100 4,387,729
------------
COMMUNICATIONS EQUIPMENT (2.2%)
Avaya, Inc. (a) 306,500 4,413,600
Cisco Systems, Inc. (a) 186,700 3,586,507
Motorola, Inc. 219,200 3,783,392
Nokia Corp. ADR (j) 330,800 5,100,936
QUALCOMM, Inc. 49,700 2,077,957
------------
18,962,392
------------
COMPUTERS & PERIPHERALS (2.3%)
Dell, Inc. (a) 155,900 5,465,854
Hewlett-Packard Co. (g) 345,200 6,441,432
VInternational Business Machines Corp. 90,700 8,140,325
------------
20,047,611
------------
CONSUMER FINANCE (1.3%)
American Express Co. 118,300 6,278,181
Capital One Financial Corp. 69,300 5,111,568
------------
11,389,749
------------
CONTAINERS & PACKAGING (0.5%)
Smurfit-Stone Container Corp. 255,700 4,438,952
------------
DIVERSIFIED FINANCIAL SERVICES (2.7%)
VCitigroup, Inc. 354,593 15,733,291
JPMorgan Chase & Co. 191,244 7,382,019
------------
23,115,310
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.8%)
ALLTEL Corp. 64,200 3,526,506
BellSouth Corp. 97,200 2,592,324
SBC Communications, Inc. 181,100 4,574,586
Sprint Corp. (FON Group) 303,100 6,349,945
Verizon Communications, Inc. 196,800 7,694,880
------------
24,738,241
------------
ELECTRICAL EQUIPMENT (0.2%)
Cooper Industries, Ltd. Class A 25,400 1,623,060
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.3%)
Agilent Technologies, Inc. (a) 105,600 $ 2,646,336
------------
ENERGY EQUIPMENT & SERVICES (6.0%)
Baker Hughes, Inc. 95,300 4,081,699
BJ Services Co. 79,500 4,054,500
Diamond Offshore Drilling, Inc. (g) 47,500 1,605,500
ENSCO International, Inc. 112,300 3,430,765
VPride International, Inc. (a) 609,300 11,259,864
VRowan Cos., Inc. (a) 363,700 9,285,261
VTransocean, Inc. (a) 385,000 13,571,250
Weatherford International Ltd. (a) 85,700 4,478,682
------------
51,767,521
------------
FOOD & STAPLES RETAILING (1.9%)
CVS Corp. 167,600 7,283,896
Kroger Co. (The) (a) 264,600 3,998,106
Walgreen Co. 141,500 5,078,435
------------
16,360,437
------------
FOOD PRODUCTS (1.6%)
Cadbury Schweppes PLC (i)(j) 162,000 5,427,000
General Mills, Inc. 154,500 6,836,625
Kraft Foods, Inc. Class A 46,800 1,558,908
------------
13,822,533
------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.6%)
Boston Scientific Corp. (a) 118,900 4,197,170
Fisher Scientific International, Inc. (a) 77,900 4,468,344
Medtronic, Inc. 98,200 5,019,002
------------
13,684,516
------------
HEALTH CARE PROVIDERS & SERVICES (3.6%)
Caremark Rx, Inc. (a) 155,300 4,654,341
HCA, Inc. 136,400 5,009,972
Quest Diagnostics, Inc. 49,000 4,289,460
UnitedHealth Group, Inc. 100,300 7,261,720
Universal Health Services, Inc. Class B 139,100 5,780,996
WellPoint Health Networks, Inc. (a) 48,400 4,726,744
------------
31,723,233
------------
HOUSEHOLD DURABLES (1.4%)
D.R. Horton, Inc. (g) 117,200 3,516,000
Harman International Industries, Inc. 40,100 4,819,218
Lennar Corp. 94,700 4,259,606
------------
12,594,824
------------
</Table>
<Table>
<Caption>
SHARES VALUE
HOUSEHOLD PRODUCTS (0.9%)
Colgate-Palmolive Co. 46,200 $ 2,061,444
Kimberly-Clark Corp. 95,400 5,692,518
------------
7,753,962
------------
INDUSTRIAL CONGLOMERATES (1.2%)
General Electric Co. 171,200 5,841,344
3M Co. 60,400 4,685,228
------------
10,526,572
------------
INSURANCE (1.8%)
Allstate Corp. (The) 91,200 4,385,808
Hartford Financial Services Group, Inc. (The) 75,900 4,438,632
Prudential Financial, Inc. 56,600 2,630,202
St. Paul Travelers Cos., Inc. (The) 127,561 4,331,972
------------
15,786,614
------------
IT SERVICES (1.2%)
Accenture Ltd. Class A (a) 31,800 769,878
Computer Sciences Corp. (a) 134,300 6,670,681
First Data Corp. 70,100 2,893,728
------------
10,334,287
------------
LEISURE EQUIPMENT & PRODUCTS (0.3%)
Mattel, Inc. 134,200 2,349,842
------------
MACHINERY (2.4%)
Danaher Corp. 114,400 6,306,872
Dover Corp. 133,300 5,234,691
Illinois Tool Works, Inc. 62,300 5,749,044
Navistar International Corp. (a) 107,300 3,707,215
------------
20,997,822
------------
MEDIA (0.6%)
Omnicom Group, Inc. 65,800 5,191,620
------------
METALS & MINING (0.3%)
Alcoa, Inc. 94,900 3,084,250
------------
MULTILINE RETAIL (1.2%)
Kohl's Corp. (a) 101,700 5,162,292
Target Corp. 113,200 5,662,264
------------
10,824,556
------------
OIL & GAS (1.3%)
ConocoPhillips 48,000 4,046,880
Kerr-McGee Corp. 68,100 4,032,882
Unocal Corp. 72,500 3,026,875
------------
11,106,637
------------
</Table>
18 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS (1.4%)
Bowater, Inc. (g) 186,300 $ 6,863,292
International Paper Co. 132,200 5,091,022
------------
11,954,314
------------
PHARMACEUTICALS (2.7%)
Bristol-Myers Squibb Co. 215,200 5,042,136
Johnson & Johnson 102,300 5,972,274
Merck & Co., Inc. 77,300 2,420,263
Pfizer, Inc. 206,200 5,969,490
Teva Pharmaceutical Industries Ltd. (g)(j) 166,000 4,316,000
------------
23,720,163
------------
ROAD & RAIL (0.3%)
Burlington Northern Santa Fe Corp. 59,200 2,475,152
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (2.1%)
Advanced Micro Devices, Inc. (a)(g) 264,500 4,448,890
Analog Devices, Inc. 63,000 2,536,380
Applied Materials, Inc. (a) 133,300 2,146,130
Intel Corp. 131,600 2,929,416
KLA-Tencor Corp. (a) 54,400 2,476,832
Maxim Integrated Products, Inc. 48,900 2,151,111
Texas Instruments, Inc. 74,800 1,828,860
------------
18,517,619
------------
SOFTWARE (3.0%)
VBMC Software, Inc. (a) 499,900 9,458,108
Electronic Arts, Inc. (a)(g) 60,700 2,726,644
Microsoft Corp. 156,300 4,374,837
Oracle Corp. (a) 90,200 1,141,932
Symantec Corp. (a) 109,100 6,212,154
VERITAS Software Corp. (a)(g) 103,700 2,268,956
------------
26,182,631
------------
SPECIALTY RETAIL (3.2%)
Bed Bath & Beyond, Inc. (a) 135,500 5,527,045
Best Buy Co., Inc. (a) 71,200 4,216,464
Gap, Inc. (The) 368,700 7,366,626
Lowe's Cos., Inc. 97,300 5,476,044
TJX Cos., Inc. (The) 208,700 5,004,626
------------
27,590,805
------------
TEXTILES, APPAREL & LUXURY GOODS (1.2%)
Coach, Inc. (a) 105,400 4,914,802
NIKE, Inc. Class B 64,200 5,220,102
------------
10,134,904
------------
</Table>
<Table>
<Caption>
SHARES VALUE
THRIFTS & MORTGAGE FINANCE (0.3%)
New York Community Bancorp, Inc. 1 $ 12
Washington Mutual, Inc. 73,200 2,833,572
------------
2,833,584
------------
Total Common Stocks (Cost $523,731,198) 564,649,787
------------
CONVERTIBLE PREFERRED STOCKS (0.7%)
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES (0.0%) (B)
QuadraMed Corp. (c) 10,700 267,500
------------
MACHINERY (0.7%)
Goldman Sach Group, Inc. Series NAV 161,539 5,644,819
------------
Total Convertible Preferred Stocks (Cost
$6,567,521) 5,912,319
------------
PREFERRED STOCK (0.1%)
- --------------------------------------------------------------------------------
REAL ESTATE (0.1%)
Sovereign Real Estate Investment Corp.
12.00%, Class A (c) 300 450,000
------------
Total Preferred Stock (Cost $445,000) 450,000
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (13.6%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (9.5%)
AIG Funding, Inc.
1.78%, due 11/2/04 $ 8,885,000 8,884,560
American Express Credit Corp.
1.80%, due 11/18/04 (e) 11,500,000 11,490,222
Chevron Texaco Funding Corp.
1.75%, due 11/8/04 5,000,000 4,998,298
General Electric Capital Corp.
1.74%, due 11/1/04 620,000 620,000
1.75%, due 11/1/04 700,000 700,000
General Electric Co.
1.78%, due 11/10/04 12,660,000 12,654,365
Harvard University
1.73%, due 11/19/04 (e) 2,925,000 2,922,468
Ing Funding LLC
1.78%, due 11/12/04 1,300,000 1,299,292
International Business Machines Corp.
1.70%, due 11/1/04 1,600,000 1,600,000
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
19
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (CONTINUED)
Morgan Stanley Dean Witter & Co.
1.81%, due 11/9/04 $ 5,150,000 $ 5,147,928
Prudential Funding LLC
1.76%, due 11/2/04 3,500,000 3,499,829
Rabobank USA Financial Corp.
1.75%, due 11/3/04 5,650,000 5,649,451
Starbird Funding Corp. (h)
2.085%, due 3/14/05 7,500,000 7,443,752
UBS Finance (Delaware) LLC
1.84%, due 11/1/04 15,745,000 15,745,000
------------
Total Commercial Paper (Cost $82,655,165) 82,655,165
------------
<Caption>
SHARES
INVESTMENT COMPANIES (1.3%)
AIM Institutional Funds Group (h) 1,243,708 1,243,708
Merrill Lynch Premier Institutional Fund 10,000,000 10,000,000
------------
Total Investment Companies (Cost $11,243,708) 11,243,708
------------
<Caption>
PRINCIPAL
AMOUNT
MASTER NOTE (1.1%)
Banc of America Securities LLC
1.955%, due 11/1/04 (h) $ 9,339,000 9,339,000
------------
Total Master Note (Cost $9,339,000) 9,339,000
------------
REPURCHASE AGREEMENTS (1.7%)
Credit Suisse First Boston Corp.
1.925%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $5,622,902 (h)
(Collateralized by Various Bonds with a
Principal Amount of $5,637,736 and a Market
Value of $5,734,655) 5,622,000 5,622,000
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
REPURCHASE AGREEMENTS (CONTINUED)
Lehman Brothers Inc.
1.925%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $7,894,266 (h)
(Collateralized by Various Bonds with a
Principal Amount of $15,726,514 and a Market
Value of $8,140,000) $ 7,893,000 $ 7,893,000
------------
Merrill Lynch Pierce Fenner & Smith
1.955%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $1,369,223 (h)
(Collateralized by Various Bonds with a
Principal Amount of $1,353,912 and a Market
Value of $1,437,604) 1,369,000 1,369,000
------------
Total Repurchase Agreements (Cost $14,884,000) 14,884,000
------------
Total Short-Term Investments (Cost $118,121,873) 118,121,873
------------
Total Investments (Cost $907,547,012) (l) 109.6% 953,765,651(m)
Liabilities in Excess of
Cash and Other Assets (9.6) (83,664,748)
------------- ------------
Net Assets 100.0% $870,100,903
============= ============
</Table>
20 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) TBA: Securities purchased on a forward commitment basis
with an approximate principal amount and maturity date.
The actual principal amount and maturity date will be
deter-mined upon settlement. The market value of these
securities at October 31, 2004 is $47,951,319.
(e) Segregated or partially segregated as collateral for
TBA.
(f) Floating rate. Rate shown is the rate in effect at
October 31, 2004.
(g) Represent securities out on loan or a portion which is
out on loan.
(h) Represents security, or portion thereof, purchased with
cash collateral received for securities on loan.
(i) Yankee Bond -- Dollar Denominated bonds issued in United
States by foreign banks and corporations.
(j) ADR-American Depository Receipt.
(k) Restricted security.
(l) The cost for federal income tax purposes is
$912,442,336.
(m) At October 31, 2004, net unrealized appreciation was
$41,323,315, 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 $60,752,679 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $19,429,364.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
21
STATEMENT OF ASSETS AND LIABILITIES
AS OF OCTOBER 31, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $907,547,012) including
$31,746,526 market value of securities
loaned $953,765,651
Cash 11,459
Deposit with broker for securities loaned 5,188
Receivables:
Investment securities sold 7,468,563
Dividends and interest 3,555,784
Fund shares sold 74,347
Other assets 33,234
------------
Total assets 964,914,226
------------
LIABILITIES:
Securities lending collateral 32,915,648
Payables:
Investment securities purchased 59,226,080
Fund shares redeemed 855,622
NYLIFE Distributors 665,462
Transfer agent 507,985
Manager 469,907
Custodian 18,863
Trustees 12,263
Accrued expenses 141,493
------------
Total liabilities 94,813,323
------------
Net assets $870,100,903
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 64,537
Class B 417,009
Class C 2,521
Class I 2
Additional paid-in capital 812,047,466
Accumulated undistributed net investment
income 518,433
Accumulated net realized gain on investments 10,832,141
Net unrealized appreciation on investments 46,218,639
Net unrealized appreciation on translation of
other assets and liabilities in foreign
currencies 155
------------
Net assets $870,100,903
============
CLASS A
Net assets applicable to outstanding shares $115,877,336
============
Shares of beneficial interest outstanding 6,453,705
============
Net asset value per share outstanding $ 17.96
Maximum sales charge (5.50% of offering price) 1.05
------------
Maximum offering price per share outstanding $ 19.01
============
CLASS B
Net assets applicable to outstanding shares $749,688,823
============
Shares of beneficial interest outstanding 41,700,882
============
Net asset value and offering price per share
outstanding $ 17.98
============
CLASS C
Net assets applicable to outstanding shares $ 4,531,624
============
Shares of beneficial interest outstanding 252,080
============
Net asset value and offering price per share
outstanding $ 17.98
============
CLASS I
Net assets applicable to outstanding shares $ 3,120
============
Shares of beneficial interest outstanding 174
============
Net asset value and offering price per share
outstanding $ 17.92
============
</Table>
22 MainStay Total Return Fund 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 YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 13,477,552
Dividends (a) 7,287,443
Income from securities loaned -- net 148,561
------------
Total income 20,913,556
------------
EXPENSES:
Distribution -- Class B 6,033,347
Distribution -- Class C 35,998
Manager 5,802,586
Transfer agent -- Classes A, B and C 3,220,030
Service -- Class A 311,201
Service -- Class B 2,011,208
Service -- Class C 12,000
Shareholder communication 195,525
Professional 142,734
Custodian 121,035
Recordkeeping 120,043
Trustees 65,476
Registration 38,076
Miscellaneous 73,404
------------
Total expenses 18,182,663
------------
Net investment income 2,730,893
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments from:
Security transactions 46,152,104
Foreign currency transactions 846
------------
Net realized gain on investments and foreign
currency transactions 46,152,950
------------
Net change in unrealized appreciation on
investments:
Security transactions (16,753,244)
Translation of other assets and liabilities
in foreign currencies 155
------------
Net unrealized loss on investments and foreign
currency transactions (16,753,089)
------------
Net realized and unrealized gain on
investments and foreign currency
transactions 29,399,861
------------
Net increase in net assets resulting from
operations $ 32,130,754
============
</Table>
(a) Dividends recorded net of foreign withholding taxes of $8,264.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
23
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 2,730,893 $ 4,489,169 $ 10,616,038
Net realized gain
(loss) on investments
and foreign currency
translations 46,152,950 1,599,399 (28,791,816)
Net change in
unrealized
appreciation
(depreciation) on
investments (16,753,089) 121,630,260 (220,645,625)
-----------------------------------------------
Net increase
(decrease) in net
assets resulting from
operations 32,130,754 127,718,828 (238,821,403)
-----------------------------------------------
Dividends to shareholders:
From net investment income:
Class A (1,148,966) (1,369,286) (2,917,833)
Class B (1,788,557) (2,893,322) (8,537,041)
Class C (10,693) (17,144) (54,696)
Class I (10) -- --
-----------------------------------------------
Total dividends to
shareholders (2,948,226) (4,279,752) (11,509,570)
-----------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 20,764,539 35,201,986 39,440,166
Class B 32,973,201 33,763,017 45,224,081
Class C 586,220 545,522 1,116,671
Class I 3,106 -- --
Net asset value of shares issued to
shareholders in reinvestment of
dividends:
Class A 1,078,925 1,294,851 2,779,055
Class B 1,741,322 2,811,248 8,247,653
Class C 9,944 14,923 47,065
Class I 4 -- --
-----------------------------------------------
57,157,261 73,631,547 96,854,691
Cost of shares redeemed:
Class A (49,094,585) (57,123,036) (82,365,310)
Class B (138,738,732) (104,608,118) (195,502,933)
Class C (1,053,024) (831,519) (2,821,262)
-----------------------------------------------
(188,886,341) (162,562,673) (280,689,505)
Decrease in net
assets derived
from capital share
transactions (131,729,080) (88,931,126) (183,834,814)
-----------------------------------------------
Net increase
(decrease) in net
assets (102,546,552) 34,507,950 (434,165,787)
</Table>
<Table>
<Caption>
2004 2003* 2002
NET ASSETS:
Beginning of period $ 972,647,455 $ 938,139,505 $1,372,305,292
-----------------------------------------------
End of period $ 870,100,903 $ 972,647,455 $ 938,139,505
===============================================
Accumulated
undistributed
(distributions in
excess of) net
investment income at
end of period $ 518,433 $ 629,497 $ (18,107)
===============================================
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
24 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
25
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH -------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 17.42 $ 15.29 $ 18.92 $ 22.14 $ 27.23 $ 24.96
-------- -------- -------- -------- -------- --------
Net investment income 0.17 0.16(c) 0.27 0.34(c) 0.38 0.34
Net realized and unrealized gain (loss) on
investments 0.54 2.12 (3.62) (2.99)(c) (1.62) 3.69
-------- -------- -------- -------- -------- --------
Total from investment operations 0.71 2.28 (3.35) (2.65) (1.24) 4.03
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.17) (0.15) (0.28) (0.35) (0.39) (0.34)
From net realized gain on investments -- -- -- (0.22) (3.46) (1.42)
-------- -------- -------- -------- -------- --------
Total dividends and distributions (0.17) (0.15) (0.28) (0.57) (3.85) (1.76)
-------- -------- -------- -------- -------- --------
Net asset value at end of period $ 17.96 $ 17.42 $ 15.29 $ 18.92 $ 22.14 $ 27.23
======== ======== ======== ======== ======== ========
Total investment return (a) 4.05% 15.02%(b) (17.75%) (11.92%) (4.48%) 16.46%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.94% 1.21%+ 1.57% 1.74%(c) 1.42% 1.32%
Net expenses 1.30% 1.33%+ 1.30% 1.18% 1.13% 1.13%
Expenses (before waiver) 1.30% 1.33%+ 1.31% 1.21% 1.15% 1.16%
Portfolio turnover rate 103% 67% 96% 120% 123% 125%
Net assets at end of period (in 000's) $115,877 $138,787 $140,298 $221,022 $231,649 $203,924
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $17.45 $15.32 $ 18.95 $ 22.17 $27.23 $24.96
------ ------ ------- ------- ------ ------
Net investment income 0.04 0.06(c) 0.14 0.20(d) 0.18 0.15
Net realized and unrealized gain (loss) on
investments 0.53 2.13 (3.61) (3.00)(d) (1.60) 3.69
------ ------ ------- ------- ------ ------
Total from investment operations 0.57 2.19 (3.47) (2.80) (1.42) 3.84
------ ------ ------- ------- ------ ------
Less dividends and distributions:
From net investment income (0.04) (0.06) (0.16) (0.20) (0.18) (0.15)
From net realized gain on investments -- -- -- (0.22) (3.46) (1.42)
------ ------ ------- ------- ------ ------
Total dividends and distributions (0.04) (0.06) (0.16) (0.42) (3.64) (1.57)
------ ------ ------- ------- ------ ------
Net asset value at end of period $17.98 $17.45 $ 15.32 $ 18.95 $22.17 $27.23
====== ====== ======= ======= ====== ======
Total investment return (a) 3.27% 14.33%(b) (18.37%) (12.61%) (5.10%) 15.60%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.19% 0.46%+ 0.82% 0.99%(d) 0.67% 0.57%
Net expenses 2.05% 2.08%+ 2.05% 1.93% 1.88% 1.88%
Expenses (before waiver) 2.05% 2.08%+ 2.06% 1.96% 1.90% 1.91%
Portfolio turnover rate 103% 67% 96% 120% 123% 125%
Net assets at end of period (in 000's) $4,532 $4,845 $ 4,501 $ 7,528 $9,671 $5,579
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class I shares were first offered on January 2, 2004.
+ Annualized.
(a) Total return is calculated exclusive of sales charges. Class
I is not subject to sales charges.
(b) Total return in not annualized.
(c) Per share data based on average shares outstanding during
the period.
(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 (0.02) (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>
26 MainStay Total Return Fund 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>
JANUARY 1,
2003
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2004 2003*
$ 17.45 $ 15.32
-------- --------
0.04 0.06(c)
0.53 2.13
-------- --------
0.57 2.19
-------- --------
(0.04) (0.06)
-- --
-------- --------
(0.04) (0.06)
-------- --------
$ 17.98 $ 17.45
======== ========
3.27% 14.33%(b)
0.19% 0.46%+
2.05% 2.08%+
2.05% 2.08%+
103% 67%
$749,689 $829,016
<Caption>
CLASS B
-------------------------------------------------
YEAR ENDED DECEMBER 31,
2002 2001 2000 1999
$ 18.95 $ 22.17 $ 27.23 $ 24.96
-------- ---------- ---------- ----------
0.14 0.20(d) 0.18 0.15
(3.61) (3.00)(d) (1.60) 3.69
-------- ---------- ---------- ----------
(3.47) (2.80) (1.42) 3.84
-------- ---------- ---------- ----------
(0.16) (0.20) (0.18) (0.15)
-- (0.22) (3.46) (1.42)
-------- ---------- ---------- ----------
(0.16) (0.42) (3.64) (1.57)
-------- ---------- ---------- ----------
$ 15.32 $ 18.95 $ 22.17 $ 27.23
======== ========== ========== ==========
(18.37%) (12.61%) (5.10%) 15.60%
0.82% 0.99%(c) 0.67% 0.57%
2.05% 1.93% 1.88% 1.88%
2.06% 1.96% 1.90% 1.91%
96% 120% 123% 125%
$793,340 $1,143,755 $1,457,366 $1,678,696
</Table>
<Table>
<Caption>
CLASS I
------------
JANUARY 2,
2004**
THROUGH
OCTOBER 31,
2004
$17.98
------
0.15
(0.03)
------
0.12
------
(0.18)
--
------
(0.18)
------
$17.92
======
0.68%(b)
1.40%+
0.84%+
0.84%+
103%
$ 3
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
27
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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 four 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 I shares are not subject to
sales charge. Distribution of Class I shares commenced on January 2, 2004. Class
A shares, Class B shares, Class C shares and Class I shares bear the same voting
(except for issues that relate solely to one class), dividend, liquidation and
other rights and conditions. Each class of shares, other than Class I shares,
bears distribution and/or service fee payments 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.
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
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. Reasons for which securities may be valued in this manner
include, but are not limited to, trading for a security has been halted or
suspended, a security has been de-listed from a national exchange, or trading on
a security's primary market is temporarily closed at a time when under normal
conditions it would be open. The Fund did not hold securities at October 31,
2004, that were valued in such manner.
(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
28 MainStay Total Return Fund
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 "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
gain on investments arising from permanent differences; net assets at October
31, 2004, are not affected.
<Table>
<Caption>
ACCUMULATED UNDISTRIBUTED ACCUMULATED NET REALIZED
NET INVESTMENT INCOME GAIN ON INVESTMENTS
$107,269 $(107,269)
</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) 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 unrealized changes in net assets arising from
fluctuations in exchange rates and market prices of securities are not
separately presented.
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.
(I) 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
www.mainstayfunds.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 0.64% of the Fund's
average daily net assets on assets up to $500 million and 0.60% annually on
assets in excess of $500 million. Effective December 1, 2004, NYLIM has
voluntarily agreed to reimburse the expenses of the Fund to the extent that
operating expenses would exceed on an annualized basis 1.19%, 1.94% and 1.94% of
the average daily net assets of the Class A, Class B and Class C shares,
respectively and an equivalent reduction in the management fee for Class I. For
the year ended October 31, 2004, the Manager earned from the Fund $5,802,586.
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
0.32% of the average daily net assets of the Fund on assets up to $500 million
and 0.30% on assets in excess of $500 million. 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 other than Class I 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 shares was $33,824 for the year ended
October 31, 2004. 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 $7,776, $330,990 and $1,101, respectively, for the year ended October
31, 2004.
(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 for the year ended October 31, 2004,
amounted to $3,220,030.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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 $27,471 for the year ended October 31,
2004.
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 $120,043 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
State Street Bank and Trust Company is custodian of cash and securities of the
Fund. Custodial fees are charged to the Funds based on the market value of
securities in the
30 MainStay Total Return Fund
Fund and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- 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, 2004:
<Table>
<Caption>
PRINCIPAL
DATE(S) OF AMOUNT/ 10/31/04 PERCENT OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
Goodyear Tire & Rubber Co.
2nd Lien Note
11.00%, due 3/1/11 6/24/04 $360,000 $ 395,293 $403,200 0.1%
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
NOTE 6 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
UNREALIZED TOTAL ACCUMULATED
APPRECIATION GAIN
$41,323,470 $57,569,368
</Table>
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED CAPITAL
NET ORDINARY INCOME AND OTHER GAINS
$520,045 $15,725,853
</Table>
The difference between the book-basis and tax-basis unrealized appreciation is
due to premium amortization adjustments and wash sale deferrals.
The Fund utilized $30,836,200 of capital loss carryforwards for the year ended
October 31, 2004.
The tax character of distributions paid for the year ended October 31, 2004, the
ten months ended October 31, 2003 and the year ended December 31, 2002, shown in
the Statement of Changes in Net Assets, were as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid from:
Ordinary Income $2,948,226 $4,279,752 $11,509,570
</Table>
NOTE 7 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of U.S. Government
securities, other than short-term securities, were $344,563 and $362,832,
respectively. Purchases and sales of securities, other than U.S. Government
securities and short-term securities, were $596,936 and $722,434, respectively.
NOTE 8 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2004, the Fund had securities on loan with an aggregate market
value of $31,746,526. The Fund received $32,915,648 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.
Pursuant to Rule 2a-7, securities purchased with collateral received are valued
at amortized cost.
NOTE 9 -- 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 year ended October 31, 2004.
NOTE 10 -- CAPITAL SHARE TRANSACTIONS
(IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C CLASS I*
Shares sold 1,159 1,838 33 --(a)
- -------------------------------------------------------------
Shares issued in
reinvestment of
dividends and
distributions 60 97 1 --(a)
- -------------------------------------------------------------
1,219 1,935 34 --(a)
Shares redeemed (2,732) (7,740) (60) --
- -------------------------------------------------------------
Net increase
(decrease) (1,513) (5,805) (26) --(a)
- -------------------------------------------------------------
</Table>
www.mainstayfunds.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003**
CLASS A CLASS B CLASS C
Shares sold 2,173 2,089 33
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 81 178 1
- -----------------------------------------------------------
2,254 2,267 34
Shares redeemed (3,466) (6,552) (50)
- -----------------------------------------------------------
Net decrease (1,212) (4,285) (16)
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 2,346 2,672 64
- ------------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 171 511 3
- ------------------------------------------------------------
2,517 3,183 67
Shares redeemed (5,021) (11,742) (170)
- ------------------------------------------------------------
Net decrease (2,504) (8,559) (103)
- ------------------------------------------------------------
</Table>
(a) Less than one thousand.
* First offered on January 2, 2004.
** The Fund changed its fiscal year end from December 31 to October 31.
NOTE 11 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 12 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31,2003 and year ended December 31, 2002
did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through, the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
32 MainStay Total Return Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Total Return Fund (the "Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2004, and
the related statement of operations, statement of changes in net assets and the
financial highlights for the year or period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the period ended October 31, 2003 and the year ended December
31, 2002, and the financial highlights for the periods presented through October
31, 2003, were audited by other auditors, whose report dated December 18, 2003
expressed an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Total Return Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year or period then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG
Philadelphia, Pennsylvania
December 28, 2004
www.mainstayfunds.com 33
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
34 MainStay Total Return Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 35
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
36 MainStay Total Return Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2004,
should be multiplied by 100% to arrive at the amount eligible for qualified
dividend income and 100% for the corporate dividends received deduction.
In January 2005, shareholders will receive on IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2004. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2004.
www.mainstayfunds.com 37
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MacKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
38 MainStay Total Return Fund
(MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06293 RECYCLE LOGO MSTR11-12/04
14
(MAINSTAY LOGO)
MAINSTAY
VALUE FUND
The MainStay Funds
Annual Report
October 31, 2004
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quarter of 2004, and according to
preliminary estimates from the Bureau of Economic Analysis, gross domestic
product grew at a seasonally adjusted annual rate of 3.9% in the third quarter
of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 2
- ----------------------------------------------------
Investment and Performance Comparison 3
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 6
- ----------------------------------------------------
Portfolio of Investments 8
- ----------------------------------------------------
Financial Statements 11
- ----------------------------------------------------
Notes to Financial Statements 16
Report of Independent Registered Public
Accounting Firm 21
- ----------------------------------------------------
Trustees and Officers 22
- ----------------------------------------------------
Proxy Voting Policies and Procedures 24
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 24
- ----------------------------------------------------
Federal Income Tax Information 25
- ----------------------------------------------------
MainStay Funds 26
</Table>
2 MainStay Value Fund
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 5.23% 1.43% 6.99%
Excluding sales charges 11.36 2.59 7.60
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/94 9450 10000
10964 12471
13359 15431
16395 20552
16265 23599
17304 27500
19220 29017
17896 25575
14619 23012
17656 28276
10/31/04 19661 32646
</Table>
<Table>
-- MainStay Value Fund -- Russell 1000 Value Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 5.56% 1.45% 6.86%
Excluding sales charges 10.56 1.83 6.86
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/94 10000 10000
11530 12471
13971 15431
17070 20552
16808 23599
17737 27500
19560 29017
18068 25575
14649 23012
17563 28276
10/31/04 19417 32646
</Table>
<Table>
-- MainStay Value Fund -- Russell 1000 Value Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 9.56% 1.83% 6.86%
Excluding sales charges 10.56 1.83 6.86
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/94 10000 10000
11530 12471
13971 15431
17070 20552
16808 23599
17737 27500
19560 29017
18068 25575
14649 23012
17563 28276
10/31/04 19417 32646
</Table>
<Table>
-- MainStay Value Fund -- Russell 1000 Value Index
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee, and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Class R1 shares are sold with
no initial sales charge or CDSC and have no annual 12b-1 fee. Class R2 shares
are sold with no initial sales charge or CDSC and have an annual 12b-1 fee of
..25%. Class R1 and Class R2 shares are available only through
corporate-sponsored retirement programs, which include certain minimum program
requirements. From inception (5/1/86) through 12/31/94 (for Class A, first
offered 1/3/95), 8/31/98 (Class C, first offered 9/1/98), and 12/31/03 (Class I,
R1, and R2, first offered 1/2/04), performance of Class A, C, I, R1, and R2
shares includes the historical performance of Class B shares adjusted to reflect
the applicable sales charge (or CDSC) and fees and expenses for Class A, C, I,
R1, and R2 shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 3
CLASS I SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
11.74% 2.83% 7.92%
</Table>
(LINE GRAPH FOR CLASS I SHARES IN $)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/94 10000 10000
11643 12471
14252 15431
17580 20552
17484 23599
18629 27500
20740 29017
19339 25575
15832 23012
19171 28276
10/31/04 21423 32646
</Table>
<Table>
-- MainStay Value Fund -- Russell 1000 Value Index
</Table>
CLASS R1 SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
11.66% 2.75% 7.82%
</Table>
(LINE GRAPH FOR CLASS R1 SHARES IN $)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/94 10000 10000
11638 12471
14226 15431
17540 20552
17418 23599
18537 27500
20629 29017
19219 25575
15719 23012
19012 28276
10/31/04 21229 32646
</Table>
<Table>
-- MainStay Value Fund -- Russell 1000 Value Index
</Table>
CLASS R2 SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
11.37% 2.49% 7.55%
</Table>
(LINE GRAPH FOR CLASS R2 SHARES IN $)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/94 10000 10000
11601 12471
14149 15431
17399 20552
17240 23599
18312 27500
20320 29017
18885 25575
15414 23012
18593 28276
10/31/04 20706 32646
</Table>
<Table>
-- MainStay Value Fund -- Russell 1000 Value Index
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Russell 1000(R) Value Index(1) 15.45% 3.49% 12.56%
Average Lipper large-cap value fund(2) 11.58 2.01 10.15
</Table>
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. The Russell 1000(R) Value Index is
considered to be the Fund's broad-based securities-market index for
comparison purposes. 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.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Value Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY VALUE FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/01/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,026.50 $ 6.62 $1,018.50 $ 6.60
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,022.75 $10.42 $1,014.75 $10.38
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,022.75 $10.42 $1,014.75 $10.38
- ------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,026.90 $ 4.89 $1,020.20 $ 4.87
- ------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,027.50 $ 5.40 $1,019.70 $ 5.38
- ------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,025.85 $ 6.67 $1,018.45 $ 6.65
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
<Table>
Common Stocks 89.4%
Short-Term Investments (Collateral from securities lending
is 11.2%) 13.6
Convertible Preferred Stocks 2.5
Liabilities in Excess of Cash and Other Assets -5.5%
</Table>
See Portfolio of Investments on page 8 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Citigroup, Inc.
2. Bank of America Corp.
3. Verizon Communications, Inc.
4. JPMorgan Chase & Co.
5. ExxonMobil Corp.
6. CVS Corp.
7. International Business Machines Corp.
8. Transocean, Inc.
9. Computer Sciences Corp.
10. Sprint Corp.
</Table>
www.mainstayfunds.com 5
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Richard A. Rosen of MacKay Shields LLC
WHAT MAJOR FACTORS INFLUENCED THE STOCK MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2004?
An improving economy and strong growth in corporate profits drove stock prices
higher during the 12-month period. Despite three Federal Open Market Committee
increases in the targeted federal funds rate, the interest-rate and inflation
outlook remained relatively benign through most of the reporting period. In the
spring and summer of 2004, the equity markets' upward trend reversed and then
paused when investors became concerned about higher energy prices and the
unsteady pace of job growth. The ongoing risks associated with election-year
politics and geopolitical uncertainty also remained unsettling factors. Even so,
equities finished the 12-month period on a strong note, as the national
elections approached, energy prices eased somewhat, and investors appeared to
take a more positive view of stock valuations.
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests at least 65% of its total assets in equity securities
and is not managed primarily to produce current income. In implementing this
strategy, the Fund normally invests in common stocks that we believe to be
"undervalued," or selling below their value, when purchased. The stocks in which
the Fund invests typically pay dividends, but the Fund may invest in
non-dividend-paying stocks if they meet the "undervalued" criterion. Normally,
the Fund invests in stocks that are listed on a national securities exchange or
are traded in the over-the-counter market. When assessing whether a stock is
undervalued, we compare the stock's market price to the company's cash flow and
interest coverage ratios, the company's book value, the estimated value of the
company's assets, the company's growth rates, and its future earnings. We may
sell stocks if we no longer believe they will contribute to meeting the
investment objective of the Fund.
WHICH SECTORS HAD THE GREATEST IMPACT ON THE FUND'S PERFORMANCE DURING THE
ANNUAL PERIOD?
Information technology and energy were the Fund's top-performing sectors
relative to the Russell 1000(R) Value Index.(1) These positive contributions,
however, were offset by mediocre individual stock performance in the financials
and health care sectors.
WHAT WERE SOME OF THE FUND'S STRONG PERFORMERS DURING THE REPORTING PERIOD?
CVS rose 24% during the reporting period,(2) as sales trends in the company's
pharmacy business continued on a solid course and the company's purchase of
Eckerd stores in Texas and Florida met with investor approval.
Rising oil and gas prices helped the shares of many of the Fund's energy sector
holdings, including integrated producers ConocoPhillips (+51%), Chevron-
Texaco (+48%), and ExxonMobil (+38%). We reduced the Fund's positions in each of
these stocks by the end of the reporting period, as they approached our price
targets. Throughout the period, we also tilted the Fund's energy exposure away
from producers, which were generating high levels of free cash flow, and toward
oil services and exploration companies that we believed were likely to benefit
from increased spending. These holdings also performed well during the reporting
period, led by Transocean (+84%) and Kerr-McGee (+48%).
Holdings in the information technology and telecommunications services sectors
also contributed positively to performance. Information technology services
company Computer Sciences (+25%) benefited from strengthening trends in bookings
and increased cash-flow generation. Motorola (+29%) benefited as profitability
markedly improved in its mobile handset unit and its other business segments. We
reduced the Fund's positions in these stocks when they each neared our price
targets during the reporting period. Wireless and wireline telecommunication
services company Sprint was another strong performer, gaining 23% from the
Fund's initial purchase in June 2004 through the end of the reporting period.
HOW DID THE FUND'S FINANCIAL STOCKS FARE DURING THE REPORTING PERIOD?
The shares of most insurance companies were hurt during the reporting period by
an investigation led by the New York attorney general into insurance brokerage
practices. Among the hardest-hit companies was Marsh & McLennan, a specific
target of the New York's attorney general. From the time we
1. See footnote on page 4 for more information on the Russell 1000(R) Value
Index.
2. Performance percentages reflect the price performance of the securities
mentioned for the 12 months ended October 12, 2004, or for the portion of the
reporting period shares were held in the Fund, if shorter. Performance
percentages 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.
6 MainStay Value Fund
purchased the stock in January 2004 through the end of the reporting period, the
share price was down 42%. We sold a portion of the Fund's Marsh & McLennan
position at levels well above the period-end closing price. We sold the
remainder of the position near the price at which the stock closed on October
29, 2004. Insurance provider AIG also felt the impact of the attorney general's
investigation, although AIG's shares were up 4% from the time we initiated a
position in December 2003 through the end of the Fund's fiscal year. We reduced
the Fund's position in AIG near the end of the reporting period. Despite
industry volatility, several of the Fund's other insurance-related holdings
posted strong 12-month results. The price of Allstate shares rose 25%, and the
price of Prudential Financial shares advanced 22%.
The industrials sector generally improved with the economy. Burlington Northern
Santa Fe (+47%), Boeing (+32%), and Cooper Industries (+24%) were among the
Fund's stronger holdings. As these stocks approached our price targets, we
reduced all three positions.
WHICH STOCKS DETRACTED FROM THE FUND'S RESULTS?
Several pharmaceutical holdings were weak, including Merck (-27%) which fell
when its popular drug Vioxx was recalled. We reduced the Fund's position in
Merck at levels above the period-end closing price, but we continued to hold a
position in this stock, as we believed the shares to be near the bottom of their
historical valuation range. Shares of pharmaceutical competitor Pfizer (-7%)
fell from our August 2004 purchase price through the end of the period, and we
reduced the Fund's position in this stock as well.
Navistar (-15%), a truck manufacturer, was an exception to the positive trend in
the industrials sector. After posting strong gains in 2003, Navistar saw its
share price decline throughout much of the reporting period. Fortunately, we
reduced the Fund's position at levels above the end-of-period closing price.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2004, the Fund had overweighted positions relative to the
Russell 1000(R) Value Index in consumer staples, energy, health care,
industrials, materials, and information technology. As of the same date, the
Fund was underweighted relative to the Index in consumer discretionary,
financials, and utilities.
WHAT DO YOU ANTICIPATE GOING FORWARD?
We intend to continue to emphasize stocks with better-than-market visibility for
earnings and cash-flow generation, as well as stocks with well-below-market
valuations. At the end of the period, we were finding many stocks with these
characteristics in the energy, consumer staples, and information technology
sectors, but were finding few similar opportunities in the utilities and
consumer discretionary sectors.
We expect energy prices to remain at relatively high levels, which may spur
increased exploration and production activity and benefit oil-drilling
companies. We have also added to the Fund's holdings in the information
technology and consumer staples sectors, as cash-flow generation prospects have
improved for many of these companies. Many health care stocks have struggled in
2004 because of political and company-specific concerns. Since we see an
emerging theme in this sector, we may add to the Fund's health care holdings as
opportunities arise.
We intend to remain underweighted in areas of the market that depend on consumer
spending, based on questions about where incremental increases might be
generated. We have focused our concerns on the consumer discretionary sector and
some financial institutions. Despite a strong showing in 2004, utilities appear
to offer little value going forward, and we intend to maintain the Fund's
underweighted position in this sector. We remain confident in our disciplined
classic value strategy and will continue to seek opportunities among undervalued
stocks with improving fundamental characteristics.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
www.mainstayfunds.com 7
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (89.4%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (3.5%)
Boeing Co. (The) 100,100 $ 4,994,990
Northrop Grumman Corp. 234,200 12,119,850
Raytheon Co. 196,600 7,171,968
------------
24,286,808
------------
BUILDING PRODUCTS (0.7%)
American Standard Cos., Inc. (a) 139,000 5,083,230
------------
CAPITAL MARKETS (5.1%)
Goldman Sachs
Group, Inc. (The) 111,100 10,930,018
iShares Russell 1000
Value Index (f) 108,100 6,653,555
Merrill Lynch & Co., Inc. 204,900 11,052,306
State Street Corp. (c) 142,600 6,424,130
------------
35,060,009
------------
COMMERCIAL BANKS (9.2%)
VBank of America Corp. 482,126 21,594,424
PNC Financial Services
Group, Inc. (The) 157,100 8,216,330
U.S. Bancorp 381,900 10,926,159
Wachovia Corp. 282,500 13,901,825
Wells Fargo & Co. 151,200 9,029,664
------------
63,668,402
------------
COMMUNICATIONS EQUIPMENT (2.9%)
Motorola, Inc. 495,600 8,554,056
Nokia Corp. ADR (d) 747,600 11,527,992
------------
20,082,048
------------
COMPUTERS & PERIPHERALS (3.3%)
Hewlett-Packard Co. 384,800 7,180,368
VInternational Business
Machines Corp. 172,000 15,437,000
------------
22,617,368
------------
CONTAINERS & PACKAGING (1.4%)
Smurfit-Stone Container Corp. (a)(c) 564,200 9,794,512
------------
DIVERSIFIED FINANCIAL SERVICES (6.1%)
VCitigroup, Inc. 571,066 25,338,198
VJPMorgan Chase & Co. 433,792 16,744,371
------------
42,082,569
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (8.6%)
ALLTEL Corp. 145,200 7,975,836
BellSouth Corp. 348,300 9,289,161
</Table>
<Table>
<Caption>
SHARES VALUE
DIVERSIFIED TELECOMMUNICATION SERVICES (CONTINUED)
SBC Communications, Inc. 410,700 $ 10,374,282
VSprint Corp. 685,300 14,357,035
VVerizon Communications, Inc. 443,800 17,352,580
------------
59,348,894
------------
ELECTRICAL EQUIPMENT (0.5%)
Cooper Industries, Ltd. Class A 56,000 3,578,400
------------
ENERGY EQUIPMENT & SERVICES (6.0%)
ENSCO International, Inc. 163,600 4,997,980
Pride International, Inc. (a) 407,200 7,525,056
Rowan Cos., Inc. (a) 553,600 14,133,408
VTransocean, Inc. (a) 428,500 15,104,625
------------
41,761,069
------------
FOOD & STAPLES RETAILING (3.7%)
VCVS Corp. (c) 380,300 16,527,838
Kroger Co. (The) (a) 598,000 9,035,780
------------
25,563,618
------------
FOOD PRODUCTS (5.1%)
Cadbury Schweppes PLC ADR (d) 349,600 11,711,600
General Mills, Inc. 310,500 13,739,625
Kraft Foods, Inc. Class A (c) 283,900 9,456,709
------------
34,907,934
------------
HEALTH CARE PROVIDERS & SERVICES (1.0%)
HCA, Inc. 193,300 7,099,909
------------
HOUSEHOLD PRODUCTS (1.8%)
Kimberly-Clark Corp. 212,600 12,685,842
------------
INSURANCE (7.1%)
Allstate Corp. (The) 206,500 9,930,585
American International
Group, Inc. 96,100 5,834,231
Hartford Financial Services Group, Inc. (The) 171,400 10,023,472
Prudential Financial, Inc. (c) 289,400 13,448,418
St. Paul Travelers
Cos., Inc. (The) 287,511 9,763,874
------------
49,000,580
------------
IT SERVICES (2.1%)
VComputer Sciences Corp. (a) 294,600 14,632,782
------------
MACHINERY (1.6%)
Navistar International Corp. (a) 329,700 11,391,135
------------
</Table>
8 MainStay Value Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
METALS & MINING (1.7%)
Alcoa, Inc. 362,156 $ 11,770,070
------------
OIL & GAS (7.7%)
ChevronTexaco Corp. 261,604 13,880,708
ConocoPhillips 163,200 13,759,392
VExxonMobil Corp. 336,600 16,567,452
Kerr-McGee Corp. 153,800 9,108,036
------------
53,315,588
------------
PAPER & FOREST PRODUCTS (2.2%)
Bowater, Inc. (c) 175,500 6,465,420
International Paper Co. (c) 228,800 8,811,088
------------
15,276,508
------------
PHARMACEUTICALS (3.4%)
Bristol-Myers Squibb Co. 459,600 10,768,428
Merck & Co., Inc. 174,100 5,451,071
Pfizer, Inc. 243,100 7,037,745
------------
23,257,244
------------
ROAD & RAIL (0.8%)
Burlington Northern
Santa Fe Corp. 133,800 5,594,178
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.7%)
Advanced Micro Devices, Inc. (a)(c) 278,100 4,677,642
------------
SOFTWARE (0.1%)
BMC Software, Inc. (a) 45,600 862,752
------------
SPECIALTY RETAIL (2.0%)
Gap, Inc. (The) 675,100 13,488,498
------------
THRIFTS & MORTGAGE FINANCE (1.1%)
Washington Mutual, Inc. 198,450 7,682,000
------------
Total Common Stocks
(Cost $547,963,707) 618,569,589
------------
CONVERTIBLE PREFERRED STOCKS (2.5%)
- --------------------------------------------------------------------------------
OIL & GAS (1.5%)
Goldman Sachs
Group, Inc. (The)
2.50% Series BSKT (e) 100,000 10,120,800
------------
</Table>
<Table>
<Caption>
SHARES VALUE
SOFTWARE (1.0%)
Goldman Sachs
Group, Inc. (The)
2.00% Series BMC (e) 360,640 $ 6,800,949
------------
Total Convertible
Preferred Stocks
(Cost $16,065,965) 16,921,749
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (13.6%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (10.4%)
AIG Funding, Inc.
1.78%, due 11/2/2004 $ 15,000,000 14,999,258
American Express Credit Corp.
1.80%, due 11/18/2004 8,000,000 7,993,198
Chevron Texaco Funding Corp.
1.75%, due 11/8/2004 8,000,000 7,997,277
Harvard University
1.73%,due 11/19/2004 7,000,000 6,993,941
International Business
Machines Corp.
1.70%, due 11/1/2004 2,525,000 2,525,000
Lilly (Eli) & Co.
1.72%, due 11/3/2004 9,420,000 9,419,099
Starbird Funding Corp.
2.09%, due 3/14/05 (g) 7,500,000 7,443,752
UBS Finance (Delaware) LLC
1.89%, due 11/1/2004 15,000,000 15,000,000
------------
Total Commercial Paper
(Cost $72,371,525) 72,371,525
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.2%)
AIM Institutional Funds Group (g) 1,131,334 1,131,334
------------
Total Investment Company (Cost $1,131,334) 1,131,334
------------
<Caption>
PRINCIPAL
AMOUNT
MASTER NOTE (0.2%)
Banc of America Securities LLC 1.9549%, due
11/1/04 (g) $ 1,428,000 1,428,000
------------
Total Master Note
(Cost $1,428,000) 1,428,000
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (2.8%)
Credit Suisse First Boston LLC
1.9249%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $1,267,203 (g)
(Collateralized by Various Bonds with a
Principal Amount of $1,270,544 and a Market
Value of $1,292,386) $ 1,267,000 $ 1,267,000
Lehman Brothers, Inc.
1.9249%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $7,161,149 (g)
(Collateralized by Various Bonds with a
Principal Amount of $14,266,127 and a Market
Value of $7,348,915) 7,160,000 7,160,000
Merrill Lynch & Co., Inc.
1.9549%, dated 10/29/04 due 11/1/04
Proceeds at Maturity $10,834,765 (g)
(Collateralized by Various Bonds with a
Principal Amount of $10,712,809 and a Market
Value of $11,375,025) 10,833,000 10,833,000
------------
Total Repurchase Agreements (Cost $19,260,000) 19,260,000
------------
Total Short-Term Investments (Cost $94,190,859) 94,190,859
------------
Total Investments (Cost $658,220,531) (h) 105.5% 729,682,197(i)
Liabilities in Excess of
Cash & Other Assets (5.5) (37,749,527)
------------- ------------
Net Assets 100.0% $691,932,670
============= ============
</Table>
<Table>
(a) Non-income producing security.
(b) Less than one-tenth of a percent.
(c) Represents security, or a portion thereof, which is out
on loan.
(d) ADR-American Depositary Receipt.
(e) Synthetic Convertible -- an equity linked security
issued by an entity other than the issuer of the
underlying equity instrument.
(f) Exchange Traded Fund -- represents a basket of
securities that are traded on an exchange.
(g) Represents security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(h) The cost for federal income tax purposes is
$660,570,044.
(i) At October 31, 2004 net unrealized appreciation was
$69,112,153, 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 $81,520,900 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $12,408,747.
</Table>
10 MainStay Value Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $658,220,531) including
$26,404,559 market value of securities
loaned $729,682,197
Cash 922
Deposits with brokers for securities loaned 4,036
Receivables:
Investment securities sold 7,970,015
Dividends and interest 1,348,588
Fund shares sold 120,139
Other assets 26,171
------------
Total assets 739,152,068
------------
LIABILITIES:
Securities lending collateral 29,267,122
Payables:
Investment securities purchased 15,977,104
Fund shares redeemed 590,259
NYLIFE Distributors 511,005
Manager 378,324
Transfer agent 377,447
Custodian 13,096
Trustees 9,495
Accrued expenses 95,546
------------
Total liabilities 47,219,398
------------
Net assets $691,932,670
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 64,628
Class B 308,521
Class C 2,418
Class I 1
Class R1 1
Class R2 2,642
Additional paid-in capital 659,858,096
Accumulated undistributed net investment
income 737,736
Accumulated net realized loss on investments
and written option transactions (40,503,039)
Net unrealized appreciation on investments 71,461,666
------------
Net assets $691,932,670
============
CLASS A
Net assets applicable to outstanding shares $118,818,268
============
Shares of beneficial interest outstanding 6,462,783
============
Net asset value per share outstanding $ 18.39
Maximum sales charge (5.50% of offering price) 1.07
------------
Maximum offering price per share outstanding $ 19.46
============
CLASS B
Net assets applicable to outstanding shares $563,837,704
============
Shares of beneficial interest outstanding 30,852,110
============
Net asset value and offering price per share
outstanding $ 18.28
============
CLASS C
Net assets applicable to outstanding shares $ 4,418,375
============
Shares of beneficial interest outstanding 241,763
============
Net asset value and offering price per share
outstanding $ 18.28
============
CLASS I
Net assets applicable to outstanding shares $ 1,032
============
Shares of beneficial interest outstanding 56
============
Net asset value and offering price per share
outstanding $ 18.43
============
CLASS R1
Net assets applicable to outstanding shares $ 1,031
============
Shares of beneficial interest outstanding 56
============
Net asset value and offering price per share
outstanding $ 18.42
============
CLASS R2
Net assets applicable to outstanding shares $ 4,856,260
============
Shares of beneficial interest outstanding 264,201
============
Net asset value and offering price per share
outstanding $ 18.38
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $13,947,026
Interest 496,893
Income from securities loaned -- net 151,377
-----------
Total income 14,595,296
-----------
EXPENSES:
Manager 4,420,269
Distribution -- Class B 4,364,744
Distribution -- Class C 29,255
Transfer agent -- Classes A, B and C 2,389,349
Transfer agent -- Classes I, R1 and R2 2,762
Service -- Class A 297,674
Service -- Class B 1,454,915
Service -- Class C 9,751
Service -- Class R2 2,790
Shareholder communication 162,966
Professional 97,455
Recordkeeping 97,270
Custodian 76,344
Registration 50,494
Trustees 50,195
Miscellaneous 38,592
-----------
Total expenses 13,544,825
-----------
Net investment income 1,050,471
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND WRITTEN
OPTION TRANSACTIONS:
Net realized gain from:
Security transactions 47,879,070
Written option transactions 197,294
-----------
Net realized gain on investments and written
option transactions 48,076,364
-----------
Net change in unrealized appreciation on
investments 22,189,601
-----------
Net realized and unrealized gain on investments
and written option transactions 70,265,965
-----------
Net increase in net assets resulting from
operations $71,316,436
===========
</Table>
12 MainStay Value Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment income $ 1,050,471 $ 1,589,008 $ 1,391,003
Net realized gain
(loss) on investments
and written option
transactions 48,076,364 (12,489,841) (69,510,057)
Net change in
unrealized
appreciation
(depreciation) on
investments and
written option
transactions 22,189,601 111,856,028 (126,335,292)
-------------------------------------------
Net increase (decrease)
in net assets
resulting from
operations 71,316,436 100,955,195 (194,454,346)
-------------------------------------------
Dividends and distribution to
shareholders:
From net investment income:
Class A (330,510) (715,302) (829,279)
Class B (553,974) (615,014) (295,185)
Class C (3,274) (3,236) (1,246)
From net realized gain on
investments:
Class A -- -- (1,242,187)
Class B -- -- (6,335,113)
Class C -- -- (28,151)
-------------------------------------------
Total dividends and
distributions to
shareholders (887,758) (1,333,552) (8,731,161)
-------------------------------------------
</Table>
<Table>
<Caption>
2004 2003* 2002
Capital share transactions:
Net proceeds from sale of shares:
Class A $ 23,291,573 $ 32,974,027 $ 105,753,757
Class B 29,566,755 26,713,170 45,457,546
Class C 1,700,177 2,004,101 2,710,624
Class I 1,000 -- --
Class R1 1,000 -- --
Class R2 6,632,744 -- --
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A 320,495 699,669 2,019,522
Class B 536,956 594,905 6,434,917
Class C 2,413 2,445 21,560
-------------------------------------------
62,053,113 62,988,317 162,397,926
Cost of shares redeemed:
Class A (30,043,320) (39,146,443) (115,637,418)
Class B (84,570,388) (66,610,376) (117,411,603)
Class C (722,335) (1,658,503) (1,412,165)
Class I -- -- --
Class R1 -- -- --
Class R2 (1,792,733) -- --
-------------------------------------------
(117,128,776) (107,415,322) (234,461,186)
Decrease in net
assets derived from
capital share
transactions (55,075,663) (44,427,005) (72,063,260)
-------------------------------------------
Net increase
(decrease) in net
assets 15,353,015 55,194,638 (275,248,767)
NET ASSETS:
Beginning of period 676,579,655 621,385,017 896,633,784
-------------------------------------------
End of period $691,932,670 $676,579,655 $ 621,385,017
===========================================
Accumulated
undistributed net
investment income at
end of period $ 737,736 $ 575,023 $ 319,567
===========================================
</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. www.mainstayfunds.com
13
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 16.56 $ 14.13 $ 18.52 $ 19.12 $ 18.18 $ 17.16
-------- -------- -------- -------- -------- --------
Net investment income (loss) 0.14(a) 0.11 0.12 0.19 0.15 0.12
Net realized and unrealized gain (loss) on
investments 1.74 2.42 (4.23) (0.52) 1.96 1.29
-------- -------- -------- -------- -------- --------
Total from investment operations 1.88 2.53 (4.11) (0.33) 2.11 1.41
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.05) (0.10) (0.11) (0.19) (0.15) (0.00)(c)
From net realized gain on investments -- -- (0.17) (0.08) (0.91) (0.32)
Return of capital -- -- -- -- (0.11) (0.07)
-------- -------- -------- -------- -------- --------
Total dividends and distributions (0.05) (0.10) (0.28) (0.27) (1.17) (0.39)
-------- -------- -------- -------- -------- --------
Net asset value at end of period $ 18.39 $ 16.56 $ 14.13 $ 18.52 $ 19.12 $ 18.18
======== ======== ======== ======== ======== ========
Total investment return (b) 11.36% 18.02%(d) (22.16%) (1.74%) 11.89% 8.33%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.77% 0.93%+ 0.82% 0.99% 0.73% 0.70%
Expenses 1.30% 1.38%+ 1.30% 1.20% 1.20% 1.13%
Portfolio turnover rate 53% 47% 66% 88% 92% 61%
Net assets at end of period (in 000's) $118,818 $112,745 $101,999 $141,703 $113,111 $117,036
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $16.55 $14.13 $18.53 $19.12 $18.09 $17.15
------ ------ ------ ------ ------ ------
Net investment income (loss) 0.00(a)(c) 0.02 0.01 0.04 0.01 (0.01)
Net realized and unrealized gain (loss) on
investments 1.75 2.42 (4.23) (0.51) 1.95 1.28
------ ------ ------ ------ ------ ------
Total from investment operations 1.75 2.44 (4.22) (0.47) 1.96 1.27
------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income (0.02) (0.02) (0.01) (0.04) (0.01) (0.00)(c)
From net realized gain on investments -- -- (0.17) (0.08) (0.91) (0.32)
Return of capital -- -- -- -- (0.01) (0.01)
------ ------ ------ ------ ------ ------
Total dividends and distributions (0.02) (0.02) (0.18) (0.12) (0.93) (0.33)
------ ------ ------ ------ ------ ------
Net asset value at end of period $18.28 $16.55 $14.13 $18.53 $19.12 $18.09
====== ====== ====== ====== ====== ======
Total investment return (b) 10.56% 17.26%(d) (22.76%) (2.45%) 11.05% 7.51%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.02% 0.18%+ 0.07% 0.24% (0.02%) (0.05%)
Expenses 2.05% 2.13%+ 2.05% 1.95% 1.95% 1.88%
Portfolio turnover rate 53% 47% 66% 88% 92% 61%
Net assets at end of period (in 000's) $4,418 $3,095 $2,336 $1,631 $ 774 $ 631
</Table>
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
** First offered on January 2, 2004.
+ Annualized.
Per share data based on average shares outstanding during
(a) the period.
Total return is calculated exclusive of sales charges.
(b) Classes I, R1 and R2 are not subject to sales charges.
(c) Less than one cent per share.
(d) Total return is not annualized.
</Table>
14 MainStay Value Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH -------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 16.55 $ 14.13 $ 18.53 $ 19.12 $ 18.09 $ 17.15
-------- -------- -------- -------- -------- ----------
0.00(a)(c) 0.02 0.01 0.04 0.01 (0.01)
1.75 2.42 (4.23) (0.51) 1.95 1.28
-------- -------- -------- -------- -------- ----------
1.75 2.44 (4.22) (0.47) 1.96 1.27
-------- -------- -------- -------- -------- ----------
(0.02) (0.02) (0.01) (0.04) (0.01) (0.00)(c)
-- -- (0.17) (0.08) (0.91) (0.32)
-- -- -- -- (0.01) (0.01)
-------- -------- -------- -------- -------- ----------
(0.02) (0.02) (0.18) (0.12) (0.93) (0.33)
-------- -------- -------- -------- -------- ----------
$ 18.28 $ 16.55 $ 14.13 $ 18.53 $ 19.12 $ 18.09
======== ======== ======== ======== ======== ==========
10.56% 17.26%(d) (22.76%) (2.45%) 11.05% 7.51%
0.02% 0.18%+ 0.07% 0.24% (0.02%) (0.05%)
2.05% 2.13%+ 2.05% 1.95% 1.95% 1.88%
53% 47% 66% 88% 92% 61%
$563,838 $560,740 $517,050 $753,299 $819,003 $1,012,767
</Table>
<Table>
<Caption>
CLASS I CLASS R1 CLASS R2
------- -------- --------
JANUARY 2, 2004** THROUGH
OCTOBER 31,
2004
$17.86 $17.86 $17.86
------ ------ ------
0.09(a) 0.07(a) 0.12(a)
0.48 0.49 0.40
------ ------ ------
0.57 0.56 0.52
------ ------ ------
-- -- --
-- -- --
-- -- --
------ ------ ------
-- -- --
------ ------ ------
$18.43 $18.42 $18.38
====== ====== ======
3.19%(d) 3.14%(d) 2.91%(d)
1.11%+ 1.01%+ 0.76%+
0.96%+ 1.06%+ 1.31%+
53% 53% 53%
$ 1 $ 1 $4,856
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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 six classes of shares, Class A shares, Class B shares,
Class C shares, Class I shares, Class R1 shares and Class R2 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. Class I, Class R1 and Class R2 shares are not subject to
sales charge. Distribution of Class B shares and Class C shares commenced on May
1, 1986 and September 1, 1998, respectively.
Distribution of Class I shares, Class R1 shares and Class R2 shares commenced on
January 2, 2004. The six 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 and Class R2 shares under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares and
Class R1 shares are not subject to a distribution or service fee. Class R1 and
Class R2 shares are authorized to pay to New York Life Investment Management
LLC, its affiliates, or independent third-party service providers, as
compensation for services rendered to shareholders of Class R1 or Class R2
shares, a shareholder service fee.
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 for which market
quotations are not readily available are valued by methods deemed by the Board
of Trustees to represent fair value. Reasons for which securities may be valued
in this manner include, but are not limited to, trading for a security has been
halted or suspended, a security has been de-listed from a national exchange, or
trading on a security's primary market is temporarily closed at a time when
under normal conditions it would be open. The Fund did not hold securities at
October 31, 2004, that were valued in such manner.
(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. (See Note 6.)
(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 forgoes 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
16 MainStay Value Fund
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.
(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.
(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. Effective
December 1, 2004, NYLIM has voluntarily agreed to reimburse the expenses of the
Fund to the extent that operating expenses would exceed on an annualized basis
1.22%, 1.97% and 1.97% of the average daily net assets of the Class A, Class B
and Class C shares, respectively, and an equivalent reduction in the management
fee for Class I, Class R1 and Class R2 shares. For the year ended October 31,
2004, the Manager earned from the Fund $4,420,269.
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. To the extent the Manager has agreed to reimburse expenses of the
www.mainstayfunds.com 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
Class A, Class B, Class C and Class R2 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 and Class R2 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 and Class R2 shares, which is an expense of the
Class A and Class R2 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.
The Fund has adopted a shareholder services plan with respect to Class R1 and
Class R2 shares. Under the terms of this plan, Class R1 and Class R2 shares are
authorized to pay to NYLIM, its affiliates, or independent third-party
providers, as compensation for services rendered, a shareholder services fee at
the rate of 0.10% of the average daily net assets of the Fund's Class R1 and R2
shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $39,067 for the year ended
October 31, 2004. 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 $11,896, $249,437 and $1,243, respectively, for the year ended October
31, 2004.
(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 for the year ended October 31, 2004,
amounted to $2,392,111.
(E) NON-INTERESTED TRUSTEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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 $21,193 for the year ended October 31,
2004.
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 $97,270 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
State Street Bank and Trust Company is custodian of cash and securities of the
Fund. Custodian fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
ORDINARY ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
INCOME AND OTHER LOSSES APPRECIATION GAIN
$737,736 $(38,153,526) $69,112,153 $31,696,363
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals.
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $38,153,526 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund
18 MainStay Value 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 $15,725
2011 22,428
---------------------------------------------
$38,153
---------------------------------------------
</Table>
The tax character of distributions paid the year ended October 31, 2004, the ten
months ended October 31, 2003 and the year ended December 31, 2002, shown in the
Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid from:
Ordinary Income $887,758 $1,333,552 $1,125,710
Long-Term Gains -- -- 7,605,451
- ----------------------------------------------------------
$887,758 $1,333,552 $8,731,161
- ----------------------------------------------------------
</Table>
NOTE 6 -- PORTFOLIO SECURITIES LOANED AND WRITTEN OPTIONS:
As of October 31, 2004, the Fund had securities on loan with an aggregate market
value of $26,404,559 and received $29,267,122 in cash as collateral for
securities on loan. Pursuant to Rule 2a-7, securities purchased with collateral
received are valued at amortized cost.
Written option activity for year ended October 31, 2004 was as follows:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options outstanding at October 31,
2003 -- $--
Options -- written (3,880) (467,588)
Options -- buybacks 2,221 282,702
Options -- exercised 1,108 108,025
Options -- expired 551 76,861
- ----------------------------------------------------------
Options outstanding at October 31,
2004 -- $--
- ----------------------------------------------------------
</Table>
NOTE 7 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $348,448 and $420,105, respectively.
NOTE 8 -- 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 year ended October 31, 2004.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 1,298 1,650 95
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 19 31 --(a)
- ---------------------------------------------------------
1,317 1,681 95
- ---------------------------------------------------------
Shares redeemed (1,664) (4,712) (40)
- ---------------------------------------------------------
Net increase (decrease) (347) (3,031) 55
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 2, 2004, THROUGH
OCTOBER 31, 2004
CLASS I* CLASS R1* CLASS R2*
Shares sold --(a) --(a) 362
- -----------------------------------------------------------
Shares issued in
reinvestment of
dividends and
distributions -- -- --
- -----------------------------------------------------------
--(a) --(a) 362
- -----------------------------------------------------------
Shares redeemed -- -- (98)
- -----------------------------------------------------------
Net increase --(a) --(a) 264
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1, THROUGH
OCTOBER 31, 2003**
CLASS A CLASS B CLASS C
Shares sold 2,226 1,797 139
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 47 39 --(a)
- ---------------------------------------------------------
2,273 1,836 139
- ---------------------------------------------------------
Shares redeemed (2,683) (4,545) (117)
- ---------------------------------------------------------
Net increase (decrease) (410) (2,709) 22
- ---------------------------------------------------------
</Table>
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 6,321 2,723 169
- ---------------------------------------------------------
Shares issued in
reinvestment of
dividends and
distributions 141 456 1
- ---------------------------------------------------------
6,462 3,179 170
- ---------------------------------------------------------
Shares redeemed (6,894) (7,250) (93)
- ---------------------------------------------------------
Net increase (decrease) (432) (4,071) 77
- ---------------------------------------------------------
</Table>
* First offered on January 2, 2004.
** The Fund changed its fiscal year end from December 31 to October 31.
(a) Less than one-thousand.
NOTE 10 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 11 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
20 MainStay Value Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Value Fund (the "Fund"), one of
the funds constituting The MainStay Funds, as of October 31, 2004, and the
related statement of operations, statement of changes in net assets and the
financial highlights for the year or period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the period ended October 31, 2003 and the year ended December
31, 2002, and the financial highlights for the periods presented through October
31, 2003, were audited by other auditors, whose report dated December 18, 2003
expressed an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Value Fund of The MainStay Funds as of October 31, 2004, the results of
its operations, the changes in its net assets and its financial highlights for
the year or period then ended, in conformity with U.S. generally accepted
accounting principles.
(KPMG LLP SIGNATURE)
Philadelphia, Pennsylvania
December 28, 2004
www.mainstayfunds.com 21
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
22 MainStay Value Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 23
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
24 MainStay Value Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2004,
should be multiplied by 100% to arrive at the amount eligible for qualified
dividend income and 100% for the corporate dividends received deduction.
In January 2005, shareholders will receive on IRS Form 1099-DIV or substitute
Form 1099, the federal tax status of the distributions received by shareholders
in calendar year 2004. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2004.
www.mainstayfunds.com 25
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
26 MainStay Value Fund
(MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06352 [RECYCLE LOGO] MSV11-12/04
15
(MAINSTAY LOGO)
MAINSTAY
DIVERSIFIED INCOME FUND
The MainStay Funds
Annual Report
October 31, 2004
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quar-
ter of 2004, and according to preliminary estimates from the Bureau of Economic
Analysis, gross domestic product grew at a seasonally adjusted annual rate of
3.9% in the third quarter of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 2
- ----------------------------------------------------
Investment and Performance Comparison 3
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 6
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 25
- ----------------------------------------------------
Notes to Financial Statements 30
Report of Independent Registered Public
Accounting Firm 39
- ----------------------------------------------------
Trustees and Officers 40
- ----------------------------------------------------
Proxy Voting Policies and Procedures 42
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 42
- ----------------------------------------------------
MainStay Funds 43
</Table>
2 MainStay Diversified Income Fund
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 3.56% 5.98% 5.59%
Excluding sales charges 8.44 6.96 6.23
</Table>
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND THREE-INDEX COMPOSITE AGGREGATE BOND INDEX
-------------------- --------------------- --------------------
2/28/97 9550 10000 10000
10209 10676 10747
10451 11375 11750
10845 11498 11813
10834 11361 12675
11400 12192 14520
11332 12850 15375
14002 15123 16129
10/30/04 15183 16674 17021
</Table>
<Table>
-- MainStay Diversified Income Fund -- Three-Index Composite
- - Lehman Brothers Aggregate Bond Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 2.68% 5.85% 5.45%
Excluding sales charges 7.68 6.16 5.45
</Table>
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND THREE-INDEX COMPOSITE AGGREGATE BOND INDEX
-------------------- --------------------- --------------------
2/28/97 10000 10000 10000
10635 10676 10747
10802 11375 11750
11143 11498 11813
11031 11361 12675
11535 12192 14520
11370 12850 15375
13953 15123 16129
10/30/04 15025 16674 17021
</Table>
<Table>
-- MainStay Diversified Income Fund -- Three-Index Composite
- - Lehman Brothers Aggregate Bond Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 6.68% 6.16% 5.45%
Excluding sales charges 7.68 6.16 5.45
</Table>
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND THREE-INDEX COMPOSITE AGGREGATE BOND INDEX
-------------------- --------------------- --------------------
2/28/97 10000 10000 10000
10635 10676 10747
10802 11375 11750
11143 11498 11813
11031 11361 12675
11535 12192 14520
11370 12850 15375
13953 15123 16129
10/30/04 15025 16674 17021
</Table>
<Table>
-- MainStay Diversified Income Fund -- Three-Index Composite
- - Lehman Brothers Aggregate Bond Index
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 4.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee, and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. From inception (2/28/97)
through 8/31/98, performance for Class C shares (first offered 9/1/98), includes
the historical performance of Class B shares adjusted to reflect the applicable
CDSC for Class C shares. From inception (2/28/97) through 12/31/03, performance
for Class I shares (first offered 1/2/04) includes the historical performance of
Class A shares adjusted to reflect the applicable fees and expenses for Class I
shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 3
CLASS I SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
8.82% 7.25% 6.51%
</Table>
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND THREE-INDEX COMPOSITE AGGREGATE BOND INDEX
-------------------- --------------------- --------------------
2/28/97 10000.00 10000.00 10000.00
10708.00 10676.00 10747.00
10989.00 11375.00 11750.00
11433.00 11498.00 11813.00
11451.00 11361.00 12675.00
12080.00 12192.00 14520.00
12038.00 12850.00 15375.00
14910.00 15123.00 16129.00
10/31/04 16225.00 16674.00 17021.00
</Table>
<Table>
-- MainStay Diversified Income Fund -- Three-Index Composite
- - Lehman Brothers Aggregate Bond Index
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
Three-Index Composite(1) 10.25% 7.72% 6.89%
Lehman Brothers(R) Aggregate Bond
Index(2) 5.53 7.58 7.18
Average Lipper multi-sector income
fund(3) 9.06 7.02 5.97
</Table>
1. 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. The
Fund's Three-Index Composite is considered to be the Fund's broad-based
securities-market index for comparison purposes. An investment cannot be made
directly into an index or this composite.
2. The Lehman Brothers(R) Aggregate Bond Index is an unmanaged index that
includes the following other unmanaged Lehman Brothers(R) Indices: 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(R) 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.
3. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Diversified Income Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY DIVERSIFIED INCOME FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,049.85 $ 7.27 $1,017.95 $ 7.15
- ------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,046.20 $11.11 $1,014.20 $10.94
- ------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,046.20 $11.11 $1,014.40 $10.94
- ------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,051.10 $ 5.77 $1,019.40 $ 5.69
- ------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
<Table>
Corporate Bonds 34.4%
Foreign Government Bonds 21.5
U.S. Government and Federal Agencies 20.9
Short-Term Investments 13.4
Corporate Bonds -- Foreign 10.3
Yankee Bonds 1.4
Convertible Bonds 1.0
Asset-Backed Securities 0.9
Mortgage-Backed Securities 0.9%
Preferred Stocks 0.7
Common Stocks 0.6
Convertible Preferred Stocks 0.2
Loan Assignments and Participations 0.2
Municipal Bond 0.1
Warrants 0.1
Liabilities in Excess of Cash and Other Assets -6.6
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Deutsche Bundesrepublik 3.75%, due 1/4/09
2. FNMA (TBA) 5.50%, due 11/18/19
3. U.S. Treasury Note 4.75%, due 5/15/14
4. Deutsche Bundesrepublik 5.00%, due 7/4/11
5. FHLMC (TBA) 5.50%, due 12/13/34
6. U.S. Treasury Note 4.625%, due 5/15/06
7. U.S. Treasury Note 6.00%, due 8/15/09
8. FNMA 5.50%, due 11/1/33
9. Development Bank of Japan 1.60%, due
6/20/14
10. FNMA (TBA) 5.50%, due 12/13/34
</Table>
www.mainstayfunds.com 5
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Donald E. Morgan and Joseph Portera of
MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests at least 65% of its total assets in a diversified
portfolio of domestic and foreign debt or debt-related securities issued by
government and corporate issuers. The securities may be denominated in U.S. or
foreign currencies and may have fixed, variable, floating, or inverse-floating
rates of interest. The Fund invests in various bond market sectors (U.S.
government--including mortgage-related and asset-backed--securities, foreign
government, U.S. corporate and foreign corporate, including high-yield
securities in each of the sectors). Allocations across market sectors are based
on current and projected economic and market conditions. In implementing this
strategy, we seek to identify investment opportunities based on the financial
condition and competitiveness of individual companies. In making allocation and
sector decisions, we may rely on fundamental economic cycle analysis. We may
also consider credit quality and interest-rate trends. Investments may include
bonds of established economies and emerging markets.
HOW DID YOU POSITION THE FUND DURING THE 12 MONTHS ENDED OCTOBER 31, 2004?
We tend to take a long-term view of asset allocation and try to avoid shifting
in and out of the broader sectors. During the reporting period, we maintained a
static weighting of 33% in high-grade securities, 39% in high-yield bonds, and
28% in international debt.
HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK AND PEERS?
Despite the massive rally in high-yield securities, we elected to maintain only
a modestly overweighted position in high-yield bonds, since the benchmark
equally weights the three principal sectors in which the Fund invests. During
the reporting period, the Fund underperformed its peers for reasons that were
difficult to pinpoint in light of the market's many undercurrents. The average
peer fund may have held more high-yield debt or may have had broader exposure to
foreign currencies or emerging-market dollar debt. Our prudent
currency-management strategy gave the Fund at most a 12% exposure to foreign
exchange fluctuations. During the reporting period, however, the U.S. dollar
weakened, and more than half of the Citigroup(R) Non-U.S. Dollar Bond Index's(1)
12.2% return in U.S. dollars was attributable to currency movements.
HIGH-GRADE DOMESTIC BONDS
WHAT ECONOMIC FACTORS INFLUENCED THE HIGH-GRADE BOND MARKET DURING THE 12 MONTHS
ENDED OCTOBER 31, 2004?
The Federal Reserve maintained the targeted federal funds rate at an
accommodative 1.00% through the first half of the Fund's fiscal year, and from
November 2003 through March 2004, economic data was mixed. In April 2004,
however, uniformly firm economic releases challenged the assumption that there
was little risk of the economy overheating. Many investors began to believe the
Federal Reserve's cautionary stance would be relatively short-lived. Consistent
with market expectations, the Federal Open Market Committee tightened monetary
policy at its June 30, 2004, meeting by raising the targeted federal funds rate
to 1.25%. Another 25-basis-point rate hike followed in August, and yet another
in September. These moves brought the targeted federal funds rate to 1.75% at
the end of October 2004.
HOW DID THESE FACTORS AFFECT TREASURY YIELDS?
During the 12-month reporting period, the U.S. Treasury yield curve pivoted
around the five-year maturity benchmark. Two-year Treasury yields rose from 1.8%
to 2.6%; five-year yields were basically unchanged at 3.25%; 10-year yields fell
from 4.3% to 4.0%; and 30-year yields declined from 5.1% to 4.8%. The narrowing
of the yield spread between the two-year and 30-year maturities (commonly known
as a flattening of the yield curve) was prompted by Federal Reserve tightening,
lower inflation expectations, and large block purchases of U.S. Treasury
securities by foreign governments.
Funds that invest in bonds are subject to interest rate, credit, and inflation
risk and can lose principal when interest rates rise. 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.
1. See footnote on page 4 for more information on the Citigroup Non-U.S. Dollar
World Government Bond Index.
6 MainStay Diversified Income Fund
HOW DID YOU POSITION THE HIGH-GRADE PORTION OF THE FUND'S PORTFOLIO AMONG THE
VARIOUS BOND SECTORS?
The Fund's high-grade position in credit-related securities contributed
positively to the Fund's performance. High-grade positions in mortgage-backed
and asset-backed securities, which tend to perform well when U.S. Treasuries are
range bound, also had a positive impact. As of October 31, 2004, the high-grade
portion of the Fund's portfolio was diversified across U.S. Treasuries, agency
debentures, investment-grade corporates, residential mortgage-backed securities,
commercial mortgage-backed securities, and asset-backed securities.
HOW DID YIELD-CURVE AND DURATION POSITIONING AFFECT PERFORMANCE IN THE
HIGH-GRADE PORTION OF THE FUND'S PORTFOLIO?
We maintained a neutral yield-curve posture during the 12-month reporting
period, so the flattening of the yield curve had minimal impact on the Fund's
performance. Our duration positioning, however, detracted from relative
performance. We maintained a modestly shorter-than-benchmark duration for much
of the reporting period, as intermediate- and long-term Treasury yields rallied.
We had decided to shorten the Fund's duration early in the Fund's fiscal year,
anticipating that the unusually low average yield of the U.S. Treasury sector
was unsustainable. What we failed to appreciate was the sizeable impact of a
weaker U.S. dollar on interest rates. Specifically, foreign central banks bought
large blocks of U.S. Treasuries to stall the appreciation of their currencies
against the weaker U.S. dollar.
HIGH-YIELD BONDS
HOW DID YOU POSITION THE HIGH-YIELD PORTION OF THE FUND'S PORTFOLIO DURING THE
12-MONTH REPORTING PERIOD?
As the high-yield bond market continued to climb, the Fund continued to benefit
from our careful bottom-up security selection. Over the 12 months ended October
31, 2004, we reduced exposure to high-yield securities in the utilities,
wireless communications, telecommunications, information technology, and
food/tobacco sectors. We increased high-yield weightings among companies in
services and chemicals. At the end of October 2004, the high-yield portion of
the Fund's portfolio was overweighted relative to the Credit Suisse First
Boston(TM) High Yield Index(2) in broadcasting, cable/wireless, and airlines. At
the same time, the Fund was underweighted relative to the Index in gaming,
manufacturing, and food & drugs. As issuers sought to refinance while interest
rates were still low, several of the Fund's high-yield holdings tendered.
WHAT WERE SOME OF THE FUND'S STRONG HIGH-YIELD HOLDINGS DURING THE REPORTING
PERIOD?
The Fund's metal-related bonds--such as AK Steel, Algoma Steel, and Allegheny
Ludlum--were among the top performers for the last 12 months as commodity prices
strengthened and North American manufacturing activity increased. Cable
companies, including FrontierVision and UGC Europe, were also strong high-yield
performers for the reporting period. In December 2003, UnitedGlobalCom acquired
all shares of the recently reorganized UGC Europe. These companies were among
several cable providers that reported good earnings over the annual period. The
performance of these companies led to upbeat expectations for the industry as a
whole.
WERE THERE OTHER AREAS OF STRENGTH IN THE HIGH-YIELD PORTION OF THE FUND'S
PORTFOLIO?
Several of the Fund's wireless companies performed well over the 12-month
reporting period. US Unwired, Alamosa, Nextel International, and Mobifon each
outperformed related securities in the CSFB High Yield Index. The Fund's
holdings in Nextel International consisted of equity received as the result of a
restructuring at the beginning of 2003.
WERE THERE ANY HIGH-YIELD HOLDINGS THAT DIDN'T MEET YOUR EXPECTATIONS?
The Fund's high-yield investments in the airline industry had disappointing
performance, as airline costs rose with the rising price of oil. Concerns about
a possible bankruptcy at Delta Airlines affected our position in the company.
Delta sought a resolution with the pilots' union that didn't arrive until the
end of October 2004. Delta Airlines and Northwest Airlines were among the Fund's
poorest high-yield performers during the reporting period. Other high-yield
holdings that produced disappointing results were securities issued by utilities
company Calpine, restaurant company Family Restaurants, and cutting-and
welding-products company Thermadyne Holdings.
2. See footnote on page 4 for more information on the Credit Suisse First
Boston(TM) High Yield Index.
www.mainstayfunds.com 7
INTERNATIONAL BONDS
WHAT MAJOR FACTORS INFLUENCED THE INTERNATIONAL BOND MARKETS DURING THE 12
MONTHS ENDED OCTOBER 31, 2004?
In the early part of the reporting period, geopolitical risks buoyed government
bond markets. Few investors believed that the global economy was growing fast
enough to warrant higher interest rates soon. With improving economic data from
the United States, Japan, and China, however, rising rates became inevitable.
Indeed, for most of the period, the United Kingdom and Australian monetary
authorities were aggressively raising short-term interest rates.
HOW DID VARIOUS INTERNATIONAL-BOND MARKETS PERFORM?
Among developed international markets, the best performer was Norway, which
returned more than 8% in local currency terms for the 12-month reporting period.
The U.K., Canada, Australia, and Sweden each had 12-month returns better than 7%
in local currency terms. The worst performer was Japan, which was up only 1.5%
in local currency terms for the reporting period.
WHAT EFFECT DID CURRENCY POSITIONING HAVE ON THE INTERNATIONAL-BOND PORTION OF
THE FUND'S PORTFOLIO DURING THE REPORTING PERIOD?
Currency positioning was a major detractor from performance in the international
bond portion of the Fund's portfolio. During the reporting period, nearly every
major foreign currency rallied relative to the U.S. dollar. Unfortunately
defensive currency management and fundamental analysis led us to underweight
foreign currency in the portfolio, specifically but not solely in the Japanese
yen.
WHAT INFLUENCE DID COUNTRY ALLOCATION HAVE ON FUND PERFORMANCE?
Over the period, we made significant asset shifts among international-bond
markets, based primarily on interest-rate and currency-movement expectations. We
reduced exposure to Canadian dollar bonds. We redeployed some of those assets
into U.K. bonds and increased duration within the U.K. market significantly. We
also increased the Fund's exposure in core European bonds. Within the
Scandinavian markets, we increased exposure in Danish krone denominated bonds
and established a position in Norway, seeking to benefit from advances in the
oil sector. We believed that the Norwegian krone would likely outperform the
euro as oil prices continued to rise--and it did. Shifting the portfolio's
duration risk away from Canada and into markets that we believed would
outperform in a rising U.S. interest-rate environment proved effective, making a
positive contribution to the Fund's results. We also increased the Fund's
exposure to Japan during the reporting period. With Japanese short-term rates
close to zero, however, we focused on investments in corporate and emerging
names rather than on government bonds.
HOW DID EMERGING-MARKET DEBT PERFORM?
The Fund's holdings in emerging-market debt performed well over the 12-month
reporting period, despite higher U.S. interest rates. There was a sell-off in
the emerging-market sector during the second quarter of 2004, but
emerging-market debt subsequently recovered and posted impressive returns, as
yield spreads to U.S. Treasuries narrowed. We maintained about 12% of the Fund's
international-bond assets in emerging-market debt.
WHAT IS YOUR OUTLOOK FOR FUND?
Going forward, it appears that investors still have sufficient appetite for risk
to favor high-yielding assets. The Federal Reserve will no doubt continue to
raise the targeted federal funds rate slowly. As a result, we see value in
non-U.S. dollar denominated debt in markets where we believe interest-rate
tightening is unlikely. Continental Europe and the U.K. offer the best potential
to outperform U.S. Treasuries. We will continue to actively manage within each
subsector as well as the Fund's overall asset allocation as we seek to maximize
returns and minimize risks--especially credit and currency risks in the
higher-yielding portions of the Fund's portfolio.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8 MainStay Diversified Income Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (91.6%)+
ASSET-BACKED SECURITIES (0.9%)
- -------------------------------------------------------------------------------
CONSUMER FINANCE (0.6%)
BMW Vehicle Owner Trust
Series 2003-A Class A3
1.94%, due 2/25/07 $ 114,023 $ 113,744
Harley-Davidson Motorcycle Trust
Series 2004-1 Class A2
2.53%, due 11/15/11 430,000 425,583
Volkswagen Auto Loan Enhanced Trust
Series 2003-2 Class A3
2.27%, due 10/22/07 295,000 293,869
------------
833,196
------------
CONSUMER LOANS (0.1%)
Atlantic City Electric Transition Funding LLC
Series 2002-1 Class A4
5.55%, due 10/20/23 75,000 79,810
------------
DIVERSIFIED FINANCIAL SERVICES (0.1%)
Capital One Master Trust
Series 2001-5 Class A
5.30%, due 6/15/09 70,000 72,931
------------
MULTI-UTILITIES & UNREGULATED POWER (0.1%)
Public Service of New Hampshire Funding LLC
Pass-Through Certificates
Series 2002-1 Class A
4.58%, due 2/1/08 175,382 180,233
------------
THRIFTS & MORTGAGE FINANCE (0.0%) (B)
Vanderbilt Mortgage Finance
Series 1999-B Class 1A4
6.545%, due 4/7/18 26,355 26,920
------------
Total Asset-Backed Securities
(Cost $1,190,459) 1,193,090
------------
CONVERTIBLE BONDS (1.0%)
- -------------------------------------------------------------------------------
AIRLINES (0.0%) (B)
Delta Air Lines, Inc.
8.00%, due 6/3/23 95,000 46,075
------------
COMMUNICATIONS EQUIPMENT (0.5%)
CIENA Corp.
3.75%, due 2/1/08 203,000 169,505
Nortel Networks Corp.
4.25%, due 9/1/08 350,000 338,188
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMUNICATIONS EQUIPMENT (CONTINUED)
Riverstone Networks, Inc.
3.75%, due 12/1/06 (c)(d) $ 190,000 $ 174,800
------------
682,493
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%)
At Home Corp.
4.75%, due 12/15/06 (d) 504,238 68,072
------------
HEALTH CARE PROVIDERS & SERVICES (0.3%)
Laboratory Corp. of America Holdings
(zero coupon), due 9/11/21 (q) 185,000 138,981
Lincare Holdings, Inc.
3.00%, due 6/15/33 180,000 186,075
------------
325,056
------------
INSURANCE (0.0%) (B)
Loews Corp.
3.125%, due 9/15/07 35,000 34,431
------------
IT SERVICES (0.1%)
Electronic Data Systems Corp.
3.875%, due 7/15/23 90,000 92,025
------------
MEDIA (0.0%) (B)
Adelphia Communications Corp.
6.00%, due 2/15/06 (d) 80,000 18,800
------------
Total Convertible Bonds
(Cost $1,417,137) 1,266,952
------------
CORPORATE BONDS (34.4%)
- -------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.5%)
BE Aerospace, Inc., Series B
8.00%, due 3/1/08 40,000 40,400
8.875%, due 5/1/11 235,000 247,220
General Dynamics Corp.
4.50%, due 8/15/10 115,000 118,291
Sequa Corp.
Series B
8.875%, due 4/1/08 207,000 226,148
------------
632,059
------------
AIRLINES (0.7%)
American Airlines, Inc.
Series 2001-2 Class B
8.608%, due 4/1/11 170,000 144,314
+ Among the Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May
be subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -------------------------------------------------------------------------------
AIRLINES (CONTINUED)
Delta Air Lines, Inc.
8.30%, due 12/15/29 $ 421,000 $ 151,560
10.00%, due 8/15/08 45,000 23,625
10.375%, due 2/1/11 120,000 54,600
10.375%, due 12/15/22 180,000 66,600
Northwest Airlines, Inc.
8.875%, due 6/1/06 100,000 85,000
Series 1996-1
8.97%, due 1/2/15 21,343 13,308
9.875%, due 3/15/07 165,000 127,050
10.00%, due 2/1/09 145,000 99,325
Southwest Airlines Co.
5.25%, due 10/1/14 85,000 85,318
------------
850,700
------------
AUTO COMPONENTS (0.9%)
Advanced Accessory Systems
10.75%, due 6/15/11 25,000 22,750
Collins & Aikman Products
12.875%, due 8/15/12 (c)(e) 245,000 211,925
Dana Corp.
7.00%, due 3/1/29 120,000 117,600
Goodyear Tire & Rubber Co. (The)
6.375%, due 3/15/08 43,000 41,710
6.625%, due 12/1/06 85,000 87,550
8.50%, due 3/15/07 140,000 143,500
2nd Lien Note
11.00%, due 3/1/11 (c)(f) 425,000 476,000
Tenneco Automotive, Inc.
Series B
10.25%, due 7/15/13 95,000 110,675
------------
1,211,710
------------
AUTOMOBILES (0.3%)
DaimlerChrysler North America Holdings, Inc.
6.50%, due 11/15/13 285,000 311,217
General Motors Corp.
8.375%, due 7/15/33 130,000 135,276
------------
446,493
------------
BEVERAGES (0.1%)
Miller Brewing Co.
4.25%, due 8/15/08 (c) 155,000 158,142
------------
BUILDING PRODUCTS (0.3%)
Dayton Superior Corp.
10.75%, due 9/15/08 145,000 154,425
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
BUILDING PRODUCTS (CONTINUED)
Interline Brands, Inc.
11.50%, due 5/15/11 $ 180,000 $ 199,800
MMI Products, Inc.
Series B
11.25%, due 4/15/07 85,000 85,850
------------
440,075
------------
CAPITAL MARKETS (1.5%)
Bear Stearns Cos., Inc. (The)
4.00%, due 1/31/08 60,000 60,974
Goldman Sachs
Group, Inc. (The)
5.125%, due 4/24/13 E 170,000 228,433
6.345%, due 2/15/34 $ 275,000 280,268
LaBranche & Co., Inc.
9.50%, due 5/15/09 100,000 100,000
11.00%, due 5/15/12 195,000 200,119
Morgan Stanley & Co.
3.625%, due 4/1/08 265,000 266,466
4.75%, due 4/1/14 75,000 73,473
Series E
5.375%, due 11/14/13 L 390,000 709,471
------------
1,919,204
------------
CHEMICALS (1.5%)
Crompton Corp.
9.875%, due 8/1/12 (c) $ 230,000 253,575
E.I. Du Pont de Nemours & Co.
4.125%, due 4/30/10 205,000 207,108
Equistar Chemicals, L.P.
10.625%, due 5/1/11 275,000 317,625
Lyondell Chemical Co.
Series A
10.50%, due 6/1/13 (e) 215,000 253,700
Millennium America, Inc.
7.00%, due 11/15/06 80,000 83,600
7.625%, due 11/15/26 149,000 143,040
Sovereign Specialty Chemicals, Inc.
11.875%, due 3/15/10 188,000 202,100
Terra Capital, Inc.
12.875%, due 10/15/08 372,000 461,280
------------
1,922,028
------------
COMMERCIAL BANKS (0.1%)
FleetBoston Financial Corp.
3.85%, due 2/15/08 60,000 60,862
UGS Corp.
10.00%, due 6/1/12 (c) 100,000 112,000
------------
172,862
------------
</Table>
10 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES (0.8%)
American Color Graphics, Inc.
10.00%, due 6/15/10 $ 50,000 $ 38,250
Geo Sub Corp.
11.00%, due 5/15/12 (c) 235,000 225,600
Language Line, Inc.
11.125%, due 6/15/12 (c) 215,000 230,050
MemberWorks, Inc.
9.25%, due 4/1/14 (c) 150,000 156,750
Phoenix Color Corp.
10.375%, due 2/1/09 113,000 107,350
Protection One Alarm Monitoring, Inc.
7.375%, due 8/15/05 314,000 314,000
------------
1,072,000
------------
COMMUNICATIONS EQUIPMENT (0.4%)
Lucent Technologies, Inc.
6.45%, due 3/15/29 335,000 287,681
7.25%, due 7/15/06 (e) 172,000 182,320
------------
470,001
------------
CONSTRUCTION & ENGINEERING (0.7%)
AMSTED Industries, Inc.
10.25%, due 10/15/11 (c) 235,000 258,500
J. Ray McDermott, S.A.
11.00%, due 12/15/13 (c) 210,000 229,425
Shaw Group, Inc. (The)
10.75%, due 3/15/10 250,000 266,875
URS Corp.
11.50%, due 9/15/09 177,000 203,550
Series B
12.25%, due 5/1/09 3,000 3,195
------------
961,545
------------
CONSUMER FINANCE (0.8%)
Capital One Bank
5.75%, due 9/15/10 70,000 74,805
Ford Motor Credit Co.
7.00%, due 10/1/13 (e) 160,000 168,969
General Motors Acceptance Corp.
6.875%, due 9/15/11 105,000 109,303
Household Finance Corp.
7.25%, due 5/15/06 400,000 426,383
MBNA Corp.
6.25%, due 1/17/07 100,000 106,255
SLM Corp.
5.00%, due 10/1/13 130,000 131,985
------------
1,017,700
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONTAINERS & PACKAGING (1.0%)
Consolidated Container Co. LLC
(zero coupon), due 6/15/09
10.375%, beginning 6/15/07 $ 245,000 $ 199,675
Owens-Brockway Glass Container, Inc.
8.25%, due 5/15/13 65,000 71,500
8.875%, due 2/15/09 145,000 159,138
Owens-Illinois, Inc.
7.80%, due 5/15/18 408,000 418,200
8.10%, due 5/15/07 270,000 286,200
Rock-Tenn Co.
8.20%, due 8/15/11 43,000 50,848
Tekni-Plex, Inc.
8.75%, due 11/15/13 (c) 105,000 100,144
Series B
12.75%, due 6/15/10 35,000 26,250
------------
1,311,955
------------
DIVERSIFIED FINANCIAL SERVICES (1.9%)
Caithness Coso Funding Corp.
Series B
9.05%, due 12/15/09 205,274 227,854
Citigroup, Inc.
0.80%, due 10/30/08 Y 30,000,000 284,217
5.00%, due 9/15/14 (c) $ 290,000 294,233
Dollar Financial Group, Inc.
9.75%, due 11/15/11 80,000 85,400
FGIC Corp.
6.00%, due 1/15/34 (c) 210,000 219,066
IPC Acquisition Corp.
11.50%, due 12/15/09 285,000 314,925
J Paul Getty Trust
Series 2003
5.875%, due 10/1/33 90,000 94,326
National Beef Packing Co.
10.50%, due 8/1/11 65,000 66,625
Pharma Services Intermediate Holding Corp.
(zero coupon), due 4/14/14
11.50%, beginning 4/1/09 (c) 290,000 190,675
Rainbow National Services LLC
8.75%, due 9/1/12 (c) 120,000 128,400
10.375%, due 9/1/14 (c) 350,000 381,500
UCAR Finance, Inc.
10.25%, due 2/15/12 205,000 233,700
------------
2,520,921
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.0%)
AT&T Corp.
Series REGS
6.75%, due 11/21/06 E 120,000 165,408
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES (CONTINUED)
Citizens Communications Co.
7.60%, due 6/1/06 $ 100,000 $ 105,999
9.25%, due 5/15/11 45,000 51,750
MCI, Inc.
5.908%, due 5/1/07 21,000 20,948
6.688%, due 5/1/09 21,000 20,711
7.735%, due 5/1/14 18,000 17,348
Mountain States Telephone & Telegraph Co.
7.375%, due 5/1/30 (g) 125,000 108,125
Qwest Capital Funding, Inc.
7.75%, due 8/15/06 15,000 15,413
Qwest Communications International, Inc.
7.25%, due 2/15/11 (c) 250,000 248,125
7.50%, due 2/15/14 (c) 65,000 62,725
Qwest Corp.
9.125%, due 3/15/12 (c) 105,000 118,388
Qwest Services Corp.
13.50%, due 12/15/10 (c) 289,000 343,188
14.00%, due 12/15/14 (c) 205,000 254,200
SBC Communications, Inc.
4.125%, due 9/15/09 115,000 115,575
Sprint Capital Corp.
8.75%, due 3/15/32 190,000 248,959
TSI Telecommunication Services, Inc.
Series B
12.75%, due 2/1/09 255,000 285,600
U.S. West Communications, Inc.
5.625%, due 11/15/08 15,000 15,000
7.50%, due 6/15/23 205,000 192,700
8.875%, due 6/1/31 195,000 196,950
------------
2,587,112
------------
ELECTRIC UTILITIES (0.8%)
Cedar Brakes II LLC
9.875%, due 9/1/13 470,907 534,479
Mirant Americas Generation LLC
8.30%, due 5/1/11 (d) 45,000 43,537
8.50%, due 10/1/21 (d) 165,000 155,513
9.125%, due 5/1/31 (d) 45,000 42,750
PPL Energy Supply LLC
5.40%, due 8/15/14 100,000 102,520
Tenaska Virginia Partners L.P.
6.119%, due 3/30/24 (c) 109,346 115,745
------------
994,544
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
ELECTRICAL EQUIPMENT (0.0%) (B)
Emerson Electric Co.
6.00%, due 8/15/32 $ 50,000 $ 53,608
------------
ELECTRICAL EQUIPMENT & INSTRUMENTS (0.0%) (B)
Sensus Metering Systems, Inc.
8.625%, due 12/15/13 30,000 30,900
------------
ENERGY EQUIPMENT & SERVICES (0.9%)
El Paso Natural Gas Co.
7.50%, due 11/15/26 45,000 45,450
Series A
7.625%, due 8/1/10 185,000 200,031
Entergy-Koch Trading L.P.
3.65%, due 8/20/06 (c) 215,000 218,452
Grant Prideco, Inc.
Series B
9.625%, due 12/1/07 160,000 180,800
Lone Star Technologies, Inc.
Series B
9.00%, due 6/1/11 255,000 272,850
Parker Drilling Co.
9.625%, due 10/1/13 135,000 150,188
Series B
10.125%, due 11/15/09 39,000 41,096
------------
1,108,867
------------
FOOD & STAPLES RETAILING (0.3%)
CVS Corp.
5.789%, due 1/10/26 (c) 108,055 112,560
Safeway, Inc.
4.125%, due 11/1/08 70,000 70,345
6.15%, due 3/1/06 160,000 166,648
------------
349,553
------------
FOOD PRODUCTS (0.4%)
Cargill, Inc.
5.00%, due 11/15/13 (c) 135,000 138,151
Pinnacle Foods Holding Corp. 8.25%, due 12/1/13
(c) 30,000 28,350
Seminis, Inc.
10.25%, due 10/1/13 85,000 95,200
Swift & Co.
10.125%, due 10/1/09 50,000 55,750
12.50%, due 1/1/10 170,000 189,125
------------
506,576
------------
</Table>
12 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -------------------------------------------------------------------------------
GAS UTILITIES (0.5%)
ANR Pipeline, Inc.
7.00%, due 6/1/25 $ 70,000 $ 71,361
9.625%, due 11/1/21 325,000 399,750
Southern Natural Gas Co.
7.35%, due 2/15/31 150,000 151,500
------------
622,611
------------
HEALTH CARE EQUIPMENT & SUPPLIES (0.2%)
Fisher Scientific International, Inc.
8.00%, due 9/1/13 235,000 264,963
8.125%, due 5/1/12 40,000 44,600
------------
309,563
------------
HEALTH CARE PROVIDERS & SERVICES (1.7%)
AmeriPath, Inc.
10.50%, due 4/1/13 190,000 186,200
Anthem, Inc.
3.50%, due 9/1/07 80,000 79,454
Ardent Health Services, Inc.
10.00%, due 8/15/13 90,000 92,025
Chemed Corp.
8.75%, due 2/24/11 305,000 318,725
HCA, Inc.
7.50%, due 11/15/95 391,000 364,741
Highmark, Inc.
6.80%, due 8/15/13 (c) 245,000 266,475
Medco Health Solutions, Inc.
7.25%, due 8/15/13 85,000 94,429
National Nephrology Associates, Inc.
9.00%, due 11/1/11 (c) 75,000 86,625
Quest Diagnostics, Inc.
6.75%, due 7/12/06 220,000 233,286
Quintiles Transnational Corp.
10.00%, due 10/1/13 285,000 310,650
Vanguard Health Holding Co. II
9.00%, due 10/1/14 (c) 175,000 182,875
------------
2,215,485
------------
HOTELS, RESTAURANTS & LEISURE (1.0%)
Chumash Casino & Resort Enterprise
9.00%, due 7/15/10 (c) 200,000 223,500
Jacobs Entertainment, Inc.
11.875%, due 2/1/09 80,000 91,200
Park Place Entertainment Corp.
8.875%, due 9/15/08 35,000 40,294
President Casinos, Inc.
12.00%, due 9/15/04 (c)(d)(g)(j) 32,000 16,000
13.00%, due 9/15/04 (d)(g)(j) 72,000 27,360
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
HOTELS, RESTAURANTS & LEISURE (CONTINUED)
Starwood Hotels & Resorts Worldwide, Inc.
7.375%, due 11/15/15 $ 172,000 $ 194,360
9.625%, due 6/1/14 175,000 167,125
9.75%, due 4/15/13 100,000 96,375
Trump Atlantic City Associates
11.25%, due 5/1/06 (d) 280,000 245,700
Venetian Casino Resort LLC
11.00%, due 6/15/10 113,000 129,809
------------
1,231,723
------------
HOUSEHOLD DURABLES (0.2%)
Fedders North America, Inc.
9.875%, due 3/1/14 95,000 76,475
Foamex L.P.
10.75%, due 4/1/09 145,000 137,750
------------
214,225
------------
HOUSEHOLD PRODUCTS (0.1%)
Procter & Gamble Co. (The)
5.80%, due 8/15/34 130,000 137,646
------------
INSURANCE (0.7%)
Crum & Forster Holding Corp.
10.375%, due 6/15/13 220,000 235,400
Fremont General Corp.
Series B
7.875%, due 3/17/09 255,000 250,219
Fund American Cos., Inc.
5.875%, due 5/15/13 265,000 270,213
Lumbermens Mutual Casualty Co.
8.45%, due 12/1/97 (c)(d) 35,000 875
9.15%, due 7/1/26 (c)(d) 535,000 13,375
Marsh & McLennan Cos., Inc.
7.125%, due 6/15/09 155,000 167,821
UnumProvident Corp.
6.75%, due 12/15/28 15,000 13,425
------------
951,328
------------
INTERNET SOFTWARE & SERVICES (0.0%) (B)
Globix Corp.
11.00%, due 5/1/08 (c)(g)(k) 56,898 50,639
------------
IT SERVICES (0.4%)
Electronic Data Systems Corp.
Series B
6.00%, due 8/1/13 95,000 97,025
7.125%, due 10/15/09 50,000 54,287
7.45%, due 10/15/29 95,000 96,128
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -------------------------------------------------------------------------------
IT SERVICES (CONTINUED)
Unisys Corp.
6.875%, due 3/15/10 $ 175,000 $ 187,250
7.25%, due 1/15/05 30,000 30,300
------------
464,990
------------
MACHINERY (0.5%)
Mark IV Industries, Inc.
7.50%, due 9/1/07 414,000 391,230
Mueller Group, Inc.
10.00%, due 5/1/12 140,000 151,200
Thermadyne Holdings Corp.
9.25%, due 2/1/14 100,000 95,000
------------
637,430
------------
MACHINERY & ENGINEERING (0.1%)
Dresser-Rand Group, Inc.
7.375%, due 11/1/14 (c) 65,000 68,088
------------
MEDIA (3.4%)
Adelphia Communications Corp.
Series B
9.25%, due 10/1/05 (d) 20,000 16,900
10.25%, due 11/1/06 (d) 155,000 132,525
10.25%, due 6/15/11 (d) 165,000 147,262
AT&T Broadband Corp.
9.455%, due 11/15/22 150,000 205,905
Clear Channel Communications, Inc.
5.50%, due 9/15/14 140,000 141,274
Dex Media East LLC
12.125%, due 11/15/12 21,000 26,092
FrontierVision Holdings, L.P.
11.875%, due 9/15/07 (d) 60,000 76,500
Series B
11.875%, due 9/15/07 (d) 85,000 108,375
FrontierVision Operating Partners L.P.
11.00%, due 10/15/06 (d) 389,000 488,195
Hollinger Participation Trust
12.125%, due 11/15/10 (c)(k) 163,396 199,343
Houghton Mifflin Co.
7.20%, due 3/15/11 135,000 143,269
LCE Acquisition Corp.
9.00%, due 8/1/14 (c) 95,000 99,513
Medianews Group, Inc.
6.875%, due 10/1/13 65,000 67,438
Morris Publishing Group LLC
7.00%, due 8/1/13 220,000 224,400
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MEDIA (CONTINUED)
PanAmSat Corp.
9.00%, due 8/15/14 (c) $ 155,000 $ 164,300
Paxson Communications Corp.
(zero coupon), due 1/15/09
12.25%, beginning 1/15/06 290,000 252,299
Radio One, Inc.
Series B
8.875%, due 7/1/11 180,000 198,900
Spanish Broadcasting System, Inc.
9.625%, due 11/1/09 95,000 99,869
Time Warner Entertainment Co.
8.375%, due 3/15/23 140,000 171,422
10.15%, due 5/1/12 515,000 674,974
Time Warner, Inc.
8.05%, due 1/15/16 95,000 114,080
United Artists Theatre Circuit, Inc.
Pass-Through Certificates
Series 1995-A
9.30%, due 7/1/15 (g) 136,983 139,723
Vertis, Inc.
9.75%, due 4/1/09 120,000 130,800
Warner Music Group
7.375%, due 4/15/14 (c) 95,000 97,613
Young Broadcasting, Inc.
8.50%, due 12/15/08 70,000 74,900
Ziff Davis Media, Inc.
Series B
12.00%, due 8/12/09 (k) 187,004 187,238
------------
4,383,109
------------
METALS & MINING (0.5%)
Allegheny Ludlum Corp.
6.95%, due 12/15/25 20,000 19,100
Allegheny Technologies, Inc.
8.375%, due 12/15/11 185,000 199,800
Commonwealth Industries, Inc.
10.75%, due 10/1/06 293,000 293,733
United States Steel LLC
10.75%, due 8/1/08 150,000 177,750
------------
690,383
------------
MULTILINE RETAIL (0.3%)
Kmart Corp.
Pass-Through Certificates
Series 1995 Class K3
8.54%, due 1/2/15 (d) 62,263 20,236
</Table>
14 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -------------------------------------------------------------------------------
MULTILINE RETAIL (CONTINUED)
Kohl's Corp.
6.00%, due 1/15/33 $ 210,000 $ 217,263
Target Corp.
6.35%, due 11/1/32 20,000 22,445
8.60%, due 1/15/12 125,000 157,773
------------
417,717
------------
MULTI-UTILITIES & UNREGULATED POWER (2.5%)
AES Corp. (The)
7.75%, due 3/1/14 200,000 217,499
9.00%, due 5/15/15 (c) 400,000 466,000
10.00%, due 12/12/05 (c) 57,414 57,988
AES Eastern Energy L.P.
Pass-Through Certificates
Series 1999-A
9.00%, due 1/2/17 (h) 449,068 505,201
Calpine Corp.
7.75%, due 4/15/09 110,000 62,150
8.50%, due 7/15/10 (c) 536,000 393,960
Calpine Gilroy, L.P.
10.00%, due 9/30/14 (f)(g) 250,884 250,884
NRG Energy, Inc.
8.00%, due 12/15/13 (c) 295,000 324,869
Pacific Electric & Gas Co.
6.05%, due 3/1/34 145,000 149,340
PSE&G Power LLC
6.875%, due 4/15/06 375,000 395,055
Reliant Energy, Inc.
9.25%, due 7/15/10 80,000 88,800
Salton Sea Funding Corp.
Series B
7.37%, due 5/30/05 (g) 44,406 45,188
Tiverton/Rumford Power Associates Ltd., L.P.
Pass-Through Certificates
9.00%, due 7/15/18 (c) 258,277 183,377
Westar Energy, Inc.
7.875%, due 5/1/07 70,000 77,505
------------
3,217,816
------------
OIL & GAS (2.0%)
Dynegy Holdings, Inc.
9.875%, due 7/15/10 (c) 335,000 380,644
El Paso Corp.
7.80%, due 8/1/31 150,000 137,625
El Paso Production Holding Co.
7.75%, due 6/1/13 555,000 578,588
Energy Corp. of America
Series A
9.50%, due 5/15/07 203,000 194,880
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
OIL & GAS (CONTINUED)
Enterprise Products Partners L.P.
5.60%, due 10/15/14 (c) $ 80,000 $ 81,522
Forest Oil Corp.
8.00%, due 6/15/08 210,000 233,100
Goldman Sachs Group, Inc. (The)
8.00%, due 6/15/08 120,000 119,966
Hilcorp Energy I L.P.
10.50%, due 9/1/10 (c) 15,000 16,912
Kern River Funding Corp.
4.893%, due 4/30/18 (c) 258,191 262,570
Newfield Exploration Co.
7.625%, due 3/1/11 15,000 16,912
8.375%, due 8/15/12 15,000 16,987
Plains Exploration & Production Co.
Series B
8.75%, due 7/1/12 100,000 113,000
Vintage Petroleum, Inc.
8.25%, due 5/1/12 370,000 414,400
------------
2,567,106
------------
PAPER & FOREST PRODUCTS (1.3%)
Georgia-Pacific Corp.
8.625%, due 4/30/25 490,000 521,237
8.875%, due 2/1/10 435,000 512,213
8.875%, due 5/15/31 225,000 277,313
9.375%, due 2/1/13 100,000 117,750
Pope & Talbot, Inc.
8.375%, due 6/1/13 212,000 222,600
------------
1,651,113
------------
PERSONAL PRODUCTS (0.1%)
Estee Lauder Cos., Inc.
5.75%, due 10/15/33 75,000 77,256
------------
PHARMACEUTICALS (0.2%)
WH Holdings Ltd.
9.50%, due 4/1/11 105,000 114,975
Wyeth
5.50%, due 2/1/14 150,000 153,699
------------
268,674
------------
REAL ESTATE (1.3%)
American Real Estate Partners L.P.
8.125%, due 6/1/12 (c) 270,000 284,850
CB Richard Ellis Services, Inc.
9.75%, due 5/15/10 73,000 83,220
11.25%, due 6/15/11 244,000 285,480
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -------------------------------------------------------------------------------
REAL ESTATE (CONTINUED)
Crescent Real Estate Equities L.P.
7.50%, due 9/15/07 $ 310,000 $ 320,075
HRPT Properties Trust
5.75%, due 2/15/14 140,000 143,900
6.25%, due 8/15/16 70,000 73,711
iStar Financial, Inc.
Series B
5.125%, due 4/1/11 70,000 70,917
6.00%, due 12/15/10 120,000 127,313
Omega Healthcare Investors, Inc.
7.00%, due 4/1/14 255,000 257,550
------------
1,647,016
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.2%)
Amkor Technology, Inc.
7.125%, due 3/15/11 190,000 163,875
7.75%, due 5/15/13 20,000 17,250
ON Semiconductor Corp.
12.00%, due 3/15/10 15,000 17,588
13.00%, due 5/15/08 43,000 48,590
------------
247,303
------------
SPECIALTY RETAIL (0.2%)
Stratus Technologies, Inc.
10.375%, due 12/1/08 80,000 68,000
Williams Scotsman, Inc.
10.00%, due 8/15/08 195,000 212,550
------------
280,550
------------
TOBACCO (0.2%)
Commonwealth Brands, Inc.
9.75%, due 4/15/08 (c) 150,000 159,000
10.625%, due 9/1/08 (c) 160,000 168,000
------------
327,000
------------
TRANSPORTATION INFRASTRUCTURE (0.1%)
Great Lakes Dredge & Dock Corp.
7.75%, due 12/15/13 100,000 89,500
------------
WIRELESS TELECOMMUNICATION SERVICES (0.8%)
Alamosa Delaware, Inc.
(zero coupon), due 7/31/09
12.00%, beginning 7/31/05 100,000 106,500
11.00%, due 7/31/10 94,000 109,980
American Tower Escrow Corp.
(zero coupon), due 8/1/08 200,000 150,500
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
WIRELESS TELECOMMUNICATION SERVICES (CONTINUED)
Dobson Cellular Systems
6.96%, due 11/1/11 (c)(i) $ 40,000 $ 41,100
8.375%, due 11/1/11 (c) 40,000 41,250
9.875%, due 11/1/12 (c) 75,000 74,625
Dobson Communications Corp.
8.875%, due 10/1/13 35,000 23,537
10.875%, due 7/1/10 50,000 38,500
Loral CyberStar, Inc.
10.00%, due 7/15/06 (d) 233,000 179,410
Triton PCS, Inc.
8.50%, due 6/1/13 155,000 142,213
US Unwired, Inc.
10.00%, due 6/15/12 110,000 119,075
------------
1,026,690
------------
Total Corporate Bonds
(Cost $42,071,585) 44,533,516
------------
CORPORATE BONDS -- FOREIGN (10.3%)
- -------------------------------------------------------------------------------
AUSTRALIA (0.2%)
Burns Philp Capital Property Ltd.
10.75%, due 2/15/11 $ 265,000 296,800
------------
BELGIUM (0.2%)
Telenet Communications NV
9.00%, due 12/15/13 (c) E 85,000 116,774
Telenet Group Holding NV
(zero coupon), due 6/15/14
11.50%, beginning 12/15/08 (c) $ 160,000 121,600
------------
238,374
------------
BERMUDA (0.2%)
AES China Generating Co., Ltd.
8.25%, due 6/26/10 $ 230,000 233,633
------------
BRAZIL (0.4%)
CIA Brasileira de Bebidas
10.50%, due 12/15/11 $ 365,000 448,950
------------
CANADA (1.9%)
Calpine Canada Energy Finance
8.50%, due 5/1/08 (e) $ 426,000 261,990
Canadian Housing Trust
3.70%, due 9/15/08 (c) C$ 575,000 469,343
Hollinger, Inc.
11.875%, due 3/1/11 (c) $ 173,000 186,850
Norske Skog Canada Ltd.
7.375%, due 3/1/14 130,000 135,200
</Table>
16 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS -- FOREIGN (CONTINUED)
- -------------------------------------------------------------------------------
CANADA (CONTINUED)
Quebecor Media, Inc.
(zero coupon), due 7/15/11
13.75%, beginning 7/15/06 $ 301,000 $ 293,475
11.125%, due 7/15/11 72,000 83,340
Rogers Cable, Inc.
7.875%, due 5/1/12 245,000 267,663
Shaw Communications, Inc.
7.50%, due 11/20/13 C$ 225,000 192,020
Sun Media Corp.
7.625%, due 2/15/13 $ 210,000 227,850
Tembec Industries, Inc.
7.75%, due 3/15/12 265,000 259,700
8.50%, due 2/1/11 95,000 97,137
------------
2,474,568
------------
CAYMAN ISLANDS (0.3%)
CSN Islands VIII Corp.
9.75%, due 12/16/13 (c) $ 200,000 203,000
Hutchison Whampoa International Ltd.
5.45%, due 11/24/10 (c) 135,000 138,990
Votorantim Overseas III
7.875%, due 1/23/14 (c) 100,000 99,250
------------
441,240
------------
CHILE (0.4%)
AES General S.A.
7.50%, due 3/25/14 (c) $ 250,000 255,937
Corporacion Nacional del Cobre-Codelco, Inc.
5.50%, due 10/15/13 (c) 55,000 57,573
Empresa Nacional de Petroleo
6.75%, due 11/15/12 (c) 200,000 223,915
------------
537,425
------------
COLOMBIA (0.1%)
Bavaria S.A.
8.875%, due 11/1/10 (c) $ 60,000 63,900
------------
DENMARK (0.4%)
Realkredit Danmark
6.00%, due 10/1/29 DK 2,729,929 483,473
------------
FRANCE (0.5%)
Crown Euro Holdings S.A.
9.50%, due 3/1/11 $ 350,000 399,000
10.875%, due 3/1/13 215,000 255,312
------------
654,312
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GERMANY (1.1%)
Citibank Global Markets (Severstal) Deutschland
9.25%, due 4/19/14 (c) $ 190,000 $ 186,200
Gazprom Oao
9.625%, due 3/1/13 (c) 160,000 184,000
Kreditanstalt fuer Wiederaufbau
Series INTL
4.75%, due 8/18/06 E 724,000 957,576
Salomon Brothers (Sibneft) AG
Series REGS
10.75%, due 1/15/09 $ 100,000 110,250
------------
1,438,026
------------
ISLE OF MAN (0.2%)
Navigator Gas Transport PLC
10.50%, due 6/30/07 (c)(d)(g) $ 362,000 260,640
------------
KAZAKHSTAN (0.3%)
Kazkommerts International B.V.
8.50%, due 4/16/13 (c) $ 400,000 417,000
------------
LUXEMBURG (0.5%)
Gazprom International S.A.
7.201%, due 2/1/20 (c) $ 200,000 210,000
Millicom International Cellular S.A.
10.00%, due 12/1/13 (c) 215,000 217,150
Mobile Telesystems Finance
9.75%, due 1/30/08 (c) 150,000 162,563
Wimm-Bill-Dann Foods OJSC
8.50%, due 5/21/08 (c) 100,000 97,750
------------
687,463
------------
MEXICO (0.8%)
Banco Nacional de Comercio Exterior S.N.C.
11.25%, due 5/30/06 (c)(e) $ 175,000 198,187
Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
12.50%, due 6/15/12 300,000 340,500
Telefonos de Mexico S.A. de C.V.
4.50%, due 11/19/08 260,000 262,291
8.25%, due 1/26/06 230,000 244,547
------------
1,045,525
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS -- FOREIGN (CONTINUED)
- -------------------------------------------------------------------------------
NETHERLANDS (0.2%)
Coca-Cola HBC Finance B.V.
5.125%, due 9/17/13 $ 50,000 $ 51,561
Mobifon Holdings B.V.
12.50%, due 7/31/10 60,000 71,100
Parmalat Finance Corp. B.V.
6.25%, due 2/7/05 (d) E 300,000 64,875
------------
187,536
------------
RUSSIA (0.2%)
Tyumen Oil Co.
11.00%, due 11/6/07 (c) $ 250,000 285,000
------------
SINGAPORE (0.3%)
PSA Corp. Ltd.
7.125%, due 8/1/05 (c) $ 190,000 195,868
Singapore Powerassets Ltd.
5.00%, due 10/22/13 (c) 175,000 179,203
------------
375,071
------------
SUPRANATIONAL (0.9%)
Corporacion Andina de Fomento CAF
Series 4RG
10.75%, due 5/15/11 Y 25,000,000 237,618
European Investment Bank
2.125%, due 9/20/07 50,000,000 494,613
Invista
9.25%, due 5/1/12 (c) $ 205,000 225,500
Jafra Cosmetics International, Inc.
10.75%, due 5/15/11 170,000 193,800
------------
1,151,531
------------
SWEDEN (0.2%)
Stena AB
9.625%, due 12/1/12 $ 200,000 225,250
------------
UKRAINE (0.2%)
Kyivstar GSM
10.375%, due 8/17/09 (c) $ 275,000 303,875
------------
UNITED KINGDOM (0.8%)
Annington Finance
4.376%, due 10/2/06 (i) L 182,564 333,390
Ono Finance PLC
10.50%, due 5/15/14 (c) E 420,000 536,932
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
UNITED KINGDOM (CONTINUED)
Vodafone Group PLC
3.95%, due 1/30/08 $ 220,000 $ 223,892
------------
1,094,214
------------
Total Corporate Bonds -- Foreign
(Cost $12,125,978) 13,343,806
------------
FOREIGN GOVERNMENT BONDS (21.5%)
- -------------------------------------------------------------------------------
AUSTRALIA (0.4%)
Australian Government
Series 909
7.50, due 9/15/09 (l) A$ 570,000 465,958
------------
AUSTRIA (0.2%)
Republic of Austria
Series 2
4.65%, due 1/15/18 E 143,000 190,137
------------
BELGIUM (1.2%)
Kingdom of Belgium
Series 42
3.00%, due 9/28/08 E 825,000 1,051,768
Series 36
5.00%, due 9/28/11 400,000 553,107
------------
1,604,875
------------
BRAZIL (0.7%)
Republic of Brazil
Series 11BR
4.75%, due 4/10/07 (m) Y 25,000,000 238,676
Series 20 year
8.00%, due 4/15/14 (m) $ 713,045 706,342
------------
945,018
------------
CANADA (1.0%)
Canadian Government
5.25%, due 6/1/12 C$ 344,000 298,879
5.50%, due 6/1/10 525,000 461,053
5.75%, due 6/1/33 (l) 550,000 505,630
Province of Quebec
5.00%, due 7/17/09 $ 80,000 84,449
------------
1,350,011
------------
COLOMBIA (0.2%)
Republic of Colombia
8.125%, due 5/21/24 $ 300,000 272,250
------------
</Table>
18 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN GOVERNMENT BONDS (CONTINUED)
- -------------------------------------------------------------------------------
DENMARK (0.4%)
Kingdom of Denmark
5.00%, due 11/15/13 DK 2,985,000 $ 551,708
------------
EL SALVADOR (0.2%)
Republic of El Salvador
7.75%, due 1/24/23 (c) $ 250,000 269,687
------------
FRANCE (0.4%)
French Treasury Note
4.75%, due 7/12/07 E 400,000 536,572
------------
GERMANY (6.1%)
Republic of Deutschland
Series 99
V 3.75%, due 1/4/09 (l) E 2,610,000 3,419,428
Series 138
4.50%, due 8/18/06 145,000 191,187
Series 98
4.75%, due 7/4/08 125,000 169,264
Series 01
V 5.00%, due 7/4/11 1,405,000 1,941,069
Series 98
5.25%, due 1/4/08 704,000 961,791
Series 99
5.375%, due 1/4/10 450,000 630,058
Series 00
6.25%, due 1/4/30 350,000 556,280
------------
7,869,077
------------
GREECE (0.5%)
Hellenic Republic
5.90%, due 10/22/22 E 406,000 600,859
------------
ITALY (1.7%)
Buoni Poliennali del Tesoro
5.25%, due 12/15/05 E 321,000 421,388
5.50%, due 11/1/10 600,000 849,869
6.50%, due 11/1/27 372,000 598,317
Republic of Italy
3.80%, due 3/27/08 Y 30,000,000 314,691
------------
2,184,265
------------
JAPAN (2.2%)
Development Bank of Japan
Series INTL
1.05%, due 6/20/23 Y 41,000,000 318,286
V 1.60%, due 6/20/14 140,000,000 1,324,239
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
JAPAN (CONTINUED)
Japan Finance Corp. for Municipal Enterprises
Series INTL
1.55%, due 2/21/12 Y120,000,000 $ 1,161,201
------------
2,803,726
------------
MEXICO (0.0%) (B)
United Mexican States
4.625%, due 10/8/08 $ 15,000 15,255
6.625%, due 3/3/15 35,000 37,520
------------
52,775
------------
NETHERLANDS (0.6%)
Netherlands Government
3.75%, due 7/15/09 E 634,000 827,045
------------
NORWAY (0.6%)
Norwegian Government
6.75%, due 1/15/07 NK 4,865,000 828,971
------------
PANAMA (0.3%)
Republic of Panama
8.25%, due 4/22/08 $ 350,000 384,125
------------
PHILIPPINES (0.2%)
Republic of Philippines
9.875%, due 1/15/19 $ 200,000 201,250
------------
PORTUGAL (0.3%)
Portugal Obrigacoes do Tesouro OT
3.00%, due 7/17/06 E 335,000 430,046
------------
RUSSIA (1.1%)
Russian Federation, Series REGS
5.00%, due 3/31/30 $ 1,007,000 1,007,000
8.25%, due 3/31/10 204,000 224,400
10.00%, due 6/26/07 183,000 209,645
------------
1,441,045
------------
SOUTH AFRICA (0.1%)
Republic of South Africa
Series 3, Tranche 1
7.00%, due 4/10/08 E 100,000 141,287
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
19
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN GOVERNMENT BONDS (CONTINUED)
- -------------------------------------------------------------------------------
SWEDEN (0.6%)
Swedish Government
Series 1043
5.00%, due 1/28/09 (l) SK 3,070,000 $ 456,973
Series 1045
5.25%, due 3/15/11 $ 2,000,000 302,398
------------
759,371
------------
UKRAINE (0.1%)
Ukraine Government
6.875%, due 3/4/11 (c) $ 175,000 176,531
------------
UNITED KINGDOM (2.2%)
United Kingdom Treasury Bond
4.00%, due 3/7/09 (l) L 247,000 441,085
4.25%, due 6/7/32 300,000 522,480
5.00%, due 3/7/12 100,000 186,345
6.00%, due 12/7/28 175,000 384,949
6.25%, due 11/25/10 465,000 922,280
8.00%, due 12/7/15 150,000 352,075
------------
2,809,214
------------
VENEZUELA (0.2%)
Republic of Venezuela
Series DL
13.625%, due 8/15/18 $ 181,000 238,920
------------
Total Foreign Government Bonds
(Cost $24,766,557) 27,934,723
------------
LOAN ASSIGNMENT AND PARTICIPATION (0.2%)
- -------------------------------------------------------------------------------
CHEMICALS (0.2%)
Rockwood Specialties Group, Inc.
Bank debt, Term Loan
9.092%, due 2/11/11 (f)(i) 149,444 190,100
9.96%, due 2/11/11 (f)(i) 74,300 74,300
------------
Total Loan Assignment & Participation
(Cost $251,971) 264,400
------------
MORTGAGE-BACKED SECURITIES (0.9%)
- -------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (0.9%)
Bank of America Commercial Mortgage, Inc.
Series 2001-PB1 Class A1
4.907%, due 5/11/35 267,162 276,006
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (CONTINUED)
LB-UBS Commercial Mortgage Trust
Series 2004-C7 Class A1
3.625%, due 10/15/29 $ 300,000 $ 301,680
Merrill Lynch Mortgage Trust
Series 2004-MKB1 Class A1
3.563%, due 2/12/42 266,351 266,747
Morgan Stanley Capital I
Series 2003-IQ5 Class A1
3.02%, due 4/15/38 214,791 213,124
Wachovia Bank National Association Mortgage Trust
Series 2004-C14 Class A1
3.477%, due 8/15/41 106,935 107,108
------------
Total Mortgage-Backed Securities
(Cost $1,164,787) 1,164,665
------------
MUNICIPAL BOND (0.1%)
- -------------------------------------------------------------------------------
TEXAS (0.1%)
Harris County Texas Industrial Development Corp.
6.25%, due 6/1/42 120,000 122,364
------------
Total Municipal Bond
(Cost $120,453) 122,364
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (20.9%)
- -------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.
(MORTGAGE PASS-THROUGH SECURITIES) (2.8%)
3.00%, due 8/1/10 118,374 114,804
3.625%, due 9/15/08 200,000 202,166
5.00%, due 6/1/33-8/1/33 1,371,862 1,371,754
5.50%, due 2/1/33 288,150 294,303
V 5.50%, due 12/13/34 (n) 1,675,000 1,701,696
------------
3,684,723
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (2.3%)
4.625%, due 5/1/13 135,000 134,760
4.75%, due 1/2/07 580,000 601,229
5.125%, due 1/2/14 150,000 154,118
5.25%, due 8/1/12 515,000 538,594
5.50%, due 5/2/06 635,000 660,803
6.32%, due 8/15/08 198,009 213,194
6.625%, due 9/15/09 325,000 367,881
7.00%, due 7/15/05 263,000 271,579
------------
2,942,158
------------
</Table>
20 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
- -------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (9.0%)
Federal National Mortgage Association
4.50%, due 4/1/18-11/1/18 $ 1,251,192 $ 1,257,830
5.00%, due 9/1/17 575,458 588,045
5.00%, due 12/13/34 (n) 240,000 238,500
V 5.50%, due 11/18/19 (n) 2,725,000 2,820,375
5.50%, due 11/1/33 1,479,918 1,509,786
V 5.50%, due 11/1/33 1,323,703 1,350,419
V 5.50%, due 12/13/34 (n) 1,200,000 1,218,374
6.00%, due 11/15/34-12/13/34 (n) 1,995,000 2,063,259
6.50%, due 6/1/31-6/1/32 292,258 307,858
7.00%, due 2/1/32-4/1/32 125,180 133,015
7.50%, due 8/1/31 119,244 127,887
------------
11,615,348
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (0.3%)
6.00%, due 4/15/29-8/15/32 313,516 327,053
7.50%, due 12/15/23-12/15/28 109,190 117,996
------------
445,049
------------
U.S. TREASURY BONDS (0.6%)
5.375%, due 2/15/31 105,000 114,044
6.25%, due 8/15/23 175,000 206,719
6.875%, due 8/15/25 305,000 387,326
8.75%, due 8/15/20 45,000 65,818
------------
773,907
------------
U.S. TREASURY NOTES (5.9%)
3.00%, due 2/15/08 (o) 630,000 631,993
4.375%, due 5/15/07 (o) 255,000 265,409
V 4.625%, due 5/15/06 (o) 1,620,000 1,674,486
V 4.75%, due 5/15/14 2,075,000 2,193,989
5.75%, due 11/15/05 (o) 1,125,000 1,165,210
V 6.00%, due 8/15/09 1,490,000 1,669,789
------------
7,600,876
------------
Total U.S. Government & Federal Agencies
(Cost $26,843,245) 27,062,061
------------
YANKEE BONDS (1.4%) (P)
- -------------------------------------------------------------------------------
CONTAINERS & PACKAGING (0.1%)
Smurfit Capital Funding PLC
7.50%, due 11/20/25 185,000 185,925
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
ENERGY EQUIPMENT & SERVICES (0.3%)
Petroleum Geo-Services ASA
8.00%, due 11/5/06 $ 48,634 $ 49,485
10.00%, due 11/5/10 350,123 399,140
------------
448,625
------------
FOREIGN GOVERNMENT (0.2%)
Financement Quebec
5.00%, due 10/25/12 190,000 198,131
------------
INSURANCE (0.2%)
Fairfax Financial Holdings Ltd.
7.375%, due 4/15/18 15,000 13,237
7.75%, due 7/15/37 35,000 29,400
8.30%, due 4/15/26 15,000 13,538
Montpelier Re Holdings Ltd.
6.125%, due 8/15/13 255,000 265,779
------------
321,954
------------
MARINE (0.1%)
Sea Containers Ltd.
Series B
10.75%, due 10/15/06 139,000 144,560
------------
METALS & MINING (0.2%)
Algoma Steel, Inc.
11.00%, due 12/31/09 (g) 234,000 262,080
------------
OIL & GAS (0.1%)
YPF Sociedad Anonima
9.125%, due 2/24/09 60,000 66,600
------------
PAPER & FOREST PRODUCTS (0.1%)
Tembec Industries, Inc.
8.625%, due 6/30/09 95,000 96,662
------------
ROAD & RAIL (0.1%)
Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
11.75%, due 6/15/09 150,000 152,625
------------
Total Yankee Bonds
(Cost $1,673,589) 1,877,162
------------
Total Long-Term Bonds
(Cost $111,625,761) 118,762,739
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
21
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (0.6%)
- -------------------------------------------------------------------------------
CHEMICALS (0.0%) (B)
General Chemical Industrial Products, Inc.
(a)(f)(g)(j) 52 $ 7,197
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.0%) (B)
ICO Global Communications Holdings Ltd. (a)(g) 20,419 2,093
------------
HEALTH CARE PROVIDERS & SERVICES (0.1%)
QuadraMed Corp. (a)(f)(g) 27,862 73,834
Skilled Healthcare (a)(f)(g)(j) 110 1,760
------------
75,594
------------
INTERNET SOFTWARE & SERVICES (0.0%) (B)
Globix Corp. (a)(f)(g)(j) 9,129 17,802
Remote Dynamics, Inc. (a) 5,174 4,915
------------
22,717
------------
MACHINERY (0.1%)
Morris Material Handling, Inc. (a)(f)(g)(j) 886 4,696
Thermadyne Holdings Corp. (a)(g) 11,719 123,049
------------
127,745
------------
MEDIA (0.4%)
UnitedGlobalCom, Inc. (a) 63,643 476,050
------------
METALS & MINING (0.0%) (B)
ACP Holding Co. (a)(c)(g) 42,447 59,426
------------
TOBACCO (0.0%) (B)
North Atlantic Trading Co., Inc. (a)(f)(g)(j) 522 31,336
------------
WIRELESS TELECOMMUNICATION SERVICES (0.0%) (B)
NEON Communications, Inc. (a)(f)(g)(j) 17,266 21,582
------------
Total Common Stocks
(Cost $1,253,622) 823,740
------------
CONVERTIBLE PREFERRED STOCKS (0.2%)
- -------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES (0.2%)
QuadraMed Corp.
5.50% (c)(f)(g) 9,500 237,500
------------
</Table>
<Table>
<Caption>
SHARES VALUE
WIRELESS TELECOMMUNICATION SERVICES (0.0%) (B)
NEON Communications, Inc.
12.00% (a)(f)(g)(j) 1,882 $ 21,172
------------
Total Convertible Preferred Stocks
(Cost $258,461) 258,672
------------
PREFERRED STOCKS (0.7%)
- -------------------------------------------------------------------------------
MEDIA (0.3%)
Haights Cross Communications, Inc.
16.00%, Class B (f)(g) 3,700 186,850
Paxson Communications Corp.
14.25% (k) 14 104,956
Ziff Davis Media, Inc.
10.00%, Series E-1 (a)(g) 48 24,960
------------
316,766
------------
REAL ESTATE (0.4%)
Sovereign Real Estate Investment Corp.
12.00%, Class A (c) 358 537,000
------------
Total Preferred Stocks
(Cost $616,605) 853,766
------------
WARRANTS (0.1%)
- -------------------------------------------------------------------------------
CHEMICALS (0.0%) (B)
General Chemical Industrial Products, Inc.
Series A
Strike Price $195.43
Expire 3/31/11 (a)(f)(g)(j) 30 1,057
Series B
Strike Price $376.03
Expire 3/31/11 (a)(f)(g)(j) 22 261
------------
1,318
------------
DIVERSIFIED FINANCIAL SERVICES (0.0%) (B)
ASAT Finance LLC
Strike Price $18.60
Expire 11/1/06 (a)(c)(g) 175 2
------------
MEDIA (0.0%) (B)
Haights Cross Communications, Inc.
Strike Price $0.001
Expire 12/10/11 (a)(f)(g)(j) 6 1
Preferred Class A
Strike Price $0.001
Expire 12/10/11 (a)(f)(g)(j) 3,350 33
</Table>
22 MainStay Diversified Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
WARRANTS (CONTINUED)
- -------------------------------------------------------------------------------
MEDIA (CONTINUED)
Ono Finance PLC
Strike Price $0.01
Expire 2/15/11 (a)(c)(g)(j) 405 $ 4
Ziff Davis Media, Inc.
Strike Price $0.001
Expire 8/12/12 (a)(c) 8,954 895
------------
933
------------
METALS & MINING (0.1%)
ACP Holding Co.
Strike Price $0.01
Expire 10/7/13 (a)(c)(g) 42,051 58,871
------------
WIRELESS TELECOMMUNICATION SERVICES (0.0%) (B)
NEON Communications, Inc.
Strike Price $0.01
Expire 12/2/12 (a)(f)(g)(j) 17,266 173
Class A
Strike Price $0.01
Expire 12/2/12 (a)(f)(g)(j) 9,411 11,764
Redeemable Preferred
Strike Price $0.01
Expire 12/2/12 (a)(f)(g)(j) 11,293 113
Ubiquitel Operating Co.
Strike Price $22.74
Expire 4/15/10 (a)(c)(g) 225 2
------------
12,052
------------
Total Warrants
(Cost $98,227) 73,176
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (13.4%)
- -------------------------------------------------------------------------------
COMMERCIAL PAPER (12.5%)
AIG Funding, Inc.
1.78%, due 11/2/04 $ 4,190,000 4,189,793
American Express Credit Corp.
1.80%, due 11/18/04 3,000,000 2,997,449
General Electric Co.
1.78%, due 11/10/04 1,580,000 1,579,297
Harvard University
1.73%, due 11/19/04 1,565,000 1,563,645
ING Funding LLC
1.78%, due 11/12/04 205,000 204,888
International Business Machines Corp.
1.70%, due 11/1/04 2,000,000 2,000,000
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL PAPER (CONTINUED)
UBS Finance (Delaware) LLC
1.84%, due 11/1/04 $ 3,690,000 $ 3,690,000
------------
Total Commercial Paper
(Cost $16,225,072) 16,225,072
------------
INVESTMENT COMPANY (0.8%)
AIM Institutional Funds Group (r) 1,039,043 1,039,403
------------
Total Investment Company
(Cost $1,039,403) 1,039,403
------------
SHORT-TERM LOAN ASSIGNMENT & PARTICIPATION (0.1%)
BUILDING PRODUCTS (0.1%)
Owens Corning, Inc.
Bank debt, Revolver
3.62%, due 1/1/05 (d)(f)(i)(s) $ 235,575 160,191
------------
Total Short-Term Loan Assignment & Participation
(Cost $159,728) 160,191
------------
Total Short-Term Investments
(Cost $17,424,203) 17,424,666
------------
Total Investments
(Cost $131,276,879) (t) 106.6% 138,196,759(u)
Liabilities in Excess of Cash and Other Assets (6.6) (8,562,930)
------------ ------------
100.0% $129,633,829
============ ============
</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) Represents a security of which a portion is out on loan.
(f) Restricted security.
(g) Illiquid security.
(h) Partially segregated as collateral for unfunded loan
commitments.
(i) Floating rate. Rate shown is the rate in effect at
October 31, 2004.
(j) Fair valued security. The total market value of these
securities at October 31, 2004 is $162,313 which
reflects 0.1% of the funds net assets.
(k) PIK ("Payment in Kind") -- Dividend or interest payment
is made with additional securities.
(l) Partially segregated for foreign currency forward
contracts.
(m) Brady bond.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
23
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
(n) 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, 2004 is $7,530,498.
(o) Segregated as collateral for TBA.
(p) Yankee bond -- Dollar-denominated bonds issued in the
United States by foreign banks and corporations.
(q) LYON-Liquid Yield Option Note: callable, zero coupon
securities priced at a deep discount from par. They
include a "put" feature that enables holders to redeem
them at a specific date, at a specific price. Put prices
reflect fixed interest rates, and therefore increase
over time.
(r) Represents a security, or portion thereof, purchased
with cash collateral received for securities on loan.
(s) This security has additional commitments and
contingencies (See Note 7.)
(t) The cost for federal income tax purposes is
$134,432,260.
(u) At October 31, 2004, net unrealized appreciation was
3,764,499 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 6,686,082 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $(2,921,583).
The following abbreviations are used in the above
portfolio:
A$ -- Australian Dollar.
C$ -- Canadian Dollar.
DK -- Danish Krone.
E -- Euro.
Y -- Japanese Yen.
NK -- Norwegian Krone.
L -- Pound Sterling.
SK -- Swedish Krona.
$ -- U.S. Dollar.
</Table>
24 MainStay Diversified Income Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $131,276,879) including
$992,383 market value of securities loaned $138,196,759
Cash denominated in foreign currencies
(identified cost $137,253) 137,016
Cash 33,506
Receivables:
Dividends and interest 2,138,411
Investment securities sold 787,636
Fund shares sold 237,315
Other assets 16,727
------------
Total assets 141,547,370
------------
LIABILITIES:
Securities lending collateral 1,039,403
Payables:
Investment securities purchased 9,978,240
Fund shares redeemed 154,140
NYLIFE Distributors 85,502
Manager 68,759
Transfer agent 57,183
Custodian 15,672
Trustees 1,665
Accrued expenses 68,441
Unrealized depreciation on foreign currency
forward contracts 328,854
Dividend payable 115,682
------------
Total liabilities 11,913,541
------------
Net assets $129,633,829
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 41,258
Class B 86,707
Class C 16,076
Class I 80
Additional paid-in capital $130,223,110
Accumulated distributions in excess of net
investment income (1,987,068)
Accumulated net realized loss on investments
and option transactions (5,355,891)
Net unrealized appreciation on investments 6,919,880
Net unrealized appreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts (310,323)
------------
Net assets $129,633,829
============
CLASS A
Net assets applicable to outstanding shares $ 37,179,451
============
Shares of beneficial interest outstanding 4,125,833
============
Net asset value per share outstanding $ 9.01
Maximum sales charge (4.50% of offering price) 0.42
------------
Maximum offering price per share outstanding $ 9.43
============
CLASS B
Net assets applicable to outstanding shares $ 77,932,818
============
Shares of beneficial interest outstanding 8,670,695
============
Net asset value and offering price per share
outstanding $ 8.99
============
CLASS C
Net assets applicable to outstanding shares $ 14,449,257
============
Shares of beneficial interest outstanding 1,607,644
============
Net asset value and offering price per share
outstanding $ 8.99
============
CLASS I
Net assets applicable to outstanding shares $ 72,303
============
Shares of beneficial interest outstanding 8,018
============
Net asset value and offering price per share
outstanding $ 9.02
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
25
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 100,877
Interest 7,407,377
Income from securities loaned -- net 1,515
----------
Total income 7,509,769
----------
EXPENSES:
Manager 764,456
Distribution -- Class B 586,836
Distribution -- Class C 102,348
Transfer agent -- Class A, B and C 366,220
Transfer agent -- Class I 81
Service -- Class A 88,713
Service -- Class B 195,585
Service -- Class C 34,143
Shareholder communication 60,145
Professional 58,520
Custodian 53,081
Registration 41,543
Recordkeeping 39,408
Trustees 12,766
Miscellaneous 83,822
----------
Total expenses 2,487,667
----------
Net investment income 5,022,102
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN
OPTION AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions 2,061,743
Written option transactions 29,748
Foreign currency transactions (627,972)
----------
Net realized gain on investments, written
option and foreign currency transactions 1,463,519
----------
Net change in unrealized appreciation
(depreciation) on:
Security transactions 2,787,243
Translation of other assets and liabilities
in foreign currencies and foreign currency
forward contracts (75,912)
----------
Net unrealized gain on investments and foreign
currency transactions 2,711,331
----------
Net realized and unrealized gain on
investments, written option and foreign
currency transactions 4,174,850
----------
Net increase in net assets resulting from
operations $9,196,952
==========
</Table>
(a) Dividends recorded net of foreign withholding taxes of $829.
26 MainStay Diversified Income Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 5,022,102 $ 4,074,192 $ 4,586,443
Net realized gain (loss)
on investments, written
options and foreign
currency transactions 1,463,519 (404,779) (2,496,313)
Net change in unrealized
appreciation
depreciation on
investments, written
options and foreign
currency transactions 2,711,331 10,093,065 1,055,435
------------------------------------------
Net increase in net
assets resulting from
operations 9,196,952 13,762,478 3,145,565
------------------------------------------
Dividends and distributions to
shareholders:
From net investment income:
Class A (1,919,553) (1,109,653) (900,911)
Class B (3,675,328) (2,669,684) (2,751,630)
Class C (641,929) (316,816) (201,027)
Class I (1,934) -- --
Return of capital:
Class A -- (219,331) (310,381)
Class B -- (527,683) (947,988)
Class C -- (62,621) (69,258)
Class I -- -- --
------------------------------------------
Total dividends and
distributions to
shareholders (6,238,744) (4,905,788) (5,181,195)
------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 17,280,589 23,088,926 15,723,507
Class B 16,298,457 19,462,094 15,213,789
Class C 8,650,466 7,287,483 5,260,534
Class I 70,412 -- --
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A 1,328,042 866,572 792,843
Class B 2,718,981 2,236,330 2,515,943
Class C 322,308 194,953 147,206
Class I 1,737 -- --
------------------------------------------
46,670,992 53,136,358 39,653,822
</Table>
<Table>
<Caption>
2004 2003* 2002
Cost of shares redeemed:
Class A $(13,341,129) $(13,364,688) $(12,848,184)
Class B (16,712,880) (9,809,849) (12,009,384)
Class C (5,355,622) (3,509,989) (2,379,776)
Class I -- -- --
------------------------------------------
(35,409,631) (26,684,526) (27,237,344)
Increase in net assets
derived from capital
share transactions 11,261,361 26,451,832 12,416,478
------------------------------------------
Net increase in net
assets 14,219,569 35,308,522 10,380,848
NET ASSETS:
Beginning of period 115,414,260 80,105,738 69,724,890
------------------------------------------
End of period $129,633,829 $115,414,260 $ 80,105,738
==========================================
Accumulated distributions
in excess of net
investment income at end
of period $ (1,987,068) $ (191,495) $ (274,716)
==========================================
</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. www.mainstayfunds.com
27
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH -------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 8.77 $ 7.97 $ 8.22 $ 8.37 $ 9.20 $ 9.71
------- ------- ------- ------- ------- -------
Net investment income 0.40(a) 0.39(a) 0.55(a) 0.67(a)(e) 0.73 0.67
Net realized and unrealized gain (loss) on
investments 0.37 0.86 (0.03) (0.14)(e) (0.61) (0.45)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.05) 0.01 (0.15) 0.01 (0.26) 0.00(d)
------- ------- ------- ------- ------- -------
Total from investment operations 0.72 1.26 0.37 0.54 (0.14) 0.22
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income (0.48) (0.38) (0.46) (0.62) (0.55) (0.70)
From net realized gain on investments -- -- -- -- -- (0.03)
Return of capital -- (0.08) (0.16) (0.07) (0.14) (0.00)(d)
------- ------- ------- ------- ------- -------
Total dividends and distributions (0.48) (0.46) (0.62) (0.69) (0.69) (0.73)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 9.01 $ 8.77 $ 7.97 $ 8.22 $ 8.37 $ 9.20
======= ======= ======= ======= ======= =======
Total investment return (b) 8.44% 16.22%(c) 4.78% 6.62% (1.57%) 2.30%
Ratios (to average net assets)/
Supplemental Data:
Net investment income 4.48% 5.59%+ 6.95% 7.95%(e) 8.27% 6.97%
Net expenses 1.41% 1.46% 1.49% 1.44% 1.47% 1.34%
Portfolio turnover rate 84% 80% 84% 141% 187% 244%
Net assets at end of period (in 000's) $37,179 $31,042 $18,297 $15,066 $18,909 $19,922
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 8.75 $ 7.95 $ 8.20 $ 8.36 $ 9.19 $9.70
------- ------- ------ ------ ------ -----
Net investment income 0.33(a) 0.34(a) 0.49(a) 0.61(a)(e) 0.67 0.60
Net realized and unrealized gain (loss) on
investments 0.39 0.86 (0.03)(e) (0.15) (0.61) (0.45)
Net realized and unrealized gain (loss) on
foreign currency transactions (0.06) 0.01 (0.15) 0.01 (0.26) 0.00(d)
------- ------- ------ ------ ------ -----
Total from investment operations 0.66 1.21 0.31 0.47 (0.20) 0.15
------- ------- ------ ------ ------ -----
Less dividends and distributions:
From net investment income (0.42) (0.34) (0.42) (0.56) (0.50) (0.63)
From net realized gain on investments -- -- -- -- (0.03)
Return of capital (0.07) (0.14) (0.07) (0.13) (0.00)(d)
------- ------- ------ ------ ------ -----
Total dividends and distributions (0.42) (0.41) (0.56) (0.63) (0.63) (0.66)
------- ------- ------ ------ ------ -----
Net asset value at end of period $ 8.99 $ 8.75 $ 7.95 $ 8.20 $ 8.36 $9.19
======= ======= ====== ====== ====== =====
Total investment return (b) 7.68% 15.55%(c) 3.99% 5.78% (2.28%) 1.54%
Ratios (to average net assets)/
Supplemental Data:
Net investment income 3.73% 4.84%+ 6.20% 7.20%(e) 7.52% 6.22%
Net expenses 2.16% 2.21% 2.24% 2.19% 2.22% 2.09%
Portfolio turnover rate 84% 80% 84% 141% 187% 244%
Net assets at end of period (in 000's) $14,449 $10,573 $5,967 $2,965 $2,895 $ 768
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** First offered on January 2, 2004.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges. Class
I is not subject to sale charges.
(c) Total return is not annualized.
(d) Less than one cent per share.
(e) 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 CLASS I
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>
28 MainStay Diversified Income Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH -----------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 8.75 $ 7.95 $ 8.20 $ 8.36 $ 9.19 $ 9.70
------- ------- ------- ------- ------- -------
0.33(a) 0.34(a) 0.49(a) 0.61(a)(e) 0.67 0.60
0.39 0.86 (0.03)(e) (0.15) (0.61) (0.45)
(0.06) 0.01 (0.15) 0.01 (0.26) 0.00(c)
------- ------- ------- ------- ------- -------
0.66 1.21 0.31 0.47 (0.20) 0.15
------- ------- ------- ------- ------- -------
(0.42) (0.34) (0.42) (0.56) (0.50) (0.63)
-- -- -- -- (0.03)
(0.07) (0.14) (0.07) (0.13) (0.00)(d)
------- ------- ------- ------- ------- -------
(0.42) (0.41) (0.56) (0.63) (0.63) (0.66)
------- ------- ------- ------- ------- -------
$ 8.99 $ 8.75 $ 7.95 $ 8.20 $ 8.36 $ 9.19
======= ======= ======= ======= ======= =======
7.68% 15.55%(c) 3.99% 5.78% (2.28%) 1.54%
3.73% 4.84%+ 6.20% 7.20%(d) 7.52% 6.22%
2.16% 2.21%+ 2.24% 2.19% 2.22% 2.09%
84% 80% 84% 141% 187% 244%
$77,933 $73,799 $55,842 $51,694 $47,607 $59,645
</Table>
<Table>
<Caption>
CLASS I
-----------
JANUARY 2,
2004**
THROUGH
OCTOBER 31,
2004
$ 8.96
------
0.33
0.16
(0.02)
------
0.47
------
(0.41)
------
(0.41)
------
$ 9.02
======
5.44%(c)
4.77%+
1.12%+
84%
$ 72
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
29
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
Diversified Income Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Distribution of Class A shares
and Class B shares commenced on February 28, 1997. Class C shares and Class I
shares were initially offered on September 1, 1998 and January 2, 2004,
respectively. 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. Class A shares, Class B shares, Class C shares and
Class I shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions. Each class of
shares other than Class I shares bears distribution and/or service fee payments
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.
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.
Effective January 1, 2004, the Fund changed its name to MainStay Diversified
Income Fund from MainStay Strategic 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 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
(generally 4:00 p.m. Eastern time.) Equity securities are valued at the latest
quoted sales prices as of the close of trading on the Exchange 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 sale
price on the market where such options are principally traded. 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. 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. Reasons for which securities may be valued in this manner
include, but are not limited to, trading for a security has been halted or
suspended, a security has been de-listed from a national exchange, or trading on
a security's primary market is temporarily closed at a time when under normal
conditions it would be open. The total value of securities that were valued in
such manner amounted to $162,313 at October 31, 2004.
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. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. 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
30 MainStay Diversified Income Fund
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.
(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 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.
(D) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
assignments and loan participations. Loan assignments and participations are
agreements to make money available (a "commitment") to a borrower in a specified
amount, at a specified rate and within a specified time. Such loan assignments
and participations are typically senior, secured and collateralized in nature.
The Fund records an investment when the borrower withdraws money and records
interest as earned. These loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or London
InterBank Offered Rate (LIBOR).
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. The Fund may be contractually obligated
to receive approval from the agent bank and/or borrower prior to the sale of
these investments.
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"). In the event that the Borrower, Selling
Participant or Intermediate Participants becomes insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
Borrower. At any point in time, up to the maturity date of the issue, the
Borrower may demand the unfunded portion. These unfunded amounts are recorded in
memorandum accounts. (See Note 7).
(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. (See Note 9).
(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
www.mainstayfunds.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, and additional paid-in capital arising from
permanent differences; net assets at October 31, 2004, are not effected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
DISTRIBUTIONS IN NET REALIZED
EXCESS OF NET LOSS ON ADDITIONAL
INVESTMENT INCOME INVESTMENTS PAID-IN CAPITAL
$(578,931) $577,366 $1,565
- --------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to premium amortization
adjustments, real estate investment trusts gain (loss), paydown and 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 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.
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.
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
32 MainStay Diversified Income Fund
currency denominated assets and liabilities, other than investments, at year 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.
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 July 31, 2004, 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. Effective August 1, 2004,
the Trust pays the Manager an annual rate of 0.60% of the Fund's average daily
net assets on assets up to $500 million and 0.55% on assets over $500 million.
In addition, effective December 1, 2004, NYLIM has voluntarily agreed to
reimburse the expenses of the Fund to the extent that operating expenses would
exceed on an annualized basis 1.35%, 2.10% and 2.10% of the average daily net
assets of the Class A, Class B and Class C shares, respectively. NYLIM has also
voluntarily agreed to an equivalent reduction in the management fee for Class I
shares. For the year ended October 31, 2004 the Manager earned from the Fund
$764,456.
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. 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 shares was $32,274 for the year ended
October 31, 2004. 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 $16,002, $96,166 and $4,628, respectively, for the year ended October
31, 2004.
(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 for the year ended October 31, 2004,
amounted to $366,301.
(E) NON-INTERESTED TRUSTEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. The Trust allocates
trustees fees in proportion to the net assets of the
www.mainstayfunds.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
respective Funds. Thus the Diversified Income Fund only pays a portion of the
fees identified above.
(F) CAPITAL. At October 31, 2004, NYLIFE Distributors held shares of Class B
with a value of $7,490,203 which represents 9.6% of Class B net assets and 5.8%
of the total Fund's net assets at year 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 $3,844 for the year ended October 31,
2004.
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 $39,408 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- RESTRICTED SECURITIES:
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, 2004:
<Table>
<Caption>
PRINCIPAL
DATE(S) OF AMOUNT/ 10/31/04 PERCENT OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
Calpine Gilroy, L.P.
10.00%, due 9/30/14 11/26/03 $250,884 $ 251,513 $ 250,884 0.3%
- ---------------------------------------------------------------------------------------------------------------------------------
General Chemical Industrial Products, Inc.
Common Stock 5/25/04 52 108,236 7,197 0.0(a)
Warrants, Series A 5/25/04 30 17,145 1,057 0.0(a)
Warrants, Series B 5/25/04 22 4,632 261 0.0(a)
- ---------------------------------------------------------------------------------------------------------------------------------
Globix Corp.
Common Stock 10/15/02 9,129 2,472 17,802 0.0(a)
- ---------------------------------------------------------------------------------------------------------------------------------
Goodyear Tire & Rubber Co. (The)
2nd Lien Note
11.00%, 3/1/11 3/12/04 425,000 422,630 476,000 0.4
- ---------------------------------------------------------------------------------------------------------------------------------
Haights Cross Communications, Inc.
Preferred Stock
16.00%, Class B 1/22/04 3,700 172,130 186,850 0.1
Warrants 1/22/04 6 1 1 0.0(a)
Warrants, Preferred Class A 1/22/04 3,350 33 33 0.0(a)
- ---------------------------------------------------------------------------------------------------------------------------------
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 21,582 0.0(a)
Convertible Preferred Stock
12.00% 12/3/02 1,882 20,961 21,172 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)
- ---------------------------------------------------------------------------------------------------------------------------------
North Atlantic Trading Co., Inc.
Common Stock 4/21/04 522 5 31,336 0.0(a)
- ---------------------------------------------------------------------------------------------------------------------------------
Owens Corning, Inc.
Bank debt, Revolver
3.62%, due 1/1/05 1/10/02-10/15/02 235,575 159,728 160,191 0.1
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
34 MainStay Diversified Income Fund
Restricted securities held at October 31, 2004 (continued):
<Table>
<Caption>
PRINCIPAL
DATE(S) OF AMOUNT/ 10/31/04 PERCENT OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
QuadraMed Corp.
Common Stock 4/30/04 27,862 $ 3 $ 73,834 0.1%
Convertible Preferred Stock
5.50% 6/17/04 9,500 25 237,500 0.2
- ---------------------------------------------------------------------------------------------------------------------------------
Rockwood Specialties Group, Inc.
Bank debt, Term Loan
9.092%, due 2/11/11 8/16/04 $149,444 178,363 190,100 0.1
9.96%, due 2/11/11 8/16/04 74,300 73,608 74,300 0.1
- ---------------------------------------------------------------------------------------------------------------------------------
Skilled Healthcare Group, Inc.
Common Stock 9/4/03 110 1 1,760 0.0(a)
- ---------------------------------------------------------------------------------------------------------------------------------
$ 1,442,696 $1,768,606 1.4%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Less than one tenth of a percent.
NOTE 6 -- FEDERAL INCOME TAX:
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $4,552,109 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)
2007 $2,045
2008 1,959
2009 864
2010 1,161
2011 523
---------------------------------------------
$4,552
---------------------------------------------
</Table>
As of October 31, 2004, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED TOTAL
ORDINARY CAPITAL AND UNREALIZED ACCUMULATED
INCOME OTHER LOSSES APPRECIATION LOSS
$374,389 $(4,552,109) $3,783,030 $(394,690)
--------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals, premium amortization adjustments and bond
reorganizations.
The tax character of distributions paid during year ended October 31, 2004, the
ten months ended October 31, 2003, and year ended December 31, 2002, shown in
the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid
from:
Ordinary Income $6,238,744 $4,096,153 $3,853,568
Return of Capital -- 809,635 1,327,627
- ----------------------------------------------------------
$6,238,744 $4,905,788 $5,181,195
- ----------------------------------------------------------
</Table>
www.mainstayfunds.com 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- LOAN COMMITMENTS, FOREIGN CURRENCY FORWARD CONTRACTS, WRITTEN OPTIONS
AND FOREIGN CURRENCY:
As of October 31, 2004, the Fund had unfunded loan commitments pursuant to the
following loan agreement:
<Table>
<Caption>
UNFUNDED
BORROWER COMMITMENT
Owens Corning, Inc., due 1/1/05 $15,480
- -------------------------------------------------------
</Table>
This commitment is available until maturity date of the respective security.
Foreign currency forward contracts open at October 31, 2004:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
SOLD PURCHASED (DEPRECIATION)
Foreign Currency Sale Contracts
- ------------------------------------------------------------------------------------------------------------------
Australian Dollar vs. U.S. Dollar, expiring 11/24/04 A$ 630,933 $461,843 $(8,311)
- ------------------------------------------------------------------------------------------------------------------
Canadian Dollar vs. U.S. Dollar, expiring 11/19/04 C$ 567,765 $437,237 (28,076)
- ------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 11/17/04 E 3,000,000 $3,698,100 (117,821)
- ------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 12/1/04 E 230,713 $288,853 (4,598)
- ------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 11/24/04 E 5,490,978 $6,863,723 (120,446)
- ------------------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 11/23/04 L 841,469 $1,513,803 (25,098)
- ------------------------------------------------------------------------------------------------------------------
Swedish Krona vs. U.S. Dollar, expiring 11/17/04 SK 5,553,795 $756,261 (24,504)
- ------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation on foreign currency forward
contracts $(328,854)
- ------------------------------------------------------------------------------------------------------------------
</Table>
Written option activity for year ended October 31, 2004 was as follows:
<Table>
<Caption>
NOTIONAL
AMOUNT PREMIUM
Options outstanding at
October 31, 2003 -- $--
- ----------------------------------------------------------
Options -- written (5,880,000) (38,857)
- ----------------------------------------------------------
Options -- buybacks 4,330,000 35,107
- ----------------------------------------------------------
Options -- expired 1,550,000 3,750
- ----------------------------------------------------------
Options outstanding at
October 31, 2004 -- $--
- ----------------------------------------------------------
</Table>
Foreign currency held at October 31, 2004:
<Table>
<Caption>
CURRENCY COST VALUE
Euro E 107,634 $137,154 $136,916
Pound Sterling L 55 99 100
- ----------------------------------------------
$137,253 $137,016
- ----------------------------------------------
</Table>
36 MainStay Diversified Income Fund
NOTE 8 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of U.S. Government
securities were $55,759 and $50,458, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $56,249 and $48,960, respectively.
NOTE 9 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2004, the Fund had securities on loan with an aggregate market
value of $992,383. The Fund received $1,039,403 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.
Pursuant to Rule 2a-7, securities purchased with collateral received are valued
at amortized cost.
NOTE 10 -- 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 year ended October 31, 2004.
NOTE 11 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C CLASS I*
Shares sold 1,941 1,830 972 8
- ----------------------------------------------------------
Shares issued in
reinvestment of
dividends and
distributions 150 307 36 --(a)
- ----------------------------------------------------------
2,091 2,137 1,008 8
Shares redeemed (1,503) (1,896) (608) --
- ----------------------------------------------------------
Net increase
(decrease) 588 241 400 8
- ----------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003**
CLASS A CLASS B CLASS C
Shares sold 2,739 2,303 855
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 102 264 23
- ---------------------------------------------------------
2,841 2,567 878
Shares redeemed (1,599) (1,159) (420)
- ---------------------------------------------------------
Net increase 1,242 1,408 458
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 1,977 1,919 668
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 100 317 19
- ---------------------------------------------------------
2,077 2,236 687
Shares redeemed (1,614) (1,515) (298)
- ---------------------------------------------------------
Net increase 463 721 389
- ---------------------------------------------------------
</Table>
(a) Less than one thousand.
* First offered on January 2, 2004.
** The Fund changed its fiscal year end from December 31 to October 31.
NOTE 12 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as
www.mainstayfunds.com 37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the related guarantee disclosure to Fund shareholders. Discussions have been
held with the SEC concerning a possible resolution of this matter. These
discussions are continuing, but there can be no assurance at this time as to the
outcome of these efforts.
NOTE 13 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
38 MainStay Diversified Income Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Diversified Income Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2004, and the related statement of operations, statement of changes in net
assets and the financial highlights for the year or period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The statement
of changes in net assets for the period ended October 31, 2003 and the year
ended December 31, 2002, and the financial highlights for the periods presented
through October 31, 2003, were audited by other auditors, whose report dated
December 18, 2003 expressed an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Diversified Income Fund of The MainStay Funds as of October 31, 2004,
the results of its operations, the changes in its net assets and its financial
highlights for the year or period then ended, in conformity with U.S. generally
accepted accounting principles.
KPMG SIG
Philadelphia, Pennsylvania
December 28, 2004
www.mainstayfunds.com 39
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
40 MainStay Diversified Income Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 41
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
42 MainStay Diversified Income Fund
MAINSTAY FUNDS
MainStay offers a wide range of Funds for virtually any investment need. The
full array of MainStay offerings is listed here, with information about the
manager, subadvisors, legal counsel, and independent registered public
accounting firm.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
www.mainstayfunds.com 43
(MAINSTAY LOGO)
- ------------------------------------------------
GNot FDIC insured. G No bank guarantee. G May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06367 [RECYCLE LOGO] MSDI11-12/04
16
(MAINSTAY LOGO)
MAINSTAY
STRATEGIC VALUE FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay Strategic Value Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quarter of 2004, and according to
preliminary estimates from the Bureau of Economic Analysis, gross domestic
product grew at a seasonally adjusted annual rate of 3.9% in the third quarter
of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 11
- ----------------------------------------------------
Financial Statements 23
- ----------------------------------------------------
Notes to Financial Statements 28
Report of Independent Registered Public
Accounting Firm 35
- ----------------------------------------------------
Trustees and Officers 36
- ----------------------------------------------------
Proxy Voting Policies and Procedures 38
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 38
- ----------------------------------------------------
Federal Income Tax Information 39
- ----------------------------------------------------
MainStay Funds 40
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 4.02% 3.67% 4.54%
Excluding sales charges 10.08 4.85 5.38
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY STRATEGIC VALUE STRATEGIC VALUE
FUND COMPOSITE INDEX S&P 500 INDEX
------------------------ --------------- -------------
10/22/97 9450 10000 10000
9374 9646 9412
9767 10372 11482
10781 12074 14429
11983 13125 15308
11167 11726 11495
9750 10812 9759
12410 13638 11789
10/31/04 13661 15462 12899
</Table>
<Table>
-- MainStay Strategic Value Fund - - Strategic Value Composite Index
-- S&P 500 Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 4.19% 3.72% 4.59%
Excluding sales charges 9.19 4.06 4.59
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MAINSTAY STRATEGIC VALUE STRATEGIC VALUE
FUND COMPOSITE INDEX S&P 500 INDEX
------------------------ --------------- -------------
10/22/97 10000 10000 10000
9920 9646 9412
10256 10372 11482
11237 12074 14429
12396 13125 15308
11460 11726 11495
9935 10812 9759
12556 13638 11789
10/31/04 13710 15462 12899
</Table>
<Table>
-- MainStay Strategic Value Fund - - Strategic Value Composite Index
-- S&P 500 Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 8.19% 4.06% 4.59%
Excluding sales charges 9.19 4.06 4.59
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MAINSTAY STRATEGIC VALUE STRATEGIC VALUE
FUND COMPOSITE INDEX S&P 500 INDEX
------------------------ --------------- -------------
10/22/97 10000.00 10000.00 10000.00
9920.00 9646.00 9412.00
10256.00 10372.00 11482.00
11237.00 12074.00 14429.00
12396.00 13125.00 15308.00
11460.00 11726.00 11495.00
9947.00 10812.00 9759.00
12556.00 13638.00 11789.00
10/31/04 13709.00 15462.00 12899.00
</Table>
<Table>
-- MainStay Strategic Value Fund - - Strategic Value Composite Index
-- S&P 500 Index
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
Strategic Value Composite Index(1) 13.37% 5.07% 6.39%
S&P 500(R) Index(2) 9.42 -2.22 3.69
Average Lipper flexible portfolio
fund(3) 7.67 1.80 4.19
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. The fee waivers and/or expense
limitations are voluntary and may be discontinued at any time. From inception
(10/22/97) through 8/31/98, performance for Class C shares (first offered
9/1/98) includes the historical performance of Class B shares adjusted to
reflect the applicable CDSC for Class C shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Strategic Value Fund
1. 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(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. 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. The Credit Suisse First Boston(TM)
High Yield Index is an unmanaged market-weighted index that includes publicly
traded bonds rated below BBB by S&P and below Baa by Moody's. Results assume
that all income and capital gains are reinvested in the index or indices that
produce them. The Strategic Value Composite Index is considered to be the
Fund's broad-based securities-market index for comparison purposes. An
investment cannot be made directly into an index or this composite.
2. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
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. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital-gain distributions reinvested.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY STRATEGIC VALUE FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,028.00 $ 8.67 $1,016.50 $ 8.62
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,024.45 $12.47 $1,012.75 $12.40
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,024.45 $12.47 $1,012.75 $12.40
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
<Table>
Common Stocks 60.6%
Corporate Bonds 17.2
Convertible Bonds 7.7
Short-Term Investments 7.5
Foreign Bonds 2.6
Convertible Preferred Stocks 2.4
Yankee Bonds 0.5%
Preferred Stocks 0.4
Loan Assignment 0.2
Cash and Other Assets, Less Liabilities 0.9
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Rowan Cos., Inc.
2. Computer Sciences Corp.
3. Navistar International Corp.
4. Citigroup, Inc.
5. Transocean, Inc.
6. Bank of America Corp.
7. Northrop Grumman Corp.
8. Bowater, Inc.
9. St. Paul Travelers Cos., Inc. (The)
10. General Mills, Inc.
</Table>
6 MainStay Strategic Value Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by Donald E. Morgan, Edward Silverstein, and Mark T. Spellman
of MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests in foreign and domestic securities in three asset
classes. Between 30% and 75% of net assets are normally invested in common
stocks that we believe are undervalued, that typically pay dividends, and that
are listed on a national securities exchange or are traded on the over-the-
counter market. The Fund may invest in non-dividend-paying stocks if they meet
the "undervalued" criterion. At least 25% of the Fund's net assets will be
invested in fixed-income securities. The Fund invests 10% to 40% in corporate
debt securities that are ordinarily in the lower rating categories--rated Baa to
B by Moody's or BBB to B by Standard & Poor's(1), or judged to be of comparable
creditworthiness by our portfolio management team. The Fund invests 10% to 40%
in convertible securities in any rating category or unrated. Up to 20% of net
assets may be invested in securities that are rated CCC or below by S&P, at a
comparable level by Moody's,(2) or judged by our portfolio management team to be
of comparable quality.
EQUITIES
WHAT FACTORS AFFECTED THE STOCK MARKET DURING THE 12 MONTHS ENDED OCTOBER 31,
2004?
An improving economy, strong growth in corporate profits, and a relatively
benign interest-rate and inflation outlook helped the market advance. During the
reporting period, there were concerns about higher energy prices, the unsteady
pace of job growth, geopolitical tensions, and election-year politics. The
12-month period ended on a strong note, as the elections approached, energy
prices eased, and stock valuations appeared more attractive to investors.
WHICH VALUE-ORIENTED STOCKS SHOWED STRONG PERFORMANCE DURING THE REPORTING
PERIOD?
Oil and gas driller Transocean (+84%)(3) advanced as pricing and orders
strengthened. Refiners Premcor (+65%) and Valero Energy (+53%) added value as
gasoline inventories continued to shrink and refining margins continued to
improve. We trimmed the position in Premcor and sold Valero Energy as these
stocks approached our price targets.
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. Funds that invest in bonds are
subject to interest rate, credit, and inflation risk and can result is loss of
principal when interest rates rise.
1. Bonds rated Baa by Moody's Investors Service are considered by Moody's to be
medium-grade obligations (i.e., obligations that Moody's believes are neither
highly protected nor poorly secured). It is Moody's opinion that interest
payments and principal security appear adequate for the present, but that
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Moody's believes that such bonds
lack outstanding investment characteristics and that they in fact have
speculative characteristics as well. Bonds rated B by Moody's Investors
Service are deemed by Moody's to generally lack characteristics of the
desirable investment. According to Moody's, assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small. Debt rated BBB by Standard & Poor's is
deemed by Standard & Poor's to exhibit adequate protection parameters. It is
the opinion of Standard & Poor's, however, that adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the obligation than would be
the case for debt in higher-rated categories. Debt rated B by Standard &
Poor's is deemed by Standard & Poor's to be more vulnerable to nonpayment
than obligations rated BB, but it is the opinion of Standard & Poor's that
the obligor currently has the capacity to meet its financial commitment on
the obligation. Standard & Poor's believes that adverse business, financial,
or economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation. When applied
to Fund holdings, ratings are based solely on the creditworthiness of the
bonds in the portfolio and are not meant to represent the security or safety
of the Fund.
2. Debt rated CCC by Standard & Poor's is deemed by Standard & Poor's to be
currently vulnerable to nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor. It is the opinion of
Standard & Poor's that in the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to meet
its financial commitment on the obligation. The roughly equivalent rating by
Moody's is Caa. Bonds rated Caa by Moody's Investors Service are deemed by
Moody's to be of poor standing. Such issues may be in default or, according
to Moody's, elements of danger with respect to principal or interest may be
present. When applied to Fund holdings, ratings are based solely on the
creditworthiness of the bonds in the portfolio and are not meant to represent
the security or safety of the Fund.
3. Performance percentages reflect the price performance of the securities
mentioned for the 12-months ended October 31, 2004, 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.
www.mainstayfunds.com 7
ChevronTexaco (+48%) also benefited from higher energy prices. Computer Sciences
(+25%) benefited from government and corporate spending on IT services.
WHICH STOCKS DETRACTED FROM PERFORMANCE IN THE EQUITY PORTION OF THE FUND'S
PORTFOLIO?
Anticipating difficulties at Merck, we reduced the Fund's position in the stock.
Despite the Vioxx recall, we continue to hold Merck shares and are evaluating
our long-term view of the company's prospects. Mortgage insurer Radian Group
hurt the Fund's performance for the year. The shares dropped 17% by February
when we sold the entire position on concerns about the credit quality of the
company's insurance portfolio. Automotive-parts manufacturer TRW Automotive
(-34%) proved to be a premature purchase. We bought the shares for the Fund on
the company's February IPO, but the price fell on concerns about declining
automotive production. We used the opportunity to add to the position.
Papermaker Bowater (-8%) declined as the paper market's recovery proved more
elusive than we had hoped. Near the end of October, the recovery become more
evident. The Fund continues to hold the shares. Insurance broker Marsh &
McLennan was rocked by an investigation by the New York attorney general, and we
decided to sell the Fund's position. The shares were initially purchased in
March and were sold in October, but not before dropping 41%.
HIGH-YIELD BONDS
WHAT KEY TRENDS AFFECTED THE HIGH-YIELD BOND MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2004?
The high-yield bond market advanced as default rates continued to decline from
their peak in 2002. An ongoing economic recovery helped attract new money into
the asset class during the reporting period. The supply of new issuance,
however, failed to keep up with demand. Significant refinancing activity at
lower interest rates tightened yield spreads between high-yield bonds and
comparable investment-grade debt. Interest rate hikes by the Federal Open Market
Committee in June, August, and September of 2004--each of which raised the
targeted federal funds rate by 25 basis points--were widely anticipated by
investors.
HOW DID THE HIGH-YIELD PORTION OF THE FUND'S PORTFOLIO INVEST DURING THE
REPORTING PERIOD?
We found only limited buying opportunities, and we had some concerns regarding
the quality of newly issued securities. The market's refinancing activity led to
higher-than-normal tenders from bond issuers, which increased the Fund's cash
position.
WHAT WERE SOME STRONG PERFORMERS IN THE HIGH-YIELD PORTION OF THE FUND'S
PORTFOLIO DURING THE REPORTING PERIOD?
Some metal-related high-yield bonds--such as AK Steel, Algoma Steel, and
Allegheny Ludlum--were strong performers for the last 12 months, since metals
prices remained solid as North American manufacturing activity increased. Cable
companies, including FrontierVision and UGC Europe, also gained ground during
the reporting period. In December 2003, UnitedGlobalCom acquired all shares of
the recently reorganized UGC Europe. Other cable providers also reported good
earnings over the reporting period.
Several high-yield wireless companies performed well. US Unwired, Alamosa,
Nextel International, and Mobifon each outperformed related securities in the
Credit Suisse First Boston(TM) High Yield Index(4) (the high-yield portion of
the Strategic Value Composite Index). The Fund's holdings in Nextel
International consisted of equity received as the result of a restructuring at
the beginning of 2003.
WERE THERE ANY HIGH-YIELD HOLDINGS THAT DIDN'T MEET YOUR EXPECTATIONS?
High-yield investments in the airline industry had disappointing performance, as
airline costs rose with the rising price of oil. Concerns about a possible
bankruptcy at Delta Airlines affected our position in the company. Delta sought
a resolution with the pilots' union that didn't arrive until the end of October
2004. Delta Airlines and Northwest Airlines were among the Fund's poorest
performers during the reporting period. Other high-yield holdings that produced
disappointing results were securities issued by utilities company Calpine,
restaurant company Family Restaurants, and machinery company Thermadyne
Holdings.
DID YOU MAKE ANY SIGNIFICANT HIGH-YIELD PURCHASES OR SALES DURING THE REPORTING
PERIOD?
The high-yield portion of the Fund's portfolio lost UGC Europe bonds and took on
UnitedGlobalCom debt as part of a corporate action. Other significant additions
to the Fund's portfolio included issues of El Paso Production Holdings, Ono
Finance, Goodyear Tire & Rubber, and Rainbow National Services. We eliminated
Fund holdings in Pacific G&E, Mil-
4. See footnote 1 on page 5 for more information on the Credit Suisse First
Boston(TM) High Yield Index.
8 MainStay Strategic Value Fund
licom International, and Alamosa PCS Holding. We also sold the Nextel
International holdings the Fund had received during the company's restructuring.
CONVERTIBLE SECURITIES
WHAT MAJOR FACTORS INFLUENCED THE MARKET FOR CONVERTIBLE BONDS DURING THE
12-MONTH REPORTING PERIOD?
For the 12 months ended October 31, 2004, both stocks and bonds rose, pushing
the Credit Suisse First Boston(TM) Convertible Securities Index(5) 7.51% higher.
During the same period, convertible bond spreads relative to Treasuries
contracted 213 basis points, which helped the performance of convertible bonds.
HOW DID THE CONVERTIBLE PORTION OF THE FUND'S PORTFOLIO FARE DURING THE
REPORTING PERIOD?
The risk/reward profile we seek did not match the strongest performers during
the reporting period, which caused the convertible portion of the Fund's
portfolio to underperform the convertible portion of the benchmark. We sought to
reduce the impact of rising interest rates on the Fund's convertible holdings by
focusing on securities that were more sensitive to stock movements than to
interest rates. We also sought to reduce interest-rate sensitivity with bonds
that have relatively short-term maturities, floating interest-rate structures,
put features, or a combination of these characteristics.
HOW DID YOUR INDUSTRY OUTLOOK AFFECT PERFORMANCE IN THE CONVERTIBLE PORTION OF
THE FUND'S PORTFOLIO?
During the reporting period, we significantly overweighted the convertible
portion of the Fund's portfolio in energy-related names, particularly oil
services and equipment companies. This positioning enhanced the Fund's
performance. Our unfavorable outlook for information technology led us to
underweight the sector. Unfortunately, a market weighting in semiconductor
companies hurt performance. An underweighted position in strong-performing
Internet companies, such as Yahoo!, also detracted from performance. We sold
nearly all of the airline holdings in the convertible portion of the Fund's
portfolio on concerns about high fuel prices, overcapacity, high labor costs,
and low barriers to entry.
WHICH SECURITIES IN THE CONVERTIBLE PORTION OF THE FUND'S PORTFOLIO WERE STRONG
PERFORMERS DURING THE REPORTING PERIOD?
The convertible portion of the Fund owned convertible bonds in Halliburton. The
securities significantly outperformed the market, as the company's oil services
and equipment business revenues and profits exceeded analysts' expectations.
Tyco International benefited from a new management team, improved profitability,
significant free cash flow, and a program to retire debt and decrease interest
expense. Devon Energy was a beneficiary of higher energy prices. Transocean
found customers willing to pay higher day rates to lease the company's
equipment. Fisher Scientific shares rose when the company increased its earnings
forecast after several acquisitions during the year. Smurfit-Stone Container, a
box manufacturer, saw its shares advance when demand increased and the declining
dollar gave the company an advantage over foreign competitors. Mandalay Resorts'
convertibles and common stock performed well when the company's newest hotel
property, THE HOTEL, opened with high occupancy rates. The share price of
Mandalay Resorts climbed even more when the company accepted a takeover offer
from MGM Mirage.
WHICH SECURITIES IN THE CONVERTIBLE PORTION OF THE FUND'S PORTFOLIO DETRACTED
FROM PERFORMANCE DURING THE REPORTING PERIOD?
Teva Pharmaceuticals was weak, despite successive earnings reports that handily
beat analysts' expectations. The company was hurt by new competition and concern
about price erosion and disappointing earnings among competitors. Calpine's
shares and convertible bonds declined significantly as the company's
electric-power business was hurt by mild summer weather. Cypress Semiconductor's
shares fell when slowing sales and rising inventories of commodity
semiconductors led to earnings disappointments. Delta Airlines and Alaska Air
were both hurt by the rise in fuel costs and by airline-industry overcapacity
that has forced carriers to lower prices to attract passengers.
WHAT IS YOUR OUTLOOK GOING FORWARD?
We see upside potential in some basic materials and industrial-oriented stocks.
We see less potential in areas of the stock market that depend on consumer
spending. The energy sector may have staying power, based on the price of oil
and foreseeable geopolitical developments. In the high-yield portion of the
portfolio, a stronger economy should help reduce default rates and strengthen
overall market performance. We believe that the Federal Open Market Committee
will continue to raise interest rates into 2005. We will continue to seek
convertible opportunities that we believe offer attractive upside potential with
limited downside risk.
5. See footnote 1 on page 5 for more information on the Credit Suisse First
Boston(TM) Convertible Securities Index.
www.mainstayfunds.com 9
At a meeting on September 21, 2004, the Board of Trustees of The MainStay Funds
(the "Trust") approved an Agreement and Plan of Reorganization whereby all of
the assets and liabilities of the Fund will be transferred to the MainStay
Balanced Fund (a series of Eclipse Funds) in exchange for shares of the MainStay
Balanced Fund (the "Reorganization"). Under this Agreement, the Fund would be
completely liquidated after the Reorganization. A meeting of shareholders of the
Fund has been scheduled for January 18, 2005 in order to vote on the proposed
Reorganization. Should shareholders approve a Reorganization, it is scheduled to
be effective on or about the close of business on January 21, 2005.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
10 MainStay Strategic Value Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE SECURITIES (10.1%)+
CONVERTIBLE BONDS (7.7%)
- -----------------------------------------------------------------------------
AIRLINES (0.0%) (b)
Delta Air Lines, Inc.
8.00%, due 6/3/23 $ 20,000 $ 9,700
-----------
AUTO COMPONENTS (0.2%)
Goodyear Tire & Rubber Co. (The)
4.00%, due 6/15/34 (c) 105,000 114,713
-----------
CAPITAL MARKETS (0.3%)
Credit Suisse First Boston, Inc.
0.50%, due 3/21/11 (c) 145,000 129,050
-----------
COMMERCIAL BANKS (0.4%)
Wells Fargo & Co.
1.4438%, due 5/1/33 (g) 220,000 218,900
-----------
COMMUNICATIONS EQUIPMENT (0.3%)
CIENA Corp.
3.75%, due 2/1/08 42,000 35,070
Nortel Networks Corp.
4.25%, due 9/1/08 95,000 91,794
Riverstone Networks, Inc.
3.75%, due 12/1/06 (c)(e) 40,000 36,800
-----------
163,664
-----------
CONSUMER FINANCE (0.1%)
Providian Financial Corp.
3.25%, due 8/15/05 45,000 44,775
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.0%) (b)
At Home Corp.
4.75%, due 12/15/06 (e)(f) 177,810 24,004
-----------
ENERGY EQUIPMENT & SERVICES (2.1%)
BJ Services Co.
0.3954%, due 4/24/22 315,000 272,081
Cooper Cameron Corp.
1.50%, due 5/15/24 175,000 179,156
Halliburton Co.
3.125%, due 7/15/23 155,000 186,775
Pride International, Inc.
2.50%, due 3/1/07 183,700 218,833
Schlumberger Ltd.
Series A
1.50%, due 6/1/23 230,000 247,250
-----------
1,104,095
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOOD & STAPLES RETAILING (0.4%)
Whole Foods Market, Inc.
(zero coupon), due 3/2/18 $ 250,000 $ 217,813
-----------
HEALTH CARE EQUIPMENT & SUPPLIES (0.4%)
ALZA Corp.
(zero coupon), due 7/28/20 235,000 189,763
-----------
HEALTH CARE PROVIDERS & SERVICES (0.3%)
Laboratory Corp. of America Holdings
(zero coupon), due 9/11/21 45,000 33,806
Lincare Holdings, Inc.
3.00%, due 6/15/33 40,000 41,350
Quest Diagnostics, Inc.
1.75%, due 11/30/21 50,000 51,500
-----------
126,656
-----------
HOTELS, RESTAURANTS & LEISURE (0.3%)
International Game Technology
(zero coupon), due 1/29/33 200,000 150,250
-----------
INDUSTRIAL CONGLOMERATES (0.4%)
Tyco International Group S.A.
Series A
2.75%, due 1/15/18 155,000 219,518
-----------
INSURANCE (0.7%)
Aon Corp.
3.50%, due 11/15/12 200,000 230,500
Loews Corp.
3.125%, due 9/15/07 10,000 9,837
XL Capital Ltd.
(zero coupon), due 5/23/21 190,000 123,738
-----------
364,075
-----------
IT SERVICES (0.0%) (b)
Electronic Data Systems Corp.
3.875%, due 7/15/23 20,000 20,450
-----------
MEDIA (0.6%)
Adelphia Communications Corp.
6.00%, due 2/15/06 (e) 10,000 2,350
Liberty Media Corp.
0.75%, due 3/30/23 80,000 87,000
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE SECURITIES (CONTINUED)
CONVERTIBLE BONDS (CONTINUED)
- -----------------------------------------------------------------------------
MEDIA (CONTINUED)
Sirius Satellite Radio, Inc.
2.50%, due 2/15/09 $ 85,000 $ 99,344
Walt Disney Co. (The)
2.125%, due 4/15/23 135,000 145,125
-----------
333,819
-----------
PHARMACEUTICALS (0.5%)
Teva Pharmaceutical Industries Ltd.
0.375%, due 11/15/22 180,000 231,525
-----------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.5%)
Cymer, Inc.
3.50%, due 2/15/09 24,000 23,790
Cypress Semiconductor Corp.
1.25%, due 6/15/08 25,000 25,281
Fairchild Semiconductor International, Inc.
5.00%, due 11/1/08 90,000 90,450
LSI Logic Corp.
4.00%, due 11/1/06 130,000 129,837
-----------
269,358
-----------
UTILITIES--ELECTRIC & GAS (0.2%)
Lehman Brothers Holdings, Inc.
Series TXU (The TXU Corp.)
1.00%, due 11/3/11 (o) 125,000 125,938
-----------
Total Convertible Bonds (Cost $4,093,906) 4,058,066
-----------
<Caption>
SHARES
CONVERTIBLE PREFERRED STOCKS (2.4%)
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.3%)
Northrop Grumman Corp.
7.25% (h) 1,600 163,856
-----------
AUTOMOBILES (0.1%)
Ford Motor Co. Capital Trust II
6.50% 1,400 69,986
-----------
CONTAINERS & PACKAGING (0.3%)
Temple-Inland, Inc.
7.50% 2,800 146,020
-----------
</Table>
<Table>
<Caption>
SHARES VALUE
HEALTH CARE PROVIDERS & SERVICES (0.1%)
QuadraMed Corp.
5.50% (c)(d) 2,500 $ 62,500
-----------
INSURANCE (0.6%)
Hartford Financial Services Group, Inc. (The)
7.00% 2,500 143,425
Prudential Financial, Inc.
6.75% 2,200 151,844
-----------
295,269
-----------
MACHINERY (0.3%)
Cummins Capital Trust I
7.00% 1,900 145,825
-----------
PAPER & FOREST PRODUCTS (0.4%)
International Paper Capital Trust
5.25% 3,800 192,375
-----------
THRIFTS & MORTGAGE FINANCE (0.3%)
PMI Group, Inc. (The)
5.875% 6,400 160,000
-----------
WIRELESS TELECOMMUNICATION SERVICES (0.0%) (b)
NEON Communications, Inc.
12.00% (d)(i)(k) 438 4,928
-----------
Total Convertible Preferred Stocks (Cost
$1,156,474) 1,240,759
-----------
Total Convertible Securities (Cost $5,250,380) 5,298,825
-----------
<Caption>
PRINCIPAL
AMOUNT
CORPORATE BONDS (17.2%)
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.2%)
BE Aerospace, Inc.
Series B
8.00%, due 3/1/08 $ 10,000 10,100
8.875%, due 5/1/11 50,000 52,600
Sequa Corp.
Series B
8.875%, due 4/1/08 50,000 54,625
-----------
117,325
-----------
AIRLINES (0.4%)
American Airlines, Inc.
8.608%, due 4/1/11 45,000 38,201
</Table>
12 MainStay Strategic Value Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -----------------------------------------------------------------------------
AIRLINES (CONTINUED)
Delta Air Lines, Inc.
8.30%, due 12/15/29 $ 144,000 $ 51,840
10.00%, due 8/15/08 20,000 10,500
10.375%, due 12/15/22 20,000 7,400
Northwest Airlines, Inc.
8.875%, due 6/1/06 10,000 8,500
8.97%, due 1/2/15 32,014 19,963
9.875%, due 3/15/07 45,000 34,650
10.00%, due 2/1/09 55,000 37,675
-----------
208,729
-----------
AUTO COMPONENTS (0.6%)
Advanced Accessory Systems
10.75%, due 6/15/11 5,000 4,550
Collins & Aikman Products
12.875%, due 8/24/12 (c) 70,000 60,550
Dana Corp.
7.00%, due 3/1/29 25,000 24,500
Goodyear Tire & Rubber Co. (The)
6.375%, due 3/15/08 12,000 11,640
6.625%, due 12/1/06 20,000 20,600
8.50%, due 3/15/07 30,000 30,750
2nd Lien Note
11.00%, due 3/1/11 (c)(k) 110,000 123,200
Tenneco Automotive, Inc.
Series B
10.25%, due 7/15/13 20,000 23,300
-----------
299,090
-----------
BUILDING PRODUCTS (0.2%)
Dayton Superior Corp.
10.75%, due 9/15/08 55,000 58,575
Interline Brands, Inc.
11.50%, due 5/15/11 40,000 44,400
MMI Products, Inc.
Series B
11.25%, due 4/15/07 30,000 30,300
-----------
133,275
-----------
CAPITAL MARKETS (0.2%)
LaBranche & Co., Inc.
9.50%, due 5/15/09 25,000 25,000
11.00%, due 5/15/12 70,000 71,838
-----------
96,838
-----------
CHEMICALS (0.9%)
Crompton Corp.
9.875%, due 8/1/12 (c) 65,000 71,663
Equistar Chemicals L.P.
10.625%, due 5/1/11 60,000 69,300
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CHEMICALS (CONTINUED)
FMC Corp.
10.25%, due 11/1/09 $ 45,000 $ 52,200
Lyondell Chemical Co.
10.50%, due 6/1/13 55,000 64,900
Millennium America, Inc.
7.00%, due 11/15/06 20,000 20,900
7.625%, due 11/15/26 34,000 32,640
Sovereign Specialty Chemicals, Inc.
11.875%, due 3/15/10 47,000 50,525
Terra Capital, Inc.
12.875%, due 10/15/08 73,000 90,520
-----------
452,648
-----------
COMMERCIAL BANKS (0.1%)
UGS Corp.
10.00%, due 6/1/12 (c) 50,000 56,000
-----------
COMMERCIAL SERVICES & SUPPLIES (0.7%)
American Color Graphics, Inc.
10.00%, due 6/15/10 15,000 11,475
Geo Sub Corp.
11.00%, due 5/15/12 (c) 60,000 57,600
Language Line, Inc.
11.125%, due 6/15/12 (c) 60,000 64,200
MemberWorks, Inc.
9.25%, due 4/1/14 (c) 65,000 67,925
Phoenix Color Corp.
10.375%, due 2/1/09 65,000 61,750
Protection One Alarm Monitoring, Inc.
7.375%, due 8/15/05 85,000 85,000
8.125%, due 1/15/09 40,000 34,200
-----------
382,150
-----------
COMMUNICATIONS EQUIPMENT (0.2%)
Lucent Technologies, Inc.
5.50%, due 11/15/08 15,000 15,375
6.45%, due 3/15/29 89,000 76,429
7.25%, due 7/15/06 29,000 30,740
-----------
122,544
-----------
CONSTRUCTION & ENGINEERING (0.5%)
AMSTED Industries, Inc.
10.25%, due 10/15/11 (c) 60,000 66,000
J. Ray McDermott, S.A.
11.00%, due 12/15/13 (c) 70,000 76,475
Shaw Group, Inc. (The)
10.75%, due 3/15/10 65,000 69,388
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -----------------------------------------------------------------------------
CONSTRUCTION & ENGINEERING (CONTINUED)
URS Corp.
11.50%, due 9/15/09 $ 36,000 $ 41,400
-----------
253,263
-----------
CONTAINERS & PACKAGING (0.5%)
Consolidated Container Co. LLC
(zero coupon), due 6/15/09 65,000 52,975
Owens-Brockway Glass, Inc.
8.25%, due 5/15/13 15,000 16,500
Owens-Illinois, Inc.
7.15%, due 5/15/05 1,000 1,025
7.80%, due 5/15/18 63,000 64,575
8.10%, due 5/15/07 75,000 79,500
Tekni-Plex, Inc.
8.75%, due 11/15/13 (c) 25,000 23,844
Series B
12.75%, due 6/15/10 10,000 7,500
-----------
245,919
-----------
DIVERSIFIED FINANCIAL SERVICES (0.8%)
Caithness Coso Funding Corp.
Series B
9.05%, due 12/15/09 44,556 49,457
Dollar Financial Group, Inc.
9.75%, due 11/15/11 15,000 16,012
IPC Acquisition Corp.
11.50%, due 12/15/09 65,000 71,825
National Beef Packing Co.
10.50%, due 8/1/11 40,000 41,000
Pharma Services Intermediate Holding Corp.
(zero coupon), due 4/1/14 (c) 70,000 46,025
Rainbow National Services LLC
8.75%, due 9/1/12 (c) 30,000 32,100
10.375%, due 9/1/14 (c) 95,000 103,550
UCAR Finance, Inc.
10.25%, due 2/15/12 55,000 62,700
-----------
422,669
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES (1.0%)
Mountain States Telephone & Telegraph Co.
7.375%, due 5/1/30 (d) 25,000 21,625
Qwest Communications International, Inc.
7.25%, due 2/15/11 (c) 40,000 39,700
Series B
7.50%, due 11/1/08 50,000 45,500
7.50%, due 2/15/14 (c) 15,000 14,475
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
DIVERSIFIED TELECOMMUNICATION SERVICES (CONTINUED)
Qwest Corp.
7.25%, due 9/15/25 $ 15,000 $ 13,725
7.50%, due 6/15/25 55,000 51,700
8.875%, due 6/1/31 30,000 30,300
9.125%, due 3/15/12 (c) 25,000 28,188
Qwest Services Corp.
13.50%, due 12/15/07 (c) 30,000 34,350
14.00%, due 12/15/10 (c) 83,000 98,562
14.00%, due 12/15/14 (c) 40,000 49,600
TSI Telecommunication Services, Inc.
Series B
12.75%, due 2/1/09 65,000 72,800
-----------
500,525
-----------
ELECTRIC UTILITIES (0.5%)
Cedar Brakes II LLC
9.875%, due 9/1/13 114,426 129,874
Mirant Americas Generation LLC
8.50%, due 10/1/21 (e) 40,000 37,700
9.125%, due 5/1/31 (e) 65,000 61,750
Southern California Edison Co.
8.00%, due 2/15/07 45,000 49,759
-----------
279,083
-----------
ELECTRICAL EQUIPMENT (0.1%)
Knowles Electronics Holdings, Inc.
13.125%, due 10/15/09 55,000 57,063
-----------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.0%) (b)
Sensus Metering Systems, Inc.
8.625%, due 12/15/13 10,000 10,300
-----------
ENERGY EQUIPMENT & SERVICES (0.4%)
El Paso Natural Gas Co.
Series A
7.625%, due 8/1/10 40,000 43,250
Lone Star Technologies, Inc.
Series B
9.00%, due 6/1/11 65,000 69,550
Parker Drilling Co.
9.625%, due 10/1/13 5,000 5,563
Series B
10.125%, due 11/15/09 20,000 21,075
Pride International, Inc.
7.375%, due 7/15/14 (c) 50,000 56,250
-----------
195,688
-----------
FOOD PRODUCTS (0.2%)
Pinnacle Foods Holding Corp.
8.25%, due 12/1/13 (c) 10,000 9,450
</Table>
14 MainStay Strategic Value Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -----------------------------------------------------------------------------
FOOD PRODUCTS (CONTINUED)
Seminis, Inc.
10.25%, due 10/1/13 $ 30,000 $ 33,600
Swift & Co.
10.125%, due 10/1/09 10,000 11,150
12.50%, due 1/1/10 45,000 50,062
-----------
104,262
-----------
GAS UTILITIES (0.2%)
ANR Pipeline, Inc.
9.625%, due 11/1/21 70,000 86,100
Southern Natural Gas Co.
7.35%, due 2/15/31 45,000 45,450
-----------
131,550
-----------
HEALTH CARE EQUIPMENT & SUPPLIES (0.2%)
Fisher Scientific International, Inc. 8.00%, due
9/1/13 75,000 84,562
8.125%, due 5/1/12 5,000 5,575
-----------
90,137
-----------
HEALTH CARE PROVIDERS & SERVICES (0.9%)
AmeriPath, Inc.
10.50%, due 4/1/13 60,000 58,800
Ardent Health Services, Inc.
10.00%, due 8/15/13 25,000 25,562
Caremark Rx, Inc.
7.375%, due 10/1/06 69,000 73,898
Chemed Corp.
8.75%, due 2/24/11 75,000 78,375
HCA, Inc.
7.50%, due 11/15/95 104,000 97,015
National Nephrology
Associates, Inc.
9.00%, due 11/1/11 (c) 15,000 17,325
Quintiles Transnational Corp.
10.00%, due 10/1/13 75,000 81,750
Vanguard Health Holding Co. II
9.00%, due 10/1/14 (c) 50,000 52,250
-----------
484,975
-----------
HOTELS, RESTAURANTS & LEISURE (0.7%)
Gaylord Entertainment Co.
8%, due 11/15/13 10,000 10,775
ITT Corp.
7.375%, due 11/15/15 (l) 96,000 108,480
Jacobs Entertainment, Inc.
11.875%, due 2/1/09 25,000 28,500
MGM Mirage, Inc.
6.75%, due 9/1/12 (c) 65,000 68,900
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
HOTELS, RESTAURANTS & LEISURE (CONTINUED)
Six Flags, Inc.
9.625%, due 6/1/14 $ 35,000 $ 33,425
9.75%, due 4/15/13 35,000 33,731
Trump Atlantic City Associates
11.25%, due 5/1/06 (e) 70,000 61,425
Venetian Casino Resort LLC
11.00%, due 6/15/10 19,000 21,826
-----------
367,062
-----------
HOUSEHOLD DURABLES (0.1%)
Fedders North America, Inc.
9.875%, due 3/1/14 20,000 16,100
Foamex L.P.
10.75%, due 4/1/09 30,000 28,500
-----------
44,600
-----------
INSURANCE (0.2%)
Crum & Forster
10.375%, due 6/15/13 50,000 53,500
Fremont General Corp.
Series B
7.875%, due 3/17/09 55,000 53,968
Lumbermens Mutual Casualty
8.45%, due 12/1/97 (c)(e) 5,000 125
9.15%, due 7/1/26 (c)(e) 155,000 3,875
-----------
111,468
-----------
INTERNET SOFTWARE & SERVICES (0.0%) (b)
Globix Corp.
11.00%, due 5/1/08 (c)(d)(j) 15,440 13,741
-----------
IT SERVICES (0.2%)
Electronic Data Systems Corp.
Series B
6.00%, due 8/1/13 25,000 25,533
7.125%, due 10/15/09 10,000 10,857
7.45%, due 10/15/29 25,000 25,297
Unisys Corp.
6.875%, due 3/15/10 50,000 53,500
-----------
115,187
-----------
MACHINERY (0.3%)
Mark IV Industries, Inc.
7.50%, due 9/1/07 86,000 81,270
Mueller Group, Inc.
10.00%, due 5/1/12 35,000 37,800
Thermadyne Holdings Corp.
9.25%, due 2/1/14 25,000 23,750
-----------
142,820
-----------
MACHINERY & ENGINEERING (0.0%) (b)
Dresser-Rand Group
7.375%, due 11/1/14 (c) 20,000 20,950
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -----------------------------------------------------------------------------
MEDIA (1.7%)
Adelphia Communications Corp.
9.375%, due 11/15/09 (e) $ 20,000 $ 17,500
10.25%, due 6/15/11 (e) 75,000 66,937
10.25%, due 11/1/06 (e) 60,000 51,300
Allbritton Communications Co.
7.75%, due 12/15/12 35,000 36,487
American Media Operations, Inc.
8.875%, due 1/15/11 45,000 47,925
Dex Media East LLC
12.125%, due 11/15/12 6,000 7,455
FrontierVision Operating Partners L.P.
11.00%, due 10/15/06 (e) 120,000 150,600
Hollinger Participation Trust
12.125%, due 11/15/10 (c)(j) 39,357 48,016
Houghton Mifflin Co.
7.20%, due 3/15/11 55,000 58,369
LCE Acquisition Corp.
9.00%, due 8/1/14 (c) 25,000 26,188
Morris Publishing Group LLC
7.00%, due 8/1/13 45,000 45,900
PanAmSat Corp.
9.00%, due 8/15/14 (c) 40,000 42,400
Paxson Communications Corp.
(zero coupon), due 1/15/09 60,000 52,200
10.75%, due 7/15/08 50,000 50,375
Radio One, Inc.
Series B
8.875%, due 7/1/11 40,000 44,200
Spanish Broadcasting System, Inc.
9.625%, due 11/1/09 25,000 26,281
United Artists Theatres Circuit, Inc.
9.30%, due 7/1/15 (d) 9,434 9,623
Vertis, Inc.
9.75%, due 4/1/09 40,000 43,600
Warner Music Group
7.375%, due 4/15/14 (c) 25,000 25,688
Young Broadcasting, Inc.
8.50%, due 12/15/08 20,000 21,400
Ziff Davis Media, Inc.
Series B
13.00%, due 8/12/09 (j) 40,891 40,942
-----------
913,386
-----------
METALS & MINING (0.3%)
Allegheny Ludlum Corp.
6.95%, due 12/15/25 30,000 28,650
Allegheny Technologies, Inc.
8.375%, due 12/15/11 40,000 43,200
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
METALS & MINING (CONTINUED)
Commonwealth Industries, Inc.
10.75%, due 10/1/06 $ 34,000 $ 34,085
United States Steel LLC
10.75%, due 8/1/08 35,000 41,475
-----------
147,410
-----------
MULTILINE RETAIL (0.0%) (b)
Kmart Corp.
8.54%, due 1/2/15 (e) 24,589 7,991
-----------
MULTI-UTILITIES & UNREGULATED POWER (1.3%)
AES Corp. (The)
7.75%, due 3/1/14 45,000 48,937
9.00%, due 5/15/15 (c) 85,000 99,025
AES Eastern Energy LP
9.00%, due 1/2/17 122,299 137,587
Calpine Corp.
7.75%, due 4/15/09 25,000 14,125
8.50%, due 7/15/10 (c) 128,000 94,080
8.75%, due 7/15/07 15,000 10,725
Dynegy Holdings, Inc.
9.875%, due 7/15/10 (c) 90,000 102,262
NRG Energy, Inc.
8.00%, due 12/15/13 (c) 75,000 82,594
Reliant Energy, Inc.
9.25%, due 7/15/10 15,000 16,650
Salton Sea Funding Corp.
Series E
8.30%, due 5/30/11 (d) 33,999 37,711
Tiverton/Rumford Power Associates Ltd., L.P.
9.00%, due 7/15/18 (c) 62,583 44,434
-----------
688,130
-----------
OIL & GAS (0.9%)
El Paso Corp.
6.95%, due 12/15/07 50,000 51,375
El Paso Production Holding Co.
7.75%, due 6/1/13 135,000 140,738
Energy Corp. of America
Series A
9.50%, due 5/15/07 56,000 53,760
EXCO Resources, Inc.
7.25%, due 1/15/11 40,000 43,300
Forest Oil Corp.
8.00%, due 6/15/08 50,000 55,500
Hilcorp Finance Co.
10.50%, due 9/1/10 (c) 5,000 5,637
Newfield Exploration Co.
7.625%, due 3/1/11 5,000 5,637
8.375%, due 8/15/12 5,000 5,663
</Table>
16 MainStay Strategic Value Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -----------------------------------------------------------------------------
OIL & GAS (CONTINUED)
Northwest Pipeline Corp.
7.125%, due 12/1/25 $ 55,000 $ 56,788
Plains Exploration & Production Co.
Series B
8.75%, due 7/1/12 10,000 11,300
Vintage Petroleum, Inc.
8.25%, due 5/1/12 60,000 67,200
-----------
496,898
-----------
PAPER & FOREST PRODUCTS (0.9%)
Georgia-Pacific Corp.
8.625%, due 4/30/25 120,000 127,650
8.875%, due 2/1/10 110,000 129,525
8.875%, due 5/15/31 90,000 110,925
9.375%, due 2/1/13 20,000 23,550
Pope & Talbot, Inc.
8.375%, due 6/1/13 60,000 63,000
-----------
454,650
-----------
PERSONAL PRODUCTS (0.1%)
Herbalife International, Inc.
11.75%, due 7/15/10 35,000 40,250
-----------
PHARMACEUTICALS (0.1%)
WH Holdings Ltd.
9.50%, due 4/1/11 25,000 27,375
-----------
REAL ESTATE (0.6%)
American Real Estate Partners L.P.
8.125%, due 6/1/12 (c) 70,000 73,850
CB Richard Ellis Services, Inc.
9.75%, due 5/15/10 24,000 27,360
11.25%, due 6/15/11 66,000 77,220
Crescent Real Estate Equities L.P.
7.50%, due 9/15/07 68,000 70,210
OMEGA Healthcare Investors, Inc.
7.00%, due 4/1/14 65,000 66,625
-----------
315,265
-----------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.2%)
Amkor Technology, Inc.
7.125%, due 3/15/11 45,000 38,813
7.75%, due 5/15/13 5,000 4,312
10.50%, due 5/1/09 30,000 26,550
ON Semiconductor Corp.
13.00%, due 5/15/08 15,000 16,950
-----------
86,625
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SPECIALTY RETAIL (0.1%)
Stratus Technologies, Inc.
10.375%, due 12/1/08 $ 20,000 $ 17,000
Williams Scotsman, Inc.
10.00%, due 8/15/08 40,000 43,600
-----------
60,600
-----------
TOBACCO (0.1%)
Commonwealth Brands, Inc.
9.75%, due 4/15/08 (c) 35,000 37,100
10.625%, due 9/1/08 (c) 35,000 36,750
-----------
73,850
-----------
TRANSPORTATION INFRASTRUCTURE (0.1%)
Great Lakes Dredge & Dock Corp.
7.75%, due 12/15/13 35,000 31,325
-----------
WIRELESS TELECOMMUNICATION SERVICES (0.5%)
Alamosa Delaware, Inc.
(zero coupon), due 7/31/09 50,000 53,250
11.00%, due 7/31/10 20,000 23,400
American Tower Escrow Corp.
(zero coupon), due 8/1/08 50,000 37,625
Dobson Cellular Systems
(zero coupon), due 11/1/11 (c)(g) 10,000 10,275
8.375%, due 11/1/11 (c) 10,000 10,313
9.875%, due 11/1/12 (c) 20,000 19,900
Dobson Communications Corp.
8.875%, due 10/1/13 10,000 6,725
10.875%, due 7/1/10 10,000 7,700
Loral CyberStar, Inc.
10.00%, due 7/15/06 (e) 53,000 40,810
Triton PCS, Inc.
8.50%, due 6/1/13 45,000 41,287
US Unwired, Inc.
10.00%, due 6/15/12 30,000 32,475
-----------
283,760
-----------
Total Corporate Bonds (Cost $8,470,956) 9,087,376
-----------
FOREIGN BONDS (2.6%)
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.1%)
Heckler & Koch GmbH
9.25%, due 7/15/11 (c) E 40,000 54,189
-----------
BROADCASTING & PUBLISHING (0.1%)
Telenet Communications NV
9.00%, due 12/15/13 (c) 25,000 34,345
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN BONDS (CONTINUED)
- -----------------------------------------------------------------------------
CHEMICALS (0.2%)
Acetex Corp.
10.875%, due 8/1/09 $ 55,000 $ 60,500
Invista
9.25%, due 5/1/12 (c) 55,000 60,500
-----------
121,000
-----------
COMMERCIAL SERVICES & SUPPLIES (0.3%)
Quebecor Media, Inc.
(zero coupon), due 7/15/11 112,000 109,200
11.125%, due 7/15/11 19,000 21,992
-----------
131,192
-----------
CONTAINERS & PACKAGING (0.4%)
Crown Euro Holdings S.A.
9.50%, due 3/1/11 70,000 79,800
10.875%, due 3/1/13 115,000 136,563
-----------
216,363
-----------
FOOD & STAPLES RETAILING (0.0%) (b)
Parmalat Finance Corp. BV
6.25%, due 2/7/05 (e) E 70,000 15,137
-----------
FOOD PRODUCTS (0.2%)
Burns Philp Capital Property Ltd.
9.50%, due 11/15/10 $ 15,000 16,425
10.75%, due 2/15/11 60,000 67,200
-----------
83,625
-----------
INSURANCE (0.0%) (b)
Lindsey Morden Group, Inc.
Series B
7.00%, due 6/16/08 C$ 30,000 21,398
-----------
MARINE (0.1%)
Navigator Gas Transport PLC
10.50%, due 6/30/07 (c)(d)(e) $ 89,000 64,080
-----------
MEDIA (0.5%)
Hollinger, Inc.
12.875%, due 3/1/11 (c) 35,000 37,638
Ono Finance PLC
10.50%, due 5/15/14 (c) E 105,000 134,233
Shaw Communications, Inc.
7.50%, due 11/20/13 C$ 55,000 46,938
Telenet Group Holding NV
(zero coupon), due 6/15/14 (c) $ 40,000 30,400
-----------
249,209
-----------
MULTI-UTILITIES & UNREGULATED POWER (0.2%)
Calpine Canada Energy Finance
8.50%, due 5/1/08 125,000 76,875
-----------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
PAPER & FOREST PRODUCTS (0.2%)
Norske Skog Canada Ltd.
7.375%, due 3/1/14 $ 30,000 $ 31,200
Tembec Industries, Inc.
7.75%, due 3/15/12 65,000 63,700
8.50%, due 2/1/11 30,000 30,675
-----------
125,575
-----------
PERSONAL PRODUCTS (0.1%)
Jafra Cosmetics International, Inc.
10.75%, due 5/15/11 40,000 45,600
-----------
ROAD & RAIL (0.1%)
Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
12.50%, due 6/15/12 50,000 56,750
-----------
WIRELESS TELECOMMUNICATION SERVICES (0.1%)
Millicom International Cellular S.A.
10.00%, due 12/1/13 (c) 60,000 60,600
-----------
Total Corporate Bonds--Foreign (Cost $1,248,409) 1,355,938
-----------
LOAN ASSIGNMENT (0.2%)
- -----------------------------------------------------------------------------
CHEMICALS (0.2%)
Rockwood Specialties Group, Inc.
Bank debt, Term Loan
9.092%, due 2/11/11 (g)(k) 74,722 95,050
-----------
Total Loan Assignment (Cost $89,182) 95,050
-----------
YANKEE BONDS (0.5%) (m)
- -----------------------------------------------------------------------------
CONTAINERS & PACKAGING (0.1%)
Smurfit Capital Funding PLC
7.50%, due 11/20/25 45,000 45,225
-----------
ENERGY EQUIPMENT & SERVICES (0.2%)
Petroleum Geo-Services ASA
8.00%, due 11/5/06 12,302 12,517
10.00%, due 11/5/10 91,716 104,556
-----------
117,073
-----------
INSURANCE (0.0%) (b)
Fairfax Financial Holdings Ltd.
7.375%, due 4/15/18 5,000 4,412
7.75%, due 7/15/37 10,000 8,400
8.30%, due 4/15/26 5,000 4,513
-----------
17,325
-----------
</Table>
18 MainStay Strategic Value Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
- -----------------------------------------------------------------------------
METALS & MINING (0.1%)
Algoma Steel, Inc.
11.00%, due 12/31/09 (d) $ 55,000 $ 61,600
-----------
PAPER & FOREST PRODUCTS (0.1%)
Tembec Industries, Inc.
8.625%, due 6/30/09 45,000 45,788
-----------
Total Yankee Bonds (Cost $253,938) 287,011
-----------
<Caption>
SHARES
COMMON STOCKS (60.6%)
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.5%)
Boeing Co. (The) 4,600 229,540
VNorthrop Grumman Corp. 14,200 734,850
Raytheon Co. 9,335 340,541
-----------
1,304,931
-----------
AUTO COMPONENTS (1.6%)
Delphi Corp. 44,894 377,559
TRW Automotive Holdings Corp. (a) 26,000 477,360
-----------
854,919
-----------
BUILDING PRODUCTS (0.6%)
American Standard Cos., Inc. (a) 8,256 301,922
-----------
CAPITAL MARKETS (2.2%)
Goldman Sachs Group, Inc. (The) 4,379 430,806
Merrill Lynch & Co., Inc. 6,975 376,232
State Street Corp. 7,300 328,865
-----------
1,135,903
-----------
CHEMICALS (0.6%)
Air Products & Chemicals, Inc. 6,066 322,590
General Chemical Industrial Products, Inc.
(a)(d)(i)(k) 9 1,245
-----------
323,835
-----------
COMMERCIAL BANKS (3.5%)
VBank of America Corp. 16,916 757,668
PNC Financial Services
Group, Inc. (The) 6,208 324,678
U.S. Bancorp 18,100 517,841
Wachovia Corp. 4,900 241,130
-----------
1,841,317
-----------
COMMERCIAL SERVICES & SUPPLIES (0.6%)
Pitney Bowes, Inc. 7,222 315,963
-----------
</Table>
<Table>
<Caption>
SHARES VALUE
COMMUNICATIONS EQUIPMENT (1.2%)
Nokia Corp. 39,800 $ 613,716
-----------
COMPUTERS & PERIPHERALS (1.5%)
Hewlett-Packard Co. 17,700 330,282
International Business Machines Corp. 5,319 477,380
-----------
807,662
-----------
CONTAINERS & PACKAGING (1.1%)
Smurfit-Stone Container Corp. (a) 33,200 576,352
-----------
DIVERSIFIED FINANCIAL SERVICES (1.9%)
VCitigroup, Inc. 17,790 789,342
JPMorgan Chase & Co. 5,940 229,284
-----------
1,018,626
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES (3.5%)
ALLTEL Corp. 9,486 521,066
BellSouth Corp. 10,300 274,701
SBC Communications, Inc. 18,673 471,680
Verizon Communications, Inc. 14,588 570,391
-----------
1,837,838
-----------
ELECTRIC UTILITIES (2.3%)
FirstEnergy Corp. 11,279 466,161
PPL Corp. 5,900 306,800
Southern Co. (The) 13,900 439,101
-----------
1,212,062
-----------
ELECTRICAL EQUIPMENT (0.5%)
Cooper Industries, Ltd. Class A 4,100 261,990
-----------
ENERGY EQUIPMENT & SERVICES (5.4%)
Diamond Offshore Drilling, Inc. 5,100 172,380
ENSCO International, Inc. 12,500 381,875
Pride International, Inc. (a) 23,200 428,736
VRowan Cos., Inc. (a) 43,600 1,113,108
VTransocean, Inc. (a) 21,600 761,400
-----------
2,857,499
-----------
FOOD & STAPLES RETAILING (1.9%)
CVS Corp. 10,100 438,946
Kroger Co. (The) (a) 38,200 577,202
-----------
1,016,148
-----------
FOOD PRODUCTS (3.0%)
Cadbury Schwppes PLC 19,300 646,550
VGeneral Mills, Inc. 14,800 654,900
Kraft Foods, Inc. Class A 9,146 304,653
-----------
1,606,103
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
19
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES (2.0%)
HCA, Inc. 8,900 $ 326,896
Laboratory Corp. of America Holdings (a) 6,900 316,020
QuadraMed Corp. (a)(d) 6,368 16,875
Skilled Healthcare Group, Inc. (a)(d)(i)(k) 27 432
Universal Health Services, Inc. Class B 9,700 403,132
-----------
1,063,355
-----------
HOUSEHOLD PRODUCTS (1.5%)
Energizer Holdings, Inc. (a) 7,404 343,768
Kimberly-Clark Corp. 7,348 438,455
-----------
782,223
-----------
INSURANCE (4.6%)
Allstate Corp. (The) 11,515 553,756
American International Group, Inc. 4,400 267,124
Hartford Financial Services Group, Inc. (The) 7,912 462,694
Prudential Financial, Inc. 10,400 483,288
VSt. Paul Travelers Cos., Inc. (The) 19,951 677,536
-----------
2,444,398
-----------
INTERNET SOFTWARE & SERVICES (0.0%) (b)
Globix Corp. (a)(d)(i)(k) 2,477 4,830
Remote Dynamics, Inc. (a) 1,478 1,404
-----------
6,234
-----------
IT SERVICES (2.0%)
VComputer Sciences Corp. (a) 20,872 1,036,712
-----------
LEISURE EQUIPMENT & PRODUCTS (1.1%)
Mattel, Inc. 31,700 555,067
-----------
MACHINERY (1.6%)
Morris Material Handling, Inc. (a)(d)(i)(k) 197 1,044
VNavistar International Corp. (a) 23,600 815,380
Thermadyne Holdings Corp. (a)(d) 2,474 25,977
-----------
842,401
-----------
MEDIA (0.2%)
UnitedGlobalCom, Inc. (a) 16,073 120,226
-----------
METALS & MINING (0.9%)
ACP Holding Co. (a)(c)(d) 10,780 15,092
Alcoa, Inc. 14,575 473,687
-----------
488,779
-----------
</Table>
<Table>
<Caption>
SHARES VALUE
OIL & GAS (4.5%)
ChevronTexaco Corp. 10,410 $ 552,355
ExxonMobil Corp. 12,012 591,231
Kerr-McGee Corp. 9,600 568,512
Premcor, Inc. (a) 8,700 339,648
Unocal Corp. 7,950 331,912
-----------
2,383,658
-----------
PAPER & FOREST PRODUCTS (2.1%)
VBowater, Inc. 18,400 677,856
MeadWestvaco Corp. 12,980 409,259
-----------
1,087,115
-----------
PHARMACEUTICALS (2.0%)
Bristol-Myers Squibb Co. 12,000 281,160
Merck & Co., Inc. 13,900 435,209
Pfizer, Inc. 11,200 324,240
-----------
1,040,609
-----------
ROAD & RAIL (1.0%)
Burlington Northern Santa Fe Corp. 12,173 508,953
-----------
SOFTWARE (1.0%)
BMC Software, Inc. (a) 28,300 535,436
-----------
SPECIALTY RETAIL (1.2%)
Gap, Inc. (The) 30,500 609,390
-----------
THRIFTS & MORTGAGE FINANCE (1.0%)
PMI Group, Inc. (The) 13,800 535,716
-----------
TOBACCO (0.0%) (b)
North Atlantic Trading Co., Inc. (a)(d)(i)(k) 130 7,804
-----------
WIRELESS TELECOMMUNICATION SERVICES (0.0%) (b)
NEON Communications, Inc. (a)(d)(i)(k) 4,021 5,026
US Unwired, Inc. (a) 348 1,079
-----------
6,105
-----------
Total Common Stocks (Cost $29,314,689) 31,940,967
-----------
</Table>
20 MainStay Strategic Value Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
PREFERRED STOCKS (0.4%)
- -----------------------------------------------------------------------------
MEDIA (0.1%)
Haights Cross
Communications, Inc.
16.00%, Class B (d)(k) 900 $ 45,450
Ziff Davis Media, Inc.
10.00%, Series E-1 (d) 10 5,200
-----------
50,650
-----------
REAL ESTATE (0.3%)
Sovereign Real Estate
Investment Corp.
12.00%, Series A (c) 97 145,500
-----------
Total Preferred Stocks (Cost $128,636) 196,150
-----------
WARRANTS (0.0%) (b)
- -----------------------------------------------------------------------------
CHEMICALS (0.0%) (b)
General Chemical Industrial Products, Inc.
Series A
Strike Price $195.43
Expire 3/31/11 (a)(d)(i)(k) 5 176
Series B
Strike Price $376.03
Expire 3/31/11 (a)(d)(i)(k) 4 47
-----------
223
-----------
MEDIA (0.0%) (b)
Haights Cross
Communications, Inc.
Strike Price $0.001
Expire 12/10/11 (a)(d)(i)(k) 3 0(n)
Preferred Class A
Strike Price $0.001
Expire 12/10/11 (a)(d)(i)(k) 870 9
Ono Finance PLC
Strike Price $0.01
Expire 2/15/11 (a)(c)(d)(i) 110 1
Ziff Davis Media, Inc.
Strike Price $0.01
Expire 8/12/12 (a)(c) 1,958 196
-----------
206
-----------
</Table>
<Table>
<Caption>
SHARES VALUE
METALS & MINING (0.0%) (b)
ACP Holding Co.
Strike Price $0.01
Expire 10/7/13 (c)(d) 10,519 $ 14,726
-----------
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
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 $17,953) 17,962
-----------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (7.5%)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (7.4%)
AIG Funding, Inc.
1.78%, due 11/2/04 $ 640,000 639,968
Federal National Mortgage Association
1.74%, due 11/10/04 1,490,000 1,489,352
International Business Machines Corp.
1.70%, due 11/1/04 630,000 630,000
Lilly (Eli) & Co.
1.72%, due 11/3/04 275,000 274,974
UBS Finance (Delaware) LLC
1.84%, due 11/1/04 880,000 880,000
-----------
Total Commercial Paper (Cost $3,914,294) 3,914,294
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
21
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM LOAN ASSIGNMENT & PARTICIPATION (0.1%)
- -----------------------------------------------------------------------------
BUILDING PRODUCTS (0.1%)
Owens Corning, Inc.
Bank debt, Revolver
3.62%, due 1/1/05 (e)(g)(k)(p) $ 70,672 $ 48,057
-----------
Total Short-Term Loan
Assignment & Participation (Cost $47,919) 48,057
-----------
Total Short-Term Investments (Cost $3,962,213) 3,962,351
-----------
Total Investments (Cost $48,736,356) (q) 99.1% 52,241,630(r)
Cash and Other Assets,
Less Liabilities 0.9 487,610
----------- -----------
Net Assets 100.0% $52,729,240
=========== ===========
</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) Floating rate. Rate shown is the rate in effect at
October 31, 2004.
(h) 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.
(i) Fair valued security. The total market value of these
securities at October 31, 2004 is $28,348, which
reflects 0.1% of the Fund's net assets.
(j) PIK ("Payment in Kind")--interest or dividend payment
is made with additional securities.
(k) Restricted security.
(l) Partially segregated for unfunded loan commitments.
(m) Yankee Bond--Dollar-denominated bond issued in the
United States by a foreign bank or corporation.
(n) Less than one dollar.
(o) Synthetic Convertible--An equity-linked security issued
by an entity other than the issuer of the underlying
equity instrument.
(p) This security has additional commitments and contingen-
cies. (See Note 7.)
(q) The cost for federal income tax purposes is
$49,012,030.
(r) At October 31, 2004, net unrealized appreciation was
$3,229,600 based on cost for federal income tax
purposes. This consisted of aggregate gross unrealized
appreciation for all investments on which there was an
excess of market value over cost of $5,236,471 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $2,006,871.
The following abbreviations are used in the above
portfolio:
C$ -- Canadian Dollar
E -- Euro
L -- Pound Sterling
</Table>
22 MainStay Strategic Value Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value (identified
cost $48,736,356) $52,241,630
Cash 1,631
Receivables:
Investment securities sold 637,732
Dividends and interest 340,920
Fund shares sold 49,418
Other assets 10,128
-----------
Total assets 53,281,459
-----------
LIABILITIES:
Payables:
Investment securities purchased 354,076
Transfer agent 42,439
NYLIFE Distributors 34,704
Fund shares redeemed 29,998
Manager 18,191
Custodian 6,799
Trustees 693
Accrued expenses 65,319
-----------
Total liabilities 552,219
-----------
Net assets $52,729,240
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 14,638
Class B 33,213
Class C 1,303
Additional paid-in capital 51,437,902
Accumulated undistributed net investment income 16,055
Accumulated net realized loss on investments
and written option transactions (2,279,907)
Net unrealized appreciation on investments 3,505,274
Net unrealized appreciation on translation of
other assets and liabilities in foreign
currencies 762
-----------
Net assets $52,729,240
===========
CLASS A
Net assets applicable to outstanding shares $15,721,893
===========
Shares of beneficial interest outstanding 1,463,750
===========
Net asset value per share outstanding $ 10.74
Maximum sales charge (5.50% of offering price) 0.63
-----------
Maximum offering price per share outstanding $ 11.37
===========
CLASS B
Net assets applicable to outstanding shares $35,609,846
===========
Shares of beneficial interest outstanding 3,321,278
===========
Net asset value and offering price
per share outstanding $ 10.72
===========
CLASS C
Net assets applicable to outstanding shares $ 1,397,501
===========
Shares of beneficial interest outstanding 130,340
===========
Net asset value and offering price
per share outstanding $ 10.72
===========
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
23
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 693,602
Interest 1,181,386
----------
Total income 1,874,988
----------
EXPENSES:
Manager 370,612
Distribution -- Class B 259,167
Distribution -- Class C 8,490
Transfer agent 252,043
Service -- Class A 34,318
Service -- Class B 86,389
Service -- Class C 2,830
Shareholder communication 51,053
Professional 43,729
Registration 36,727
Custodian 29,101
Recordkeeping 19,804
Trustees 7,685
Miscellaneous 50,460
----------
Total expenses before reimbursement 1,252,408
Expenses reimbursed by Manager (144,698)
----------
Net expenses 1,107,710
----------
Net investment income 767,278
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions 1,333,399
Foreign currency transactions 27,646
----------
Net realized gain on investments and foreign
currency transactions 1,361,045
----------
Net change in unrealized appreciation on:
Security transactions 2,044,112
Translation of other assets and liabilities in
foreign currencies and foreign currency
forward transactions 632
----------
Net unrealized gain on investments and foreign
currency transactions 2,044,744
----------
Net realized and unrealized gain on investments
and foreign currency transactions 3,405,789
----------
Net increase in net assets resulting from
operations $4,173,067
==========
</Table>
24 MainStay Strategic Value Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment income $ 767,278 $ 686,006 $ 745,823
Net realized gain (loss) on
investments, written
option and foreign
currency transactions 1,361,045 (979,123) (1,987,695)
Net change in unrealized
appreciation
(depreciation) on
investments and foreign
currency transactions 2,044,744 7,359,073 (4,596,623)
---------------------------------------
Net increase (decrease) in
net assets resulting from
operations 4,173,067 7,065,956 (5,838,495)
---------------------------------------
Dividends to shareholders:
From net investment income:
Class A (300,080) (194,845) (207,179)
Class B (498,039) (418,040) (519,324)
Class C (16,352) (8,943) (10,070)
---------------------------------------
Total dividends to
shareholders (814,471) (621,828) (736,573)
---------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 7,096,786 3,808,940 2,772,185
Class B 7,403,849 5,036,688 4,566,761
Class C 891,313 371,225 613,586
Net asset value of shares issued to shareholders in reinvestment of
dividends and distributions:
Class A 266,266 186,193 198,269
Class B 476,374 401,912 500,414
Class C 11,807 6,547 6,900
---------------------------------------
16,146,395 9,811,505 8,658,115
Cost of shares redeemed:
Class A (3,137,101) (2,165,249) (1,991,966)
Class B (5,187,462) (3,700,342) (4,692,754)
Class C (347,045) (223,176) (347,675)
---------------------------------------
(8,671,608) (6,088,767) (7,032,395)
Increase in net assets
derived from capital
share transactions 7,474,787 3,722,738 1,625,720
---------------------------------------
Net increase (decrease)
in net assets 10,833,383 10,166,866 (4,949,348)
</Table>
<Table>
<Caption>
2004 2003* 2002
NET ASSETS:
Beginning of period $41,895,857 $31,728,991 $36,678,339
---------------------------------------
End of period $52,729,240 $41,895,857 $31,728,991
=======================================
Accumulated undistributed
(distributions in excess
of) net investment income
at end of period $ 16,055 $ 35,047 $ (37,568)
=======================================
</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. www.mainstayfunds.com
25
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH ----------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 9.97 $ 8.36 $ 10.12 $ 10.55 $ 11.15 $ 10.18
------- ------- ------- ------- ------- -------
Net investment income 0.22 0.22(a) 0.26 0.28(a)(e) 0.31 0.22
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.78 1.58 (1.77) (0.20)(e) 0.29 1.15
------- ------- ------- ------- ------- -------
Total from investment operations 1.00 1.80 (1.51) 0.08 0.60 1.37
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income (0.23) (0.19) (0.25) (0.30) (0.33) (0.23)
From net realized gain on investments -- -- -- (0.21) (0.87) (0.17)
------- ------- ------- ------- ------- -------
Total dividends and distributions (0.23) (0.19) (0.25) (0.51) (1.20) (0.40)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 10.74 $ 9.97 $ 8.36 $ 10.12 $ 10.55 $ 11.15
======= ======= ======= ======= ======= =======
Total investment return (b) 10.08% 21.85%(d) (14.98%) 0.81% 5.78% 13.59%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 2.09% 2.87%+ 2.78% 2.62%(e) 2.76% 1.97%
Net expenses 1.70% 1.70%+ 1.74% 1.83% 1.82% 1.69%
Expenses (before reimbursement) 1.99% 2.25%+ 2.14% 1.83% 1.82% 1.69%
Portfolio turnover rate 36% 39% 53% 82% 113% 122%
Net assets at end of period (in 000's) $15,722 $10,604 $ 7,174 $ 7,636 $19,278 $18,899
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH ----------------------------------------------
OCTOBER 31, OCTOBER 31 YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 9.96 $ 8.35 $10.10 $10.54 $11.13 $10.17
------ ------ ------ ------ ------ ------
Net investment income 0.14 0.16(a) 0.19 0.20(a)(e) 0.23 0.14
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.77 1.58 (1.76) (0.21)(e) 0.30 1.14
------ ------ ------ ------ ------ ------
Total from investment operations 0.91 1.75 (1.57) (0.01) 0.53 1.28
------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income (0.15) (0.13) (0.18) (0.22) (0.25) (0.15)
From net realized gain on investments -- -- -- (0.21) (0.87) (0.17)
------ ------ ------ ------ ------ ------
Total dividends and distributions (0.15) (0.14) (0.18) (0.43) (1.12) (0.32)
------ ------ ------ ------ ------ ------
Net asset value at end of period $10.72 $ 9.96 $ 8.35 $10.10 $10.54 $11.13
====== ====== ====== ====== ====== ======
Total investment return (b) 9.19% 21.19%(d) (15.58%) (0.07%) 5.07% 12.64%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.34% 2.12%+ 2.03% 1.87%(e) 2.01% 1.22%
Net expenses 2.45% 2.45%+ 2.49% 2.58% 2.57% 2.44%
Expenses (before reimbursement) 2.74% 3.00%+ 2.89% 2.58% 2.57% 2.44%
Portfolio turnover rate 36% 39% 53% 82% 113% 122%
Net assets at end of period (in 000's) $1,398 $ 770 $ 517 $ 358 $ 260 $ 154
</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.
(c) Less than one cent per share.
(d) Total return is not annualized.
(e) 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>
26 MainStay Strategic Value Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH ----------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 9.96 $ 8.35 $ 10.10 $ 10.54 $ 11.13 $ 10.17
------- ------- ------- ------- ------- -------
0.14 0.16(a) 0.19 0.20(a)(e) 0.23 0.14
0.77 1.59 (1.76) (0.21)(e) 0.30 1.14
------- ------- ------- ------- ------- -------
0.91 1.75 (1.57) (0.01) 0.53 1.28
------- ------- ------- ------- ------- -------
(0.15) (0.14) (0.18) (0.22) (0.25) (0.15)
-- -- -- (0.21) (0.87) (0.17)
------- ------- ------- ------- ------- -------
(0.15) (0.14) (0.18) (0.43) (1.12) (0.32)
------- ------- ------- ------- ------- -------
$ 10.72 $ 9.96 $ 8.35 $ 10.10 $ 10.54 $ 11.13
======= ======= ======= ======= ======= =======
9.19% 21.20%(d) (15.58%) (0.07%) 5.07% 12.64%
1.34% 2.12%+ 2.03% 1.87%(e) 2.01% 1.22%
2.45% 2.45%+ 2.49% 2.58% 2.57% 2.44%
2.74% 3.00%+ 2.89% 2.58% 2.57% 2.44%
36% 39% 53% 82% 113% 122%
$35,610 $30,521 $24,038 $28,684 $30,134 $35,702
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
27
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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.
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. Reasons for which securities may be valued in this manner
include, but are not limited to, trading for a security has been halted or
suspended, a security has been de-listed from a national exchange, or trading on
a security's primary market is temporarily closed at a time when under normal
conditions it would be open. At October 31, 2004, the Fund held securities with
a value of $28,348 that were valued in such manner. 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.
28 MainStay Strategic Value Fund
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 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) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
assignments and loan participations. Loan assignments and participations are
agreements to make money available (a "commitment") to a borrower in a specified
amount, at a specified rate and within a specified time. Such loan assignments
and participations are typically senior, secured and collateralized in nature.
The Fund records an investment when the borrower withdraws money and records
interest as earned. These loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or London
InterBank Offered Rate (LIBOR).
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. The Fund may be contractually obligated
to receive approval from the agent bank and/or borrower prior to the sale of
these investments.
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"). In the event that the Borrower, Selling
Participant or Intermediate Participants becomes insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
Borrower. At any point in time, up to the maturity date of the issue, the
Borrower may demand the unfunded portion. These unfunded amounts are recorded in
memorandum accounts. (See Note 7.)
(D) 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.
(E) 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.
(F) 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.
www.mainstayfunds.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table discloses the current year reclassification between
accumulated undistributed net investment income, accumulated net realized loss
on investments, and additional paid-in capital arising from permanent
differences; net assets at October 31, 2004, are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT LOSS ON ADDITIONAL
INCOME INVESTMENTS PAID-IN CAPITAL
$28,201 $(27,678) $(523)
- ----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to premium amortization
adjustments, foreign currency gain (loss), and paydown gain (loss).
(G) 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.
(H) 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.
(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 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.
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.
(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.
Through July 31, 2004, 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. The Manager had
voluntarily agreed to reimburse the expenses of the Fund to the extent that
operating expenses would exceed on an annualized basis 1.70%, 2.45% and 2.45% of
the average
30 MainStay Strategic Value Fund
daily net assets of the Class A, Class B and Class C shares, respectively.
Effective August 1, 2004, the Trust pays the Manager an annual rate of 0.75% of
the Fund's average daily net assets on assets up to $500 million and 0.70% on
assets over $500 million. In addition, effective December 1, 2004, NYLIM has
voluntarily agreed to reimburse the expenses of the Fund to the extent that
operating expenses would exceed on an annualized basis 1.40%, 2.15% and 2.15% of
the average daily net assets of the Class A, Class B and Class C shares,
respectively. For the year ended October 31, 2004, the Manager earned from the
Fund $370,612 and reimbursed the Fund $144,698.
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 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 $11,973 for the year ended
October 31, 2004. 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 $252, $28,072 and $758, respectively, for the year ended October 31,
2004.
(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 year ended October 31, 2004
amounted to $252,043.
(E) NON-INTERESTED TRUSTEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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 $1,536 for the year ended October 31,
2004.
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 $19,804 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged to the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- 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.
www.mainstayfunds.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Restricted securities held at October 31, 2004:
<Table>
<Caption>
PRINCIPAL
DATE(S) OF AMOUNT/ 10/31/04 PERCENT OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
General Chemical Industrial Products, Inc.
Common Stock 5/25/04 9 $ 19,456 $ 1,245 0.0%(a)
Warrants, Series A 5/25/04 5 2,968 176 0.0(a)
Warrants, Series B 5/25/04 4 875 47 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
Globix Corp.
Common Stock 6/21/01-3/13/02 2,477 651 4,830 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
Goodyear Tire & Rubber Co. (The)
2nd Lien Note
11.00%, due 3/1/11 5/25/04 $110,000 109,387 123,200 0.2
- --------------------------------------------------------------------------------------------------------------------------------
Haights Cross Communications, Inc.
Preferred Stock
16.00%, Class B 1/15/04 900 41,869 45,450 0.1
Warrants 1/15/04 3 0(b) 0(b) 0.0(a)
Warrants, Preferred Class A 1/15/04 870 9 9 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
Morris Material Handling, Inc.
Common Stock 3/5/99-10/22/01 197 102 1,044 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
NEON Communications, Inc.
Common Stock 9/11/03 4,021 3,563 5,026 0.0(a)
Convertible 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)
- --------------------------------------------------------------------------------------------------------------------------------
North Atlantic Trading Co., Inc.
Common Stock 4/21/04 130 1 7,804 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
Owens Corning, Inc.
Bank debt, Revolver
3.62%, due 1/1/05 1/10/02-6/6/02 70,672 47,919 48,057 0.1
- --------------------------------------------------------------------------------------------------------------------------------
Rockwood Specialties Group, Inc.
Bank debt, Term Loan
9.092%, due 2/11/11 8/16/04 74,722 89,181 95,050 0.2
- --------------------------------------------------------------------------------------------------------------------------------
Skilled Healthcare Group, Inc.
Common Stock 2/23/03 27 0(b) 432 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
$ 324,474 $340,104 0.6%
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Less than one tenth of a percent.
(b) Less than one dollar.
NOTE 6 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED TOTAL
ORDINARY CAPITAL AND UNREALIZED ACCUMULATED
INCOME OTHER LOSSES APPRECIATION GAIN
$66,222 $(2,004,747) $3,230,362 $1,291,837
- ---------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals, premium amortization adjustments and bond
reorganizations.
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $2,004,747 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
32 MainStay Strategic Value Fund
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 $ 345
2011 1,660
---------------------------------------------
$2,005
---------------------------------------------
</Table>
The tax character of distributions paid during the year ended October 31, 2004,
ten months ended October 31, 2003 and year ended December 31, 2002, shown in the
Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid
from:
Ordinary Income $814,471 $621,828 $736,573
- ----------------------------------------------------------
</Table>
NOTE 7 -- LOAN COMMITMENTS:
COMMITMENTS AND CONTINGENCIES. As of October 31, 2004, the Fund had unfunded
loan commitments pursuant to the following loan agreement:
<Table>
<Caption>
UNFUNDED
BORROWER COMMITMENT
Owens Corning, Inc., due 1/1/05 $4,170
- -------------------------------------------------------
</Table>
This commitment is available until maturity date of the respective security.
NOTE 8 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $23,919 and $16,233, respectively.
NOTE 9 -- 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 year ended October 31, 2004.
NOTE 10 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 670 702 85
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 25 45 1
- ---------------------------------------------------------
695 747 86
- ---------------------------------------------------------
Shares redeemed (294) (491) (33)
- ---------------------------------------------------------
Net increase 401 256 53
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1, THROUGH
OCTOBER 31, 2003*
CLASS A CLASS B CLASS C
Shares sold 425 553 39
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 21 45 1
- ---------------------------------------------------------
446 598 40
- ---------------------------------------------------------
Shares redeemed (241) (412) (25)
- ---------------------------------------------------------
Net increase 205 186 15
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 302 496 65
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 23 57 1
- ---------------------------------------------------------
325 553 66
- ---------------------------------------------------------
Shares redeemed (222) (513) (39)
- ---------------------------------------------------------
Net increase 103 40 27
- ---------------------------------------------------------
</Table>
(a) Less than one thousand.
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 11 -- SPECIAL MEETING OF SHAREHOLDERS:
The Board of Trustees of the Trust has called a Special Meeting of Shareholders
("Special Meeting") of the Fund, scheduled to be held on January 18, 2005. At
the Special Meeting, shareholders will vote on a proposed reorganization of the
Fund into the MainStay Balanced Fund, a series of Eclipse Funds.
www.mainstayfunds.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 13 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
34 MainStay Strategic Value Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Strategic Value Fund (the "Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2004, and
the related statement of operations, statement of changes in net assets and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the period ended October 31, 2003 and the year ended December 31, 2002, and
the financial highlights for the periods presented through October 31, 2003,
were audited by other auditors, whose report dated December 18, 2003 expressed
an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Strategic Value Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
KPMG SIG
Philadelphia, Pennsylvania
December 28, 2004
www.mainstayfunds.com 35
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
36 MainStay Strategic Value Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 37
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
38 MainStay Strategic Value Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2004,
should be multiplied by 78.0% to arrive at the amount eligible for qualified
dividend income and 80.3% for the corporate dividend received deduction.
In January 2005, shareholders will receive on IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2004. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2004.
www.mainstayfunds.com 39
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MacKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
40 MainStay Strategic Value Fund
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(MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06369 [RECYCLE LOGO] MSST11-12/04
17
(MAINSTAY LOGO)
MAINSTAY
BLUE CHIP GROWTH FUND
The MainStay Funds
Annual Report
October 31, 2004
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2 MainStay Blue Chip Growth Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quarter of 2004, and according to
preliminary estimates from the Bureau of Economic Analysis, gross domestic
product grew at a seasonally adjusted annual rate of 3.9% in the third quarter
of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 12
- ----------------------------------------------------
Notes to Financial Statements 18
Report of Independent Registered Public
Accounting Firm 22
- ----------------------------------------------------
Trustees and Officers 23
- ----------------------------------------------------
Proxy Voting Policies and Procedures 25
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 25
- ----------------------------------------------------
MainStay Funds 26
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -3.08% -8.81% -1.65%
Excluding sales charges 2.56 -7.77 -0.78
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY BLUE CHIP GROWTH
FUND S&P 500 INDEX
------------------------- -------------
6/1/98 9450 10000
9289 10133
13466 12734
15479 13510
9445 10146
7332 8613
8763 10404
10/31/04 8987 11385
</Table>
<Table>
-- MainStay Blue Chip Growth Fund -- S&P 500 Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -3.15% -8.83% -1.50%
Excluding sales charges 1.85 -8.47 -1.50
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MAINSTAY BLUE CHIP GROWTH
FUND S&P 500 INDEX
------------------------- -------------
6/1/98 10000 10000
9810 10133
14120 12734
16110 13510
9752 10146
7515 8613
8907 10404
10/31/04 9072 11385
</Table>
<Table>
-- MainStay Blue Chip Growth Fund -- S&P 500 Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 0.85% -8.47% -1.50%
Excluding sales charges 1.85 -8.47 -1.50
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MAINSTAY BLUE CHIP GROWTH
FUND S&P 500 INDEX
------------------------- -------------
6/1/98 10000 10000
9810 10133
14120 12734
16110 13510
9752 10146
7515 8613
8907 10404
10/31/04 9072 11385
</Table>
<Table>
-- MainStay Blue Chip Growth Fund -- S&P 500 Index
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
S&P 500(R) Index(1) 9.42% -2.22% 2.04%
Average Lipper large-cap growth
fund(2) 2.67 -6.49 -0.60
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
From inception (6/1/98) through 8/31/98, performance of Class C shares (first
offered 9/1/98) includes the historical performance of Class B shares adjusted
to reflect the applicable CDSC for Class C shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Blue Chip Growth Fund
1. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
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. The S&P 500(R) Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. 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.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY BLUE CHIP GROWTH FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A $1,000.00 $999.00 $ 9.85 $1,015.20 $ 9.93
- ------------------------------------------------------------------------------------------------------------------------
CLASS B $1,000.00 $996.75 $13.60 $1,011.45 $13.70
- ------------------------------------------------------------------------------------------------------------------------
CLASS C $1,000.00 $996.75 $13.60 $1,011.45 $13.70
- ------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
<Table>
Common Stocks 99.0%
Cash and Other Assets (less liabilities) 1.0
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Time Warner, Inc.
2. Microsoft Corp.
3. Walgreen Co.
4. Amgen, Inc.
5. Medtronic, Inc.
6. Citigroup, Inc.
7. Wal-Mart Stores, Inc.
8. United Technologies Corp.
9. Tiffany & Co.
10. State Street Corp.
</Table>
6 MainStay Blue Chip Growth Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Howard F. Ward of Gabelli Asset
Management Company
CAN YOU DESCRIBE THE FUND'S INVESTMENT STRATEGY?
The Fund normally invests at least 80% of its total assets in common stocks and
other securities issued by U.S. blue-chip companies. We define blue-chip firms
as those possessing leading market characteristics and certain financial
characteristics. These companies generally have market capitalizations of at
least $2 billion and revenues greater than $500 million. In implementing this
strategy, we look for companies that we believe have superior earnings-
per-share growth prospects and above-average or expanding market shares, profit
margins, and returns on equity.
WHAT MAJOR FACTORS INFLUENCED THE STOCK MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2004?
When the reporting period began, the economy appeared to be on sound footing.
Many of the positive fundamentals that contributed to calendar year 2003's rise
in prices remained solidly in place. With the stock market rising, investor
demand for equities was strong, and on December 11, 2003, the Dow Jones
Industrial Average(1) closed above 10,000 for the first time in nearly 20
months. Toward the end of January 2004, the Dow Jones Industrial Average and the
Nasdaq(R) Composite Index(2) both reached levels not seen since before September
11, 2001. The chief factor boosting the stock market's rise was the dramatic
improvement in corporate profits.
In February 2004, however, the stock market began to stagnate as investor
confidence began to wane. Despite continued economic growth and strength in
corporate profits that remained throughout the first half of 2004, the stock
market had a difficult time gaining traction. At various times, investors
appeared preoccupied with any number of issues--from economic uncertainty and
inflationary pressures to interest-rate prospects and terrorism concerns. The
stock market subsequently moved modestly lower during the third quarter of 2004.
One could argue that the market held up relatively well in the face of
persistent concerns, including continued hostilities in Iraq and sharply rising
oil prices. Near the end of October 2004, the market rallied, as oil prices
moderated somewhat and third-quarter corporate profits trended higher.
WHICH STOCKS WERE AMONG THE FUND'S STRONG PERFORMERS FOR THE REPORTING PERIOD?
Among the stocks held throughout the entire fiscal year, the five best
performers were QUALCOMM (+75.2%),(3) eBay (+74.6%), Symantec (+70.9%),
Starbucks (+67.3%), and Occidental Petroleum (+58.3%). Digital wireless leader
QUALCOMM rose steadily throughout the period on solid fundamental performance.
While most wireless chipset makers experienced mixed results during the Fund's
fiscal year, QUALCOMM surpassed earnings expectations during the fourth quarter
2003 and in the first and second quarters of 2004. In addition, earnings grew
over 50% during the company's fiscal year, which ended September 2004.
WHICH STOCKS DETRACTED FROM THE FUND'S PERFORMANCE?
The five worst-performing stocks were Veritas Software (-39.4%), Tiffany
(-38.2%), Charles Schwab (-32.5%), Intel (-32.4%), and Applied Materials
(-31.0%). Shares of storage software vendor VERITAS suffered first in January
2004 and then again in July 2004. Both declines followed announcements that
sales would be below analysts' projections. The Fund's position in VERITAS was
relatively small (0.4% at period end), and in both instances, we felt that the
stock's decline was not justified.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
We added a number of new holdings to the portfolio during the 12-month period.
Our aim was to find companies with strong growth prospects selling at reasonable
valuations as we sought to add depth and diversity to the Fund. New investments
during the first quarter of 2004, albeit relatively small, were Panera Bread,
RARE Hospitality International, and CheckFree. We also made initial investments
in Burlington Resources and British Petroleum during that period. Later in the
Fund's fiscal year, we added Suncor Energy, which extracts oil from Canadian oil
sands; Newmont Mining, a leading gold producer; Alcoa, a leading aluminum
producer; and Caterpillar,
1. 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.
2. The Nasdaq(R) Composite Index measures all Nasdaq domestic- and
international-based common-type stocks listed on The Nasdaq Stock Market. The
Nasdaq(R) Composite includes over 4,000 companies. An investment cannot be
made directly into an index.
3. Percentages reflect total returns of Fund holdings in the securities
mentioned, including purchases and sales, for the 12 months ended 10/31/04,
or for the portion of the reporting period such securities were held in the
Fund, if shorter.
www.mainstayfunds.com 7
a mining- and construction-equipment manufacturer. We also added farm-equipment
manufacturer Deere, biotech companies Genzyme and Genentech, and Internet
retailer Amazon.com.
WHICH POSITIONS DID THE FUND SELL OR REDUCE DURING THE REPORTING PERIOD?
Early in 2004, we began to trim various technology positions on strength, and we
sold the Fund's holding in W.M. Wrigley to fund new purchases. We also began to
trim the Fund's holding in Marsh & McLennan. The company was well-publicized
because of problems at its Putnam unit. We eventually eliminated the position
entirely during the second quarter of 2004, on concerns about mounting
investigations. We also eliminated holdings in Mellon and Omnicom in March 2004
and Nokia in May 2004. Nokia had disappointing earnings in both the fourth
quarter of 2003 and the first quarter of 2004. In the third quarter of 2004, we
reduced the Fund's exposure to several information technology companies,
including Symantec, QUALCOMM, Microchip Technology, Applied Materials, and
Xilinx.
HOW DID THE FUND CHANGE ITS SECTOR WEIGHTINGS?
During the 12-month reporting period, we reduced the Fund's exposure to the
consumer discretionary, financials and information technology sectors. Over the
same period, we increased exposure to the consumer staples, energy, health care,
and industrials sectors.
The reduction in the consumer discretionary sector came from our decision to
trim once-large positions in several leading media companies. In financial
services, we eliminated two significant holdings for company-specific reasons
and began to trim other holdings when it became apparent that we were entering a
rising interest-rate environment. In the information technology sector, we began
selling into strength early in 2004, after a very strong showing in many of the
Fund's information technology holdings during 2003. We continued to use the
information technology sector as a source of funds throughout the year, as
consistently high oil prices contributed to a moderation of economic growth that
we believed was likely to continue into 2005.
In consumer staples, we added to some of the Fund's existing holdings during the
summer of 2004, after they had sold off a bit. Amid growing fears about rising
oil prices, the geopolitical situation, and slowing economic growth, we felt
that investors would begin to favor the predictable earnings streams of consumer
staples companies. The Fund's exposure in the energy sector increased both from
additional investments and from significant capital appreciation as oil prices
surged. In the health care sector, we added several positions in the health care
equipment & services industry group, along with new holdings in biotechnology.
In the industrials sector, we purchased a number of new stocks and added to some
existing positions.
WHAT DO YOU ANTICIPATE GOING FORWARD?
During the second- and third-quarter 2004 earnings seasons, many companies
reported that rising labor and energy costs were making it difficult to attain
their margin goals. While overall earnings and revenues were robust, we wonder
whether we will see further margin pressure in the coming quarters. In
particular, we believe that oil prices could substantially influence economic
activity, earnings, and the stock market.
Since the economy appears (in the words of Federal Reserve Chairman Greenspan)
to have "regained some traction," we anticipate additional rate hikes at least
until the targeted federal funds rate is equal to the inflation rate, which
seems to be running between 2% and 3%.
We believe that it is currently more difficult than usual to place confidence in
economic or stock-market forecasts. There are simply too many important
unknowns, including oil prices, Iraq, China's growth rate, and Federal Reserve
policy. At this point, the primary drivers of stock prices--earnings, interest
rates, and inflation expectations--appear relatively benign. But other factors,
such as oil prices, may exert greater influence in the short-run. It's our
belief, however, that corporate earnings will ultimately drive the equity
markets.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8 MainStay Blue Chip Growth Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (99.0%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (4.7%)
General Dynamics Corp. 25,700 $ 2,624,484
L-3 Communications Holdings, Inc. 60,000 3,955,800
VUnited Technologies Corp. 55,000 5,105,100
------------
11,685,384
------------
AIR FREIGHT & LOGISTICS (1.8%)
C.H. Robinson Worldwide, Inc. 30,000 1,618,200
Expeditors International of Washington, Inc. 25,000 1,427,500
United Parcel Service, Inc. Class B 20,000 1,583,600
------------
4,629,300
------------
AUTOMOBILES (0.9%)
Harley-Davidson, Inc. 40,000 2,302,800
------------
BEVERAGES (1.9%)
Coca-Cola Co. (The) 20,000 813,200
PepsiCo, Inc. 80,000 3,966,400
------------
4,779,600
------------
BIOTECHNOLOGY (4.0%)
Affymetrix, Inc. (a) 5,000 152,500
VAmgen, Inc. (a) 110,800 6,293,440
Cephalon, Inc. (a) 5,000 238,350
Genentech, Inc. (a) 20,000 910,600
Genzyme Corp. (a) 20,000 1,049,400
IDEXX Laboratories, Inc. (a) 10,000 498,400
Invitrogen Corp. (a) 15,000 868,500
------------
10,011,190
------------
CAPITAL MARKETS (5.8%)
Charles Schwab Corp. (The) 194,300 1,777,845
Goldman Sachs Group, Inc. (The) 18,800 1,849,544
Merrill Lynch & Co., Inc. 61,700 3,328,098
Northern Trust Corp. 64,900 2,760,846
VState Street Corp. 98,400 4,432,920
UBS AG 5,000 362,450
------------
14,511,703
------------
COMMERCIAL BANKS (0.2%)
Fifth Third Bancorp 10,000 491,900
------------
COMMERCIAL SERVICES & SUPPLIES (0.3%)
Cintas Corp. 15,000 647,100
------------
</Table>
<Table>
<Caption>
SHARES VALUE
COMMUNICATIONS EQUIPMENT (2.5%)
Cisco Systems, Inc. (a) 174,400 $ 3,350,224
QUALCOMM, Inc. 67,800 2,834,718
------------
6,184,942
------------
COMPUTERS & PERIPHERALS (1.5%)
Dell, Inc. (a) 109,800 3,849,588
------------
CONSTRUCTION & ENGINEERING (0.7%)
Fluor Corp. 40,000 1,857,600
------------
CONSUMER FINANCE (0.8%)
American Express Co. 40,000 2,122,800
------------
DIVERSIFIED FINANCIAL SERVICES (2.3%)
VCitigroup, Inc. 130,000 5,768,100
------------
ENERGY EQUIPMENT & SERVICES (1.5%)
Schlumberger Ltd. 60,000 3,776,400
------------
FOOD & STAPLES RETAILING (8.1%)
Costco Wholesale Corp. 35,000 1,677,900
Sysco Corp. 110,000 3,549,700
VWal-Mart Stores, Inc. 100,000 5,392,000
VWalgreen Co. 180,000 6,460,200
Whole Foods Market, Inc. 40,000 3,257,200
------------
20,337,000
------------
HEALTH CARE EQUIPMENT & SUPPLIES (7.6%)
Alcon, Inc. 25,000 1,780,000
Biomet, Inc. 30,000 1,400,400
Edwards Lifesciences Corp. (a) 20,000 683,600
Fisher Scientific International, Inc. (a) 5,000 286,800
Guidant Corp. 35,000 2,331,700
VMedtronic, Inc. 120,000 6,133,200
St. Jude Medical, Inc. (a) 30,000 2,297,100
Stryker Corp. 25,000 1,077,250
Zimmer Holdings, Inc. (a) 40,000 3,103,600
------------
19,093,650
------------
HEALTH CARE PROVIDERS & SERVICES (1.5%)
Caremark Rx, Inc. (a) 10,000 299,700
Express Scripts, Inc. (a) 10,000 640,000
UnitedHealth Group, Inc. 40,000 2,896,000
------------
3,835,700
------------
HOTELS, RESTAURANTS & LEISURE (1.8%)
Cheesecake Factory, Inc. (The) (a) 30,000 1,302,300
Panera Bread Co. Class A (a) 10,000 349,300
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE (CONTINUED)
RARE Hospitality International, Inc. (a) 12,000 $ 332,520
Starbucks Corp. (a) 50,000 2,644,000
------------
4,628,120
------------
HOUSEHOLD PRODUCTS (1.4%)
Procter & Gamble Co. (The) 70,000 3,582,600
------------
INDUSTRIAL CONGLOMERATES (1.7%)
3M Co. 55,000 4,266,350
------------
INSURANCE (1.3%)
American International Group, Inc. 55,000 3,339,050
------------
INTERNET & CATALOG RETAIL (1.1%)
Amazon.com, Inc. (a) 20,000 682,600
eBay, Inc. (a) 20,000 1,952,200
------------
2,634,800
------------
INTERNET SOFTWARE & SERVICES (0.6%)
Yahoo!, Inc. (a) 40,000 1,447,600
------------
IT SERVICES (1.2%)
CheckFree Corp. (a) 40,000 1,240,000
Iron Mountain, Inc. (a) 50,000 1,652,500
------------
2,892,500
------------
MACHINERY (1.2%)
Caterpillar, Inc. 30,000 2,416,200
Deere & Co. 10,000 597,800
------------
3,014,000
------------
MEDIA (6.2%)
DIRECTV Group, Inc. (The) (a) 116,402 1,952,061
McGraw-Hill Cos., Inc. (The) 34,400 2,967,000
News Corp. Ltd. (The) ADR (a)(b) 25,000 806,500
VTime Warner, Inc. (a) 465,900 7,752,576
Viacom, Inc. Class B 58,028 2,117,442
------------
15,595,579
------------
METALS & MINING (1.7%)
Alcoa, Inc. 45,000 1,462,500
Newmont Mining Corp. 60,000 2,851,200
------------
4,313,700
------------
MULTILINE RETAIL (1.1%)
Target Corp. 55,000 2,751,100
------------
</Table>
<Table>
<Caption>
SHARES VALUE
OIL & GAS (7.2%)
Anadarko Petroleum Corp. 15,000 $ 1,011,750
Apache Corp. 61,000 3,092,700
BP PLC ADR (b) 35,000 2,038,750
Burlington Resources, Inc. 70,000 2,905,000
Murphy Oil Corp. 47,000 3,760,940
Occidental Petroleum Corp. 70,000 3,908,100
Suncor Energy, Inc. 40,000 1,364,000
------------
18,081,240
------------
PHARMACEUTICALS (4.1%)
Johnson & Johnson 73,200 4,273,416
Lilly (Eli) & Co. 39,100 2,146,981
Pfizer, Inc. 131,950 3,819,953
------------
10,240,350
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (7.8%)
Analog Devices, Inc. 44,500 1,791,570
Applied Materials, Inc. (a) 100,000 1,610,000
Intel Corp. 164,300 3,657,318
KLA-Tencor Corp. (a) 45,000 2,048,850
Linear Technology Corp. 90,000 3,409,200
Microchip Technology, Inc. 80,000 2,420,000
Novellus Systems, Inc. (a) 10,000 259,100
Taiwan Semiconductor Manufacturing Co. Ltd. ADR
(b) 190,594 1,442,796
Texas Instruments, Inc. 61,400 1,501,230
Xilinx, Inc. (a) 45,000 1,377,000
------------
19,517,064
------------
SOFTWARE (6.6%)
Adobe Systems, Inc. 15,000 840,450
Electronic Arts, Inc. (a) 80,000 3,593,600
VMicrosoft Corp. 270,200 7,562,898
Symantec Corp. (a) 65,000 3,701,100
VERITAS Software Corp. (a) 45,000 984,600
------------
16,682,648
------------
SPECIALTY RETAIL (4.9%)
Bed Bath & Beyond, Inc. (a) 75,000 3,059,250
Best Buy Co., Inc. 25,000 1,480,500
Home Depot, Inc. (The) 78,450 3,222,726
VTiffany & Co. 155,300 4,554,949
------------
12,317,425
------------
TEXTILES, APPAREL & LUXURY GOODS (0.9%)
Coach, Inc. (a) 50,000 2,331,500
------------
</Table>
10 MainStay Blue Chip Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES (2.1%)
Nextel Communications, Inc. Class A (a) 90,000 $ 2,384,100
Vodafone Group PLC ADR (b) 109,700 2,829,163
------------
5,213,263
------------
Total Common Stocks (Cost $237,819,347) 248,733,646
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT (2.4%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT (2.4%)
State Street Bank and Trust Co. 1.76%, dated
10/29/04, due 11/1/04 Proceeds at maturity
$6,179,906 (Collateralized by $6,270,000 U.S.
Treasury Note, 1.75%, due 12/31/04, market value
including accrued interest $6,303,137) $ 6,179,000 6,179,000
------------
Total Short-Term Investment (Cost $6,179,000) 6,179,000
------------
Total Investments (Cost $243,998,347) (c) 101.4% 254,912,646(d)
Liabilities in Excess of Cash and Other Assets (1.4) (3,639,107)
------------- ------------
Net Assets 100.0% $251,273,539
============= ============
</Table>
<Table>
(a) Non-income producing security.
(b) ADR-American Depositary Receipt.
(c) The cost for federal income tax purposes is
$245,291,351.
(d) At October 31, 2004 net unrealized appreciation was
$9,621,295, 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 $29,722,156 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $20,100,861.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
STATEMENT OF ASSETS AND LIABILITIES
AS OF OCTOBER 31, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $243,998,347) $ 254,912,646
Cash 349
Receivables:
Investment securities sold 2,317,331
Dividends and interest 108,722
Fund shares sold 90,103
Other assets 21,704
-------------
Total assets 257,450,855
-------------
LIABILITIES:
Payables:
Investment securities purchased 4,793,081
Fund shares redeemed 666,082
Transfer agent 272,843
Manager 174,112
NYLIFE Distributors 172,871
Custodian 7,255
Trustees 3,571
Accrued expenses 87,501
-------------
Total liabilities 6,177,316
-------------
Net assets $ 251,273,539
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized:
Class A $ 67,534
Class B 205,568
Class C 9,226
Additional paid-in capital 425,867,272
Accumulated net realized loss on investments (185,790,360)
Net unrealized appreciation on investments 10,914,299
-------------
Net assets $ 251,273,539
=============
CLASS A
Net assets applicable to outstanding shares $ 62,334,620
=============
Shares of beneficial interest outstanding 6,753,416
=============
Net asset value per share outstanding $ 9.23
Maximum sales charge (5.50% of offering
price) 0.54
-------------
Maximum offering price per share outstanding $ 9.77
=============
CLASS B
Net assets applicable to outstanding shares $ 180,823,686
=============
Shares of beneficial interest outstanding 20,556,802
=============
Net asset value and offering price per share
outstanding $ 8.80
=============
CLASS C
Net assets applicable to outstanding shares $ 8,115,233
=============
Shares of beneficial interest outstanding 922,583
=============
Net asset value and offering price per share
outstanding $ 8.80
=============
</Table>
12 MainStay Blue Chip Growth Fund 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 YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 2,181,200
Interest 46,475
-----------
Total income 2,227,675
-----------
EXPENSES:
Manager 2,685,493
Transfer agent 1,701,966
Distribution -- Class B 1,448,546
Distribution -- Class C 73,851
Service -- Class A 163,907
Service -- Class B 482,849
Service -- Class C 24,617
Shareholder communication 118,747
Professional 56,218
Recordkeeping 53,521
Registration 42,776
Custodian 32,565
Trustees 21,166
Miscellaneous 24,881
-----------
Total expenses before waiver 6,931,103
Fees waived by Manager (126,090)
Net expenses 6,805,013
-----------
Net investment loss (4,577,338)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (5,306,747)
Net change in unrealized depreciation on
investments 15,196,612
-----------
Net realized and unrealized gain on investments 9,889,865
-----------
Net increase in net assets resulting from
operations $ 5,312,527
===========
</Table>
(a) Dividends recorded net of foreign withholding taxes of $31,468.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss $ (4,577,338) $ (3,619,378) $ (5,255,213)
Net realized loss on
investments (5,306,747) (50,420,499) (96,051,320)
Net change in unrealized
appreciation
(depreciation) on
investments 15,196,612 104,224,698 (20,903,747)
-------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 5,312,527 50,184,821 (122,210,280)
-------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 14,781,368 18,011,660 24,856,805
Class B 23,856,843 23,662,198 33,040,173
Class C 1,659,272 4,543,423 3,142,593
-------------------------------------------
40,297,483 46,217,281 61,039,571
Cost of shares redeemed:
Class A (20,011,759) (15,959,787) (24,744,474)
Class B (39,892,146) (26,217,013) (51,653,418)
Class C (4,043,241) (5,619,503) (5,099,636)
-------------------------------------------
(63,947,146) (47,796,303) (81,497,528)
Decrease in net
assets derived from
capital share
transactions (23,649,663) (1,579,022) (20,457,957)
-------------------------------------------
Net increase
(decrease) in net
assets (18,337,136) 48,605,799 (142,668,237)
NET ASSETS:
Beginning of period 269,610,675 221,004,876 363,673,113
-------------------------------------------
End of period $251,273,539 $269,610,675 $ 221,004,876
===========================================
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
14 MainStay Blue Chip Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 9.00 $ 7.27 $ 11.00 $ 14.43 $ 16.50 $ 11.64
------- ------- ------- ------- -------- -------
Net investment loss (a) (0.11) (0.08) (0.11) (0.13) (0.14) (0.13)
Net realized and unrealized gain (loss) on
investments 0.34 1.81 (3.62) (3.30) (1.49) 4.99
------- ------- ------- ------- -------- -------
Total from investment operations 0.23 1.73 (3.73) (3.43) (1.63) 4.86
------- ------- ------- ------- -------- -------
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 $ 9.23 $ 9.00 $ 7.27 $ 11.00 $ 14.43 $ 16.50
======= ======= ======= ======= ======== =======
Total investment return (b) 2.56% 23.80%(c) (33.91%) (23.77%) (9.89%) 41.75%
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.13%) (1.28%)+ (1.29%) (1.10%) (0.87%) (1.02%)
Net expenses 1.96% 2.14%+ 2.05% 1.81% 1.66% 1.76%
Expenses (before waiver) 2.01% 2.14% 2.05% 1.81% 1.66% 1.76%
Portfolio turnover rate 32% 40% 32% 27% 46% 43%
Net assets at end of period (in 000's) $62,335 $65,811 $51,258 $77,548 $114,088 $66,326
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 8.64 $ 7.03 $10.71 $ 14.17 $ 16.33 $11.60
------ ------- ------ ------- ------- ------
Net investment loss (a) (0.17) (0.13) (0.19) (0.21) (0.26) (0.23)
Net realized and unrealized gain (loss) on
investments 0.33 1.74 (3.49) (3.25) (1.46) 4.96
------ ------- ------ ------- ------- ------
Total from investment operations 0.16 1.61 (3.68) (3.46) (1.72) 4.73
------ ------- ------ ------- ------- ------
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 $ 8.80 $ 8.64 $ 7.03 $ 10.71 $ 14.17 $16.33
====== ======= ====== ======= ======= ======
Total investment return (b) 1.85% 22.90%(c) (34.36%) (24.42%) (10.55%) 40.78%
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.88%) (2.03%)+ (2.04%) (1.85%) (1.62%) (1.77%)
Net expenses 2.71% 2.89%+ 2.80% 2.56% 2.41% 2.51%
Expenses (before waiver) 2.76% 2.89%+ 2.80% 2.56% 2.41% 2.51%
Portfolio turnover rate 32% 40% 32% 27% 46% 43%
Net assets at end of period (in 000's) $8,115 $10,322 $9,498 $17,178 $21,664 $7,133
</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.
(b) Total return is calculated exclusive of sales charges.
(c) Total return is not annualized.
</Table>
16 MainStay Blue Chip Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 8.64 $ 7.03 $ 10.71 $ 14.17 $ 16.33 $ 11.60
-------- -------- -------- -------- -------- --------
(0.17) (0.13) (0.19) (0.21) (0.26) (0.23)
0.33 1.74 (3.49) (3.25) (1.46) 4.96
-------- -------- -------- -------- -------- --------
0.16 1.61 (3.68) (3.46) (1.72) 4.73
-------- -------- -------- -------- -------- --------
-- -- -- -- (0.39) --
-- -- -- -- (0.05) --
-------- -------- -------- -------- -------- --------
-- -- -- -- (0.44) --
-------- -------- -------- -------- -------- --------
$ 8.80 $ 8.64 $ 7.03 $ 10.71 $ 14.17 $ 16.33
======== ======== ======== ======== ======== ========
1.85% 22.90%(c) (34.36%) (24.42%) (10.55%) 40.78%
(1.88%) (2.03%)+ (2.04%) (1.85%) (1.62%) (1.77%)
2.71% 2.89%+ 2.80% 2.56% 2.41% 2.51%
2.76% 2.89%+ 2.80% 2.56% 2.41% 2.51%
32% 40% 32% 27% 46% 43%
$180,824 $193,478 $160,249 $268,947 $373,652 $222,904
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and is comprised of twenty-two funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to MainStay
Blue Chip Growth Fund (the "Fund"), 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. Reasons for
which securities may be valued in this manner include, but are not limited to,
trading for a security has been halted or suspended, a security has been
de-listed from a national exchange, or trading on a security's primary market is
temporarily closed at a time when under normal conditions it would be open. The
Fund did not hold securities at October 31, 2004, that were valued in such
manner.
(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 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 additional paid-in-capital arising from
permanent differences; net assets at October 31, 2004, are not affected.
<Table>
<Caption>
ACCUMULATED NET ADDITIONAL
INVESTMENT LOSS PAID-IN CAPITAL
$4,577,338 $(4,577,338)
</Table>
18 MainStay Blue Chip Growth Fund
The reclassification for the Fund is due to the fact that net operating losses
cannot be carried forward for federal income tax purposes.
(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.
(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.
Through July 31, 2004, 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. Effective August 1, 2004,
the Trust pays the Manager an annual rate of 1.00% of the Fund's average daily
net assets on assets up to $500 million and 0.95% on assets over $500 million.
Also effective August 1, 2004, NYLIM had voluntarily agreed to waive its
management fee by 0.20% of the Fund's average net assets. In addition, effective
December 1, 2004, NYLIM 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 year ended October 31, 2004, the
Manager earned from the Fund $2,685,493 and waived $126,090 of its fee.
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 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 $30,054 for the year ended
October 31, 2004. 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 $2,766, $289,913 and $1,004, respectively, for the year ended October
31, 2004.
(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 for the year ended October 31, 2004,
amounted to $1,701,966.
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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 $7,876 for the year ended October 31,
2004.
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 $53,521 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged to the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
$(184,497,356) $9,621,295 $(174,876,061)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals.
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $184,497,356 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
2012 5,418
---------------------------------------------
$184,497
---------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than securities subject to repurchase transactions and short-term securities,
were $83,818 and $113,507, respectively.
NOTE 7 -- 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 year ended October 31, 2004.
NOTE 8 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 1,590 2,680 187
- ---------------------------------------------------------
Shares redeemed (2,147) (4,505) (458)
- ---------------------------------------------------------
Net decrease (557) (1,825) (271)
- ---------------------------------------------------------
</Table>
20 MainStay Blue Chip Growth Fund
<Table>
<Caption>
JANUARY 1, THROUGH
OCTOBER 31, 2003*
CLASS A CLASS B CLASS C
Shares sold 2,309 3,123 637
- ---------------------------------------------------------
Shares redeemed (2,047) (3,547) (795)
- ---------------------------------------------------------
Net increase (decrease) 262 (424) (158)
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 2,849 3,888 377
- ---------------------------------------------------------
Shares redeemed (2,850) (6,192) (629)
- ---------------------------------------------------------
Net decrease (1) (2,304) (252)
- ---------------------------------------------------------
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 9 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 10 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
www.mainstayfunds.com 21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Blue Chip Growth Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2004, and the related statement of operations, statement of changes in net
assets and the financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the period ended October 31, 2003 and the year ended December
31, 2002, and the financial highlights for the periods presented through October
31, 2003, were audited by other auditors, whose report dated December 18, 2003
expressed an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Blue Chip Growth Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG
Philadelphia, Pennsylvania
December 28, 2004
22 MainStay Blue Chip Growth Fund
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 23
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
24 MainStay Blue Chip Growth Fund
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 25
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
26 MainStay Blue Chip Growth Fund
This page intentionally left blank
(MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06294 [RECYCLELOGO] MSBC11-12/04
18
(MAINSTAY LOGO)
MAINSTAY
MID CAP VALUE FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay Mid Cap Value Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quarter of 2004, and according to
preliminary estimates from the Bureau of Economic Analysis, gross domestic
product grew at a seasonally adjusted annual rate of 3.9% in the third quarter
of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 11
- ----------------------------------------------------
Notes to Financial Statements 16
Report of Independent Registered Public
Accounting Firm 21
- ----------------------------------------------------
Trustees and Officers 22
- ----------------------------------------------------
Proxy Voting Policies and Procedures 24
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 24
- ----------------------------------------------------
MainStay Funds 25
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 9.97% 8.17% 10.23%
Excluding sales charges 16.37 9.40 11.21
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY MID CAP VALUE FUND RUSSELL MIDCAP VALUE INDEX
--------------------------- --------------------------
6/1/98 9450 10000
9389 9223
11932 9748
14743 10903
14406 10753
13128 10434
16067 13927
10/31/04 18697 16676
</Table>
<Table>
-- MainStay Mid Cap Value Fund -- Russell Midcap Value Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 10.52% 8.30% 10.38%
Excluding sales charges 15.52 8.59 10.38
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MAINSTAY MID CAP VALUE FUND RUSSELL MIDCAP VALUE INDEX
--------------------------- --------------------------
6/1/98 10000 10000
9908 9223
12488 9748
15309 10903
14863 10753
13433 10434
16324 13927
10/31/04 18857 16676
</Table>
<Table>
-- MainStay Mid Cap Value Fund -- Russell Midcap Value Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 14.52% 8.59% 10.38%
Excluding sales charges 15.52 8.59 10.38
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MAINSTAY MID CAP VALUE FUND RUSSELL MIDCAP VALUE INDEX
--------------------------- --------------------------
6/1/98 10000 10000
9908 9223
12488 9748
15309 10903
14863 10753
13433 10434
16324 13927
10/31/04 18857 16676
</Table>
<Table>
-- MainStay Mid Cap Value Fund -- Russell Midcap Value Index
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee, and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Class R1 shares are sold with
no initial sales charge or CDSC and have no annual 12b-1 fee. Class R2 shares
are sold with no initial sales charge or CDSC and have an annual 12b-1 fee of
..25%. Class R1 and R2 shares are available only through corporate-sponsored
retirement programs, which include certain minimum program requirements.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. The fee waivers and/or expense
limitations are voluntary and may be discontinued at any time. From inception
(6/1/98) through 8/31/98, performance for Class C shares (first offered 9/1/98)
includes the historical performance of Class B shares adjusted to reflect the
applicable CDSC for Class C shares. From inception (6/1/98) through 12/31/03,
performance for Class I, R1, and R2 shares (first offered 1/2/04) includes the
historical performance of Class A shares adjusted to reflect the applicable fees
and expenses for Class I, R1, and R2 shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Mid Cap Value Fund
CLASS I SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
16.83% 9.71% 11.51%
</Table>
(LINE GRAPH FOR CLASS I SHARES IN $)
<Table>
<Caption>
MAINSTAY MID CAP VALUE FUND RUSSELL MIDCAP VALUE INDEX
--------------------------- --------------------------
6/1/98 10000 10000
9943 9223
12671 9748
15699 10903
15378 10753
14048 10434
17236 13927
10/31/04 20136 16676
</Table>
<Table>
-- MainStay Mid Cap Value Fund -- Russell Midcap Value Index
</Table>
CLASS R1 SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
16.74% 9.61% 11.41%
</Table>
(LINE GRAPH FOR CLASS R1 SHARES IN $)
<Table>
<Caption>
MAINSTAY MID CAP VALUE FUND RUSSELL MIDCAP VALUE INDEX
--------------------------- --------------------------
6/1/98 10000 10000
9940 9223
12653 9748
15659 10903
15324 10753
13984 10434
17146 13927
10/31/04 20016 16676
</Table>
<Table>
-- MainStay Mid Cap Value Fund -- Russell Midcap Value Index
</Table>
CLASS R2 SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
16.37% 9.30% 11.10%
</Table>
(LINE GRAPH FOR CLASS R2 SHARES IN $)
<Table>
<Caption>
MAINSTAY MID CAP VALUE FUND RUSSELL MIDCAP VALUE INDEX
--------------------------- --------------------------
6/1/98 10000 10000
9932 9223
12608 9748
15560 10903
15190 10753
13829 10434
16901 13927
10/31/04 19668 16676
</Table>
<Table>
-- MainStay Mid Cap Value Fund -- Russell Midcap Value Index
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
Russell Midcap(R) Value Index(1) 19.74% 11.33% 8.30%
Average Lipper mid cap value
fund(2) 15.75 12.10 8.39
</Table>
1. 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. The Russell Midcap(R) Value Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. 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.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MID CAP VALUE FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,048.45 $ 7.36 $1,017.85 $ 7.25
- ------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,045.40 $11.21 $1,014.10 $11.04
- ------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,045.40 $11.21 $1,014.10 $11.04
- ------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,050.30 $ 5.15 $1,020.00 $ 5.08
- ------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,050.30 $ 5.88 $1,019.30 $ 5.79
- ------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,048.40 $ 7.41 $1,017.80 $ 7.30
- ------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
U.S. Common Stocks 86.8
Short Term Investments 10.2
Foreign Common Stocks 2.0
Cash and Other Assets (less liabilities) 0.8
U.S. Corporate Bonds 0.1
U.S. Convertible Preferred Stocks 0.1
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Rowan Cos., Inc.
2. ENSCO International, Inc.
3. Transocean, Inc.
4. Bowater, Inc.
5. Navistar International Corp.
6. Global Santa Fe Corp.
7. Pride International, Inc.
8. Cummins, Inc.
9. Temple-Inland, Inc.
10. Smurfit-Stone Container Corp.
</Table>
6 MainStay Mid Cap Value Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Michael C. Sheridan and Richard A.
Rosen of MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests at least 80% of its assets in common and preferred
stock of companies with market capitalizations that at the time of investment
are similar to those of companies in the Russell Midcap(R) Value Index.(1) In
implementing this strategy, we seek to identify investment opportunities based
on the financial condition and competitiveness of individual companies. In
particular, we look for firms that we deem to be undervalued based on a number
of factors, including relative valuation, ability to grow dividends, and
corporate management.
WHAT MAJOR FACTORS INFLUENCED THE STOCK MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2004?
Accommodative worldwide monetary policies and generally low interest rates led
to rapid global economic growth. Demand for raw materials was particularly
strong from emerging Asian countries, including China and India. Sharply rising
prices for energy and commodities helped energy and basic materials stocks
generate strong performance. Industrial stocks also benefited from strong global
growth. Despite economic expansion, interest rates generally remained quite low,
allowing interest-rate-sensitive sectors, such as financials and utilities, to
provide solid gains.
WHAT FACTORS MOST SIGNIFICANTLY AFFECTED THE FUND'S PERFORMANCE DURING THE
REPORTING PERIOD?
The Fund's overweighted position in the energy sector enhanced results during
the 12 months ended October 31, 2004. Our decision to underweight the health
care sector also helped the Fund's performance. Strong stock selection in the
information technology and telecommunications services sectors also had a
beneficial impact. On the other hand, the Fund's underweighted position in
utilities, coupled with poor stock selection in the consumer discretionary,
industrials, and materials sectors detracted from the Fund's results.
DID THE FUND CHANGE ANY OF ITS WEIGHTINGS?
When the reporting period began, the Fund held an overweighted position in the
energy sector. In late 2003, we became even more convinced that the sector's
fundamentals would continue to improve amid strong demand and global production
constraints. For these reasons, we further increased the Fund's exposure in the
energy sector in January 2004.
Early in the reporting period, the Fund's investments in exploration and
production companies and in refiners generated strong results. As the reporting
period progressed, the Fund's exploration and production holdings approached
what we believed to be fair valuations, and we reduced the Fund's exposure to
these companies. We used the proceeds to gradually increase the portfolio's
exposure to lagging offshore drilling companies that we felt were poised to
benefit from higher spending trends.
WHAT WERE SOME OF THE FUND'S SUCCESS STORIES?
Transocean, the world's largest offshore drilling company, appreciated 83.7%(2)
during the reporting period. Utilization of the company's high-specification
drillships and semisubmersible rigs reached nearly full capacity, and
Transocean's day rates increased dramatically. Another strong performer was
Cummins (+51.2%). This diesel-engine producer benefited from the robust increase
in demand for commercial trucks. We recently reduced the Fund's position, as we
felt the stock was approaching fair value. Kerr-McGee (+48.0%), an oil and
natural gas exploration and production company and a chemical producer, also
enhanced the Fund's results. The stock rose as Kerr-McGee generated strong
earnings and cash flows, which were driven by the dramatic rise in oil and gas
prices.
WHICH STOCKS DETRACTED FROM THE FUND'S RESULTS DURING THE REPORTING PERIOD?
On the heels of previous successes, Navistar International (-14.5%) was a
disappointment during the reporting period. The company did not fully capitalize
on the strong upturn in commercial-vehicle demand. Manufacturing inefficiencies
produced by a far-reaching and aggressive restructuring program were partly to
blame. Golf-equipment manufacturer
Mid-capitalization companies are generally less established and their stocks may
be more volatile and less liquid than the securities of large companies.
1. See footnote on page 5 for more information about the Russell Midcap(R) Value
Index.
2. Performance percentages for Fund holdings reflect the total return
performance of the indicated securities for the 12 months ended October 31,
2004, 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 or sectors
themselves.
www.mainstayfunds.com 7
Callaway Golf (-34.6%) suffered from aggressive competition from its
well-financed competitors Titleist (owned by Fortune Brands) and Taylor Made
(owned by Adidas). The Callaway Golf position has been removed from the
portfolio.
Another stock that detracted from results was Bowater (-8.0%), a manufacturer of
coated paper and newsprint. Bowater's stock declined as advertising and
help-wanted pages in newspapers remained depressed. Newsprint is a highly
consolidated industry that may be on the cusp of an upturn in light of
encouraging new-job creation and pricing increases. We believe that a weaker
U.S. dollar may also help Bowater's product lines, and the Fund continues to
hold the stock in its portfolio.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
As previously discussed, we increased the Fund's holdings in offshore drillers.
Specific holdings added to the portfolio during the reporting period included
Transocean, Diamond Offshore, Rowan Companies, Ensco International, and Pride
International.
WHAT STOCKS WERE ELIMINATED DURING THE PERIOD?
Valero Energy (+103.2%) is the largest independent refiner in North America.
While the company benefited from strong earnings and record refining margins,
the position was eliminated from the portfolio as it reached our price
objective.
Payless Shoesource, a leading shoe retailer, suffered from poor same-store sales
comparisons, as higher energy costs left consumers with less discretionary
income. The company also suffered from bloated inventories, which led to price
markdowns. These factors prompted us to sell the stock. We also eliminated the
Fund's position in food and drug retailer Safeway (-13.5%), as the company
suffered from strike-related costs and sales shortfalls. We used the proceeds
from the Safeway sale to purchase shares of its peer Kroger, a company that we
felt was better positioned as a grocery retailer.
WHAT IS YOUR OUTLOOK GOING FORWARD?
We currently perceive the market as providing both excellent opportunities and
high levels of risk. We believe the Fund is appropriately positioned for these
dynamics. We continue to see opportunities in the energy sector in general, and
offshore drillers in particular. Basic materials producers are just starting to
enjoy a positive mix of increasing demand, high factory operating rates, low
inventories, and price increases. We feel that a weaker U.S. dollar should
disproportionately benefit U.S.-based producers whose securities are held by the
Fund. In the industrials sector, we anticipate increased demand for commercial
vehicles and transport volumes. Should this occur, several Fund holdings could
benefit.
At the same time, we have sought to underweight risk-laden areas of the market
and carefully choose stocks in these sectors. In the financials sector, for
example, we are concerned about high bank valuations, little apparent new-loan
demand, and potential for credit deterioration. Based on our assessment of
long-term valuations, real estate investment trusts (REITs) and utilities both
appear overvalued. Consumer cyclicals appear overvalued, with some areas trading
at very high or even record valuations. We believe that all of these areas look
extremely vulnerable to higher interest rates, a weaker dollar, and continued
high energy prices. For these reasons, the Fund has underweighted all of these
areas, which together comprise a substantial portion of the Russell MidCap(R)
Value Index.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8 MainStay Mid Cap Value Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (88.8%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.4%)
Raytheon Co. 131,642 $ 4,802,300
------------
AUTO COMPONENTS (1.8%)
Delphi Corp. 414,300 3,484,263
TRW Automotive Holdings Corp. (a) 146,500 2,689,740
------------
6,174,003
------------
CHEMICALS (4.1%)
Air Products & Chemicals, Inc. 81,103 4,313,057
Arch Chemicals, Inc. 209,182 5,930,310
Crompton Corp. 184,300 1,713,990
Mosaic Co. (The) (a) 28,800 433,152
Olin Corp. 109,625 2,049,988
------------
14,440,497
------------
COMMERCIAL BANKS (5.8%)
Compass Bancshares, Inc. 153,514 7,333,364
Hibernia Corp. Class A 78,857 2,286,853
Marshall & Ilsley Corp. 54,143 2,272,382
SouthTrust Corp. 196,474 8,560,372
------------
20,452,971
------------
COMMERCIAL SERVICES & SUPPLIES (2.1%)
Imagistics International, Inc. (a) 11,196 385,366
Pitney Bowes, Inc. 157,111 6,873,606
------------
7,258,972
------------
CONTAINERS & PACKAGING (7.0%)
Owens-Illinois, Inc. (a) 104,900 1,943,797
VSmurfit-Stone Container Corp. (a) 565,600 9,818,816
VTemple-Inland, Inc. 210,100 12,421,112
------------
24,183,725
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.9%)
ALLTEL Corp. 58,113 3,192,147
------------
ELECTRIC UTILITIES (4.3%)
Entergy Corp. 62,387 4,077,614
FirstEnergy Corp. 67,288 2,781,013
PG&E Corp. (a) 74,525 2,387,781
PPL Corp. 113,300 5,891,600
------------
15,138,008
------------
ENERGY EQUIPMENT & SERVICES (24.3%)
Diamond Offshore Drilling, Inc. 82,500 2,788,500
VENSCO International, Inc. 603,922 18,449,817
VGlobalSantaFe Corp. 468,056 13,807,652
VPride International, Inc. (a) 702,900 12,989,592
VRowan Cos., Inc. (a) 748,700 19,114,311
VTransocean, Inc. (a) 507,500 17,889,375
------------
85,039,247
------------
</Table>
<Table>
<Caption>
SHARES VALUE
FOOD & STAPLES RETAILING (0.7%)
Kroger Co. (The) (a) 159,100 $ 2,404,001
------------
FOOD PRODUCTS (2.0%)
Cadbury Schwppes PLC ADR (b) 213,000 7,135,500
------------
HEALTH CARE PROVIDERS & SERVICES (1.2%)
Apria Healthcare Group, Inc. (a) 111,400 3,047,904
Universal Health Services, Inc. Class B 32,700 1,359,012
------------
4,406,916
------------
INSURANCE (2.5%)
Axis Capital Holdings, Ltd. 10,300 258,118
Hartford Financial Services Group, Inc. (The) 114,947 6,722,101
St. Paul Travelers Cos., Inc. (The) 53,200 1,806,672
------------
8,786,891
------------
IT SERVICES (1.3%)
Computer Sciences Corp. (a) 93,252 4,631,827
------------
LEISURE EQUIPMENT & PRODUCTS (0.5%)
Mattel, Inc. 98,600 1,726,486
------------
MACHINERY (9.5%)
AGCO Corp. (a) 169,531 3,292,292
VCummins, Inc. 180,825 12,672,216
VNavistar International Corp. (a) 409,402 14,144,839
Timken Co. (The) 124,200 2,980,800
------------
33,090,147
------------
MEDIA (0.5%)
Regal Entertainment Group Class A 81,400 1,620,674
------------
OIL & GAS (2.7%)
Kerr-McGee Corp. 99,100 5,868,702
Premcor, Inc. (a) 90,100 3,517,504
------------
9,386,206
------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS (5.8%)
VBowater, Inc. 390,751 $ 14,395,267
MeadWestvaco Corp. 190,055 5,992,434
------------
20,387,701
------------
REAL ESTATE (1.2%)
General Growth Properties, Inc. 31,448 1,037,470
Highwoods Properties, Inc. 123,063 3,053,193
------------
4,090,663
------------
ROAD & RAIL (2.7%)
Burlington Northern Santa Fe Corp. 155,395 6,497,065
CSX Corp. 78,761 2,874,776
------------
9,371,841
------------
SOFTWARE (0.5%)
BMC Software, Inc. (a) 88,200 1,668,744
------------
SPECIALTY RETAIL (2.6%)
Boise Cascade Corp. 315,400 9,310,608
------------
THRIFTS & MORTGAGE FINANCE (3.4%)
PMI Group, Inc. (The) 175,700 6,820,674
Sovereign Bancorp, Inc. 229,621 4,971,295
------------
11,791,969
------------
Total Common Stocks
(Cost $263,667,409) 310,492,044
------------
CONVERTIBLE PREFERRED STOCK (0.1%)
- --------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS (0.1%)
International Paper Capital Trust 5.25%, due at
7/20/25 Series 5,370 271,856
------------
Total Convertible Preferred Stock (Cost $256,417) 271,856
------------
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BOND (0.1%)
CORPORATE BOND (0.1%)
- --------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (0.1%)
Caithness Coso Funding Corp. Series B 9.05%, due
12/15/09 $ 350,080 $ 388,589
------------
Total Long-term Bond (Cost $316,194) 388,589
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (10.2%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (10.2%)
AIG Funding, Inc.
1.78%, due 11/2/04 $ 11,265,000 $ 11,264,443
Ing Funding LLC
1.78%, due 11/12/04 325,000 324,823
International Business Machines Corp.
1.70%, due 11/1/04 1,825,000 1,825,000
Lilly (Eli) & Co.
1.72%, due 11/3/04 11,540,000 11,538,897
Prudential Funding LLC
1.76%, due 11/2/04 4,185,000 4,184,795
UBS Finance (Delaware) LLC
1.80%, due 11/1/04 6,545,000 6,545,000
------------
Total Commercial Paper (Cost $35,682,958) 35,682,958
------------
Total Short-Term Investments (Cost $35,682,958)(d) 35,682,958
------------
WARRANTS (0.0%)(E)
- --------------------------------------------------------------------------------
REAL ESTATE (0.0%)(E)
General Growth Properties Inc.
Price $32.23
Expire 11/9/04(a) 3,145 $ 0
------------
Total Investments (Cost $299,922,978) (c) 99.2% 346,835,447
Cash and Other Assets, Less Liabilities 0.8 2,747,994
------------- ------------
Net Assets 100.0% $349,583,441
============= ============
</Table>
<Table>
(a) Non-income producing security.
(b) ADR-American Depositary Receipt.
(c) The cost for federal income tax purposes is
$300,030,722.
(d) At October 31, 2004 net unrealized appreciation was
$46,804,725, 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 $50,242,385, and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $3,437,660.
(e) Less than one-tenth of a percent.
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term
investments. May be subject to change daily.
</Table>
10 Mainstay Mid Cap Value Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value (identified
cost $299,922,978) $346,835,447
Cash 4,712
Receivables:
Investment securities sold 3,684,819
Fund shares sold 1,027,450
Dividends and interest 83,077
Other assets 26,887
------------
Total assets 351,662,392
------------
LIABILITIES:
Payables:
Fund shares redeemed 1,350,324
Transfer agent 203,566
Manager 214,350
NYLIFE Distributors 222,927
Custodian 9,780
Trustees 4,562
Accrued expenses 73,442
------------
Total liabilities 2,078,951
------------
Net assets $349,583,441
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 74,091
Class B 124,208
Class C 25,884
Class I 1
Class R1 682
Class R2 533
Additional paid-in capital 297,075,385
Accumulated net realized gain on investments 5,370,188
Net unrealized appreciation on investments 46,912,469
------------
Net assets $349,583,441
============
CLASS A
Net assets applicable to outstanding shares $116,395,608
============
Shares of beneficial interest outstanding 7,409,091
============
Net asset value per share outstanding $ 15.71
Maximum sales charge (5.50% of offering price) 0.91
------------
Maximum offering price per share outstanding $ 16.62
============
CLASS B
Net assets applicable to outstanding shares $191,390,342
============
Shares of beneficial interest outstanding 12,420,799
============
Net asset value and offering price per share
outstanding $ 15.41
============
CLASS C
Net assets applicable to outstanding shares $ 39,884,192
============
Shares of beneficial interest outstanding 2,588,437
============
Net asset value and offering price per share
outstanding $ 15.41
============
CLASS I
Net assets applicable to outstanding shares $ 1,064
============
Shares of beneficial interest outstanding 68
============
Net asset value and offering price per share
outstanding $ 15.76
============
CLASS R1
Net assets applicable to outstanding shares $ 1,074,787
============
Shares of beneficial interest outstanding 68,208
============
Net asset value and offering price per share
outstanding $ 15.76
============
CLASS R2
Net assets applicable to outstanding shares $ 837,448
============
Shares of beneficial interest outstanding 53,309
============
Net asset value and offering price per share
outstanding $ 15.71
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
<Caption>
2004
INVESTMENT INCOME:
INCOME:
Dividends $ 5,236,350
Interest 310,706
-----------
Total income 5,547,056
-----------
EXPENSES:
Manager 2,285,484
Distribution -- Class B 1,354,965
Distribution -- Class C 288,505
Distribution -- Class R2 499
Transfer agent -- Classes A, B and C 1,194,814
Transfer agent -- Classes I, R1 and R2 1,088
Service -- Class A 267,207
Service -- Class B 451,655
Service -- Class C 96,168
Service -- Class R1 285
Service -- Class R2 200
Shareholder communication 104,233
Professional 63,993
Recordkeeping 59,317
Registration 49,243
Custodian 37,476
Trustees 24,736
Miscellaneous 27,882
-----------
Total expenses 6,307,750
-----------
Net investment loss (760,694)
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 14,705,022
Net change in unrealized appreciation on
investments 31,407,947
-----------
Net realized and unrealized gain on investments 46,112,969
-----------
Net increase in net assets resulting from
operations $45,352,275
-----------
</Table>
12 Mainstay Mid Cap Value Fund 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 YEAR ENDED OCTOBER 31 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE IN NET ASSETS:
Operations:
Net investment income
(loss) $ (760,694) $ (126,015) $ 370,521
Net realized gain (loss)
on investments 14,705,022 6,922,632 (16,417,265)
Net change in unrealized
appreciation on
investments 31,407,947 31,657,415 (22,869,402)
------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 45,352,275 38,454,032 (38,916,146)
------------------------------------------
Dividends and distributions to
shareholders:
From net investment income:
Class A -- (144,291) (328,297)
From net realized gain on investments:
Class A -- -- (446,252)
Class B -- -- (729,043)
Class C -- -- (157,334)
------------------------------------------
Total dividends and
distributions to
shareholders -- (144,291) (1,660,926)
------------------------------------------
Capital share transactions:
Net proceeds from sale of
shares:
Class A 45,632,106 34,317,491 79,196,510
Class B 36,003,609 28,908,125 88,864,443
Class C 9,050,836 7,734,088 27,200,106
Class I 1,000 -- --
Class R1 1,108,901 -- --
Class R2 1,133,738 -- --
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A -- 119,561 628,017
Class B -- -- 646,444
Class C -- -- 120,713
------------------------------------------
92,930,190 71,079,265 196,656,233
</Table>
<Table>
<Caption>
2004 2003* 2002
Cost of shares redeemed:
Class A (34,827,078) (36,894,690) (28,346,039)
Class B (25,489,485) (24,289,812) (40,257,593)
Class C (7,963,268) (6,887,181) (5,251,703)
Class I -- -- --
Class R1 (65,929) -- --
Class R2 (319,582) -- --
------------------------------------------
(68,665,342) (68,071,683) (73,855,335)
Increase in net assets
derived from capital
share transactions 24,264,848 3,007,582 122,800,898
------------------------------------------
Net increase in net
assets 69,617,123 41,317,323 82,223,826
NET ASSETS:
Beginning of year $279,966,318 $238,648,995 $156,425,169
------------------------------------------
End of year $349,583,441 $279,966,318 $238,648,995
==========================================
Distributions in excess of
net investment income -- -- (125,073)
==========================================
</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. www.mainstayfunds.com
13
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 13.50 $ 11.51 $ 13.47 $ 13.14 $ 11.81 $ 10.25
-------- ------- ------- ------- ------- -------
Net investment income (loss) 0.03 0.04 0.06 0.12 0.21 0.22
Net realized and unrealized gain (loss) on
investments 2.18 1.97 (1.90) 0.52 2.44 2.30
-------- ------- ------- ------- ------- -------
Total from investment operations 2.21 2.01 (1.84) 0.64 2.65 2.52
-------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income -- (0.02) (0.06) (0.12) (0.21) (0.22)
From net realized gain on investments -- -- (0.06) (0.19) (1.02) (0.74)
In excess of net realized gain on
investments -- -- -- -- (0.09) --
-------- ------- ------- ------- ------- -------
Total dividends and distributions -- (0.02) (0.12) (0.31) (1.32) (0.96)
-------- ------- ------- ------- ------- -------
Net asset value at end of period $ 15.71 $ 13.50 $ 11.51 $ 13.47 $ 13.14 $ 11.81
======== ======= ======= ======= ======= =======
Total investment return (a) 16.37% 17.53%(b) (13.67%) 4.88% 22.79% 25.11%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.27% 0.45%+ 0.71% 0.95% 1.66% 1.94%
Net expenses 1.43% 1.54%+ 1.50% 1.53% 1.59% 1.65%
Expenses (before reimbursement) 1.43% 1.54%+ 1.50% 1.53% 1.59% 1.82%
Portfolio turnover rate 33% 30% 46% 100% 148% 193%
Net assets at end of period (in 000's) $116,396 $90,349 $80,442 $40,692 $32,782 $18,764
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 13.34 $ 11.42 $ 13.41 $ 13.09 $11.78 $10.24
------- ------- ------- ------- ------ ------
Net investment income (loss) (0.07) (0.03) (0.01) 0.03 0.12 0.15
Net realized and unrealized gain (loss) on
investments 2.14 1.95 (1.92) 0.51 2.42 2.28
------- ------- ------- ------- ------ ------
Total from investment operations 2.07 1.92 (1.93) 0.54 2.54 2.43
------- ------- ------- ------- ------ ------
Less dividends and distributions:
From net investment income -- -- -- (0.03) (0.12) (0.15)
From net realized gain on investments -- -- (0.06) (0.19) (1.02) (0.74)
In excess of net realized gain on
investments -- -- -- -- (0.09) --
------- ------- ------- ------- ------ ------
Total dividends and distributions -- -- (0.06) (0.22) (1.23) (0.89)
------- ------- ------- ------- ------ ------
Net asset value at end of period $ 15.41 $ 13.34 $ 11.42 $ 13.41 $13.09 $11.78
======= ======= ======= ======= ====== ======
Total investment return (a) 15.52% 16.81%(b) (14.35%) 4.17% 21.83% 24.16%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.48%) (0.30%)+ (0.04%) 0.20% 0.91% 1.19%
Net expenses 2.18% 2.29%+ 2.25% 2.28% 2.34% 2.40%
Expenses (before reimbursement) 2.18% 2.29%+ 2.25% 2.28% 2.34% 2.57%
Portfolio turnover rate 33% 30% 46% 100% 148% 193%
Net assets at end of period (in 000's) $39,884 $33,501 $28,183 $10,586 $2,803 $ 824
</Table>
<Table>
The Fund changed its fiscal year end from December 31 to
* October 31.
** First offered on January 2, 2004.
+ Annualized.
Total return is calculated exclusive of sales charges.
(a) Classes I, R1 and R2 are not subject to sales charges.
(b) Total return is not annualized.
</Table>
14 Mainstay Mid Cap Value Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 13.34 $ 11.42 $ 13.41 $ 13.09 $ 11.78 $ 10.24
-------- -------- -------- -------- ------- -------
(0.07) (0.03) (0.01) 0.03 0.12 0.15
2.14 1.95 (1.92) 0.51 2.42 2.28
-------- -------- -------- -------- ------- -------
2.07 1.92 (1.93) 0.54 2.54 2.43
-------- -------- -------- -------- ------- -------
-- -- -- (0.03) (0.12) (0.15)
-- -- (0.06) (0.19) (1.02) (0.74)
-- -- -- -- (0.09) --
-------- -------- -------- -------- ------- -------
-- -- (0.06) (0.22) (1.23) (0.89)
-------- -------- -------- -------- ------- -------
$ 15.41 $ 13.34 $ 11.42 $ 13.41 $ 13.09 $ 11.78
======== ======== ======== ======== ======= =======
15.52% 16.81%(b) (14.35%) 4.17% 21.83% 24.16%
(0.48%) (0.30%)+ (0.04%) 0.20% 0.91% 1.19%
2.18% 2.29%+ 2.25% 2.28% 2.34% 2.40%
2.18% 2.29%+ 2.25% 2.28% 2.34% 2.57%
33% 30% 46% 100% 148% 193%
$191,390 $156,116 $130,024 $105,146 $50,172 $23,803
</Table>
<Table>
<Caption>
CLASS I CLASS R1 CLASS R2
------- -------- --------
JANUARY 2, 2004** THROUGH
OCTOBER 31,
2004
$14.81 $14.81 $14.81
------ ------ ------
0.07 (0.01) (0.02)
0.88 0.96 0.92
------ ------ ------
0.95 0.95 0.90
------ ------ ------
-- -- --
-- -- --
-- -- --
------ ------ ------
-- -- --
------ ------ ------
$15.76 $15.76 $15.71
====== ====== ======
6.41%(b) 6.41%(b) 6.08%(b)
0.70%+ 0.56%+ 0.26%+
1.00%+ 1.14%+ 1.44%+
1.00%+ 1.14%+ 1.44%+
33% 33% 33%
$ 1 $1,075 $ 837
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay Mid
Cap Value Fund (the "Fund"), a diversified fund.
The Fund currently offers six classes of shares, Class A shares, Class B shares,
Class C shares, Class I shares, Class R1 shares and Class R2 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. Distribution of
Class I shares, Class R1 shares and Class R2 shares commenced on January 2,
2004. 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, Class R1
shares and Class R2 shares are not subject to sales charge. The six classes 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 and
Class R2 shares under a distribution plan pursuant to Rule 12b-1 under the 1940
Act. Class I shares and Class R1 shares are not subject to a distribution or
service fee. Class R1 and Class R2 shares are authorized to pay to New York Life
Investment Management LLC, its affiliates, or independent third-party service
providers, as compensation for services rendered to shareholders of Class R1 or
Class R2 shares, a shareholder service fee.
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 changed its name to MainStay Mid Cap Value
Fund from MainStay Equity 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. 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 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. Reasons for which securities may be valued in this manner
include, but are not limited to, trading for a security has been halted or
suspended, a security has been de-listed from a national exchange, or trading on
a security's primary market is temporarily closed at a time when under normal
conditions it would be open. The Fund did not hold securities at October 31,
2004, that were valued in such manner.
(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 net investment loss, accumulated net realized gain and additional
paid-in-capital arising
16 MainStay Mid Cap Value Fund
from permanent differences; net assets at October 31, 2004, are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
NET INVESTMENT NET REALIZED ADDITIONAL
LOSS GAIN PAID-IN CAPITAL
$760,694 $330,209 $(1,090,903)
</Table>
The reclassifications for the Fund are primarily due to a reclassification of
real estate investment trust 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 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.
Through July 31, 2004, 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 had
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. NYLIM had agreed to an equivalent reduction in the management fee
for Class I, Class R1 and Class R2 shares. Effective August 1, 2004, the Trust
pays the Manager an annual rate of 0.70% of the Fund's average daily net assets
on assets up to $500 million and 0.65% on assets over $500 million. In addition,
effective December 1, 2004, NYLIM has voluntarily agreed to reimburse the
expenses of the Fund to the extent that operating expenses would exceed on an
annualized basis 1.35%, 2.10% and 2.10% of the average daily net assets of the
Class A, Class B and Class C shares, respectively and an equivalent reduction in
the management fee for Class I, Class R1 and Class R2 shares. For the year ended
October 31, 2004, the Manager earned from the Fund $2,285,484. It was not
necessary for the Manager to reimburse the Fund for expenses for the year ended
October 31, 2004.
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
Class A, Class B, Class C and Class R2 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 and Class R2 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 and Class R2 shares, which is an expense of the
Class A and Class R2 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
www.mainstayfunds.com 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and Class R1 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.
The Fund has adopted a shareholder services plan with respect to Class R1 and R2
shares. Under the terms of this plan, Class R1 and Class R2 shares are
authorized to pay to NYLIM, its affiliates, or independent third-party
providers, as compensation for services rendered, a shareholder service fee at
the rate of 0.10% of the average daily net assets of the Fund's Class R1 and R2
shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $60,940 for the year ended
October 31, 2004. 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 $5,351, $236,730 and $5,869, respectively, for the year ended October
31, 2004.
(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 for the year ended October 31, 2004,
amounted to $1,195,902.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. The Trust allocates
trustees fees in proportion to the net assets of the respective Funds. Thus the
Mid 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 $10,258 for the year ended October 31,
2004.
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 $59,317 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged to the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED UNREALIZED TOTAL ACCUMULATED
REALIZED GAIN APPRECIATION GAIN
$5,477,932 $46,804,725 $52,282,657
</Table>
The differences between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals and real estate investment trust
distributions.
The Fund utilized $9,192,455 of capital loss carryforwards during the year ended
October 31, 2004.
The tax character of distributions paid during the year ended October 31, 2004,
the ten months ended October 31, 2003 and the year ended December 31, 2002,
shown in the Statement of Changes in Net Assets, are as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid from:
Ordinary income -- $144,291 $ 328,297
Long-term capital gain -- -- 1,332,629
- ------------------------------------------------------------
-- $144,291 $1,660,926
- ------------------------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $102,287 and $95,917, respectively.
18 MainStay Mid Cap Value Fund
NOTE 7 -- 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 year ended October 31, 2004.
NOTE 8 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 3,034 2,434 614
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions -- -- --
- ---------------------------------------------------------
3,034 2,434 614
- ---------------------------------------------------------
Shares redeemed (2,319) (1,720) (537)
- ---------------------------------------------------------
Net increase 715 714 77
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1, 2004* THROUGH
OCTOBER 31, 2004
CLASS I CLASS R1 CLASS R2
Shares sold (a) 72 74
- -----------------------------------------------------------
Shares issued in
reinvestment of dividends
and distributions -- -- --
- -----------------------------------------------------------
(a) 72 74
- -----------------------------------------------------------
Shares redeemed -- (4) (21)
- -----------------------------------------------------------
Net increase (a) 68 53
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003**
CLASS A CLASS B CLASS C
Shares sold 2,811 2,413 642
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 11 -- --
- ---------------------------------------------------------
2,822 2,413 642
- ---------------------------------------------------------
Shares redeemed (3,114) (2,089) (597)
- ---------------------------------------------------------
Net increase (decrease) (292) 324 45
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 6,186 6,744 2,094
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 54 57 11
- ---------------------------------------------------------
6,240 6,801 2,105
- ---------------------------------------------------------
Shares redeemed (2,275) (3,261) (428)
- ---------------------------------------------------------
Net increase 3,965 3,540 1,677
- ---------------------------------------------------------
</Table>
<Table>
(a) Less than one thousand.
* First offered on January 2, 2004.
** The Fund changed its fiscal year end from December 31 to
October 31.
</Table>
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 10 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003, and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
20 MainStay Mid Cap Value Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Mid Cap Value Fund (the "Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2004, and
the related statement of operations, statement of changes in net assets and the
financial highlights for the year or period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the period ended October 31, 2003 and the year ended December
31, 2002, and the financial highlights for the periods presented through October
31, 2003, were audited by other auditors, whose report dated December 18, 2003
expressed an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Mid Cap Value Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year or period then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
www.mainstayfunds.com 21
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
22 MainStay Mid Cap Value Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 23
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that New York Life Investment
Management LLC (NYLIM) uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
and (iii) on the Securities and Exchange Commission's ("SEC") website at
www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
24 MainStay Mid Cap Value Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
www.mainstayfunds.com 25
This page intentionally left blank
[This page intentionally left blank]
(NEW YORK LIFE INVESTMENT MANAGEMENT LLC LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06385 (RECYCLE LOGO) MSMV11-12/04
19
(MAINSTAY LOGO)
MAINSTAY
GLOBAL HIGH INCOME FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay Global High Income Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quarter of 2004, and according to
preliminary estimates from the Bureau of Economic Analysis, gross domestic
product grew at a seasonally adjusted annual rate of 3.9% in the third quarter
of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 14
- ----------------------------------------------------
Notes to Financial Statements 20
Report of Independent Registered Public
Accounting Firm 26
- ----------------------------------------------------
Trustees and Officers 27
- ----------------------------------------------------
Proxy Voting Policies and Procedures 29
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 29
- ----------------------------------------------------
MainStay Funds 30
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 9.12% 15.01% 10.15%
Excluding sales charges 14.26 16.07 10.94
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY GLOBAL HIGH INCOME J.P. MORGAN EMBI GLOBAL
FUND DIVERSIFIED INDEX
--------------------------- -----------------------
6/1/98 9550 10000
7473 8448
8831 10085
10016 11598
10825 12975
12269 14248
16283 17654
10/31/04 18605 19857
</Table>
<Table>
-- MainStay Global High Income Fund -- J.P. Morgan EMBI Global Diversified Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 8.36% 14.99% 10.07%
Excluding sales charges 13.36 15.22 10.07
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MAINSTAY GLOBAL HIGH INCOME J.P. MORGAN EMBI GLOBAL
FUND DIVERSIFED INDEX
--------------------------- -----------------------
6/1/98 10000 10000
7789 8448
9120 10085
10271 11598
11018 12975
12406 14248
16336 17654
10/31/04 18519 19857
</Table>
<Table>
-- MainStay Global High Income Fund -- J.P. Morgan EMBI Global Diversified Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 12.36% 15.22% 10.07%
Excluding sales charges 13.36 15.22 10.07
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MAINSTAY GLOBAL HIGH INCOME J.P. MORGAN EMBI GLOBAL
FUND DIVERSIFIED INDEX
--------------------------- -----------------------
6/1/98 10000 10000
7789 8448
9120 10085
10271 11598
11018 12975
12406 14248
16336 17654
10/31/04 18519 19857
</Table>
<Table>
-- MainStay Global High Income Fund -- J.P. Morgan EMBI Global Diversified Index
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
J.P. Morgan EMBI Global Diversified
Index(1) 12.48% 14.51% 11.28%
Average Lipper Emerging Markets Debt
Fund(2) 13.26 16.06 10.32
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maxi-mum initial sales charge of 4.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge are subject to
a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. The fee waivers and/or expense
limitations are voluntary and may be discontinued at any time. From inception
(6/1/98) through 8/31/98, performance of Class C shares (first offered 9/1/98)
includes the historical performance of Class B shares adjusted to reflect the
applicable CDSC for Class C shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Global High Income Fund
1. The J.P. Morgan EMBI Global Diversified Index 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 Index 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. The EMBI Global Diversified Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. An investment
cannot be made directly into an index or a composite.
2. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital-gain distributions reinvested.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY GLOBAL HIGH INCOME FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,126.55 $ 8.18 $1,017.55 $ 7.76
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,121.90 $12.16 $1,013.60 $11.54
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,121.90 $12.16 $1,013.60 $11.54
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Governments & Federal Agencies 67.1%
Corporate Bonds 17.7%
Short-Term Investments (Collateral from securities lending 15.7%
is 10.0%)
Brady Bonds 9.7%
Yankee Bonds 0.9%
Loan Participations 0.4%
Liabilities in Excess of Cash and Other Assets -11.5%
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Russian Federation 5.00%, due 3/31/30
2. United Mexican States 8.125%, due 12/30/19
3. Republic of Brazil 8.00%, due 4/15/04
4. Republic of Venezuela 9.25%, due 9/15/27
5. Republic of Brazil 9.375%, due 4/7/08
6. PEMEX Project Funding Master Trust
7.375%, due 12/15/14
7. Republic of Ecuador Series REGS
8.00%, due 8/15/30
8. Republic of Peru 4.50%, due 3/7/17
9. Republic of Brazil 11.00%, due 1/11/12
10. Republic of Brazil 11.00%, due 8/17/40
</Table>
6 MainStay Global High Income Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Gary Goodenough, Joseph Portera, and
Jeffrey M. Saxon of MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests at least 65% of its assets in high-yield securities,
including debt issued by governments, their agencies and authorities, and
corporations that are located in at least three different countries. The Fund
principally invests in emerging markets but may also invest in established
economies. In implementing this strategy, we seek to identify investment
opportunities with an approach that includes country selection, local currency
evaluation, and individual security analysis based on such factors as financial
condition and competitiveness. We may consider a country's political stability,
currency exchange rates, interest rates, inflation, relative economic growth,
and governmental policies.
WHAT FACTORS INFLUENCED EMERGING-MARKET DEBT DURING THE 12-MONTH REPORTING
PERIOD?
During the reporting period, emerging-market debt provided strong performance.
We attribute these results to improving credit trends that have been in place
for several years. The market is anticipating that early next year, Argentina
will resolve its debt default. Demand has remained strong as relatively low
interest rates have drawn investors to higher-yielding securities.
WHAT ISSUES AFFECTED THE MANAGEMENT OF THE FUND DURING THE 12-MONTH PERIOD?
Improving credit fundamentals and default resolution in several countries were
key positives for the market, and these factors drove most of our investment
decisions during the reporting period. At the beginning of the Fund's fiscal
year, the prospect that U.S. interest rates might rise adversely affected the
Fund, since most of the securities we hold are in U.S. dollars. In addition,
rising U.S. interest rates generally have a negative impact on countries that
depend on external demand, which is the case for most emerging-market economies.
On the other hand, stronger-than-expected growth in Asia was beneficial for
commodity exporters. Higher oil prices were also positive for issuers such as
Venezuela. Corporate bonds in emerging markets also made a comeback. The
improvements were dominated by oil companies and other commodity providers but
also included other types of companies.
HOW DID YOU POSITION THE FUND'S PORTFOLIO IN THIS ENVIRONMENT?
Our focus on identifying issuers with free cash flow led us to increase the
Fund's exposure in telecommunications, utilities, and consumer-oriented
companies. We believe that our emphasis on seeking value and prudently managing
risk was what allowed the Fund to outperform the market during the reporting
period.
The Fund held overweighted positions in oil- and commodity-rich countries, such
as Russia, Venezuela, Algeria, Nigeria, and Ecuador. The high price of oil
helped to substantially improve the balance sheets of these countries during the
reporting period. For example, Russia has seen its foreign-currency reserves
rise to nearly $100 billion dollars, nearly equal to the total amount of
Russia's external outstanding debt.
WERE THERE ANY COUNTRY-SPECIFIC FACTORS THAT WERE NOTEWORTHY?
Emerging debt markets are often affected by politics. Ecuador's political
problems were overshadowed by higher oil prices, which helped the country's
bonds. The nation's bonds also benefited from strategic cabinet adjustments the
president made to balance the Congress and retain power.
Venezuela's referendum to remove its president added to uncertainty, but in the
end it had little impact on bond prices. The Fund had been overweighted in
Venezuelan debt for most of the period, but we have since taken profits, and the
Fund is now closer to neutral relative to the J.P. Morgan EMBI Global
Diversified Index.(1) Russia and Ecuador remain significantly overweighted in
the Fund. We continue to look for opportunities to add to the Fund's Russian
exposure as we expect that Russian government bonds will receive a rating
upgrade within the next six months.
Brazil and Turkey were comparatively risky and volatile markets during the
reporting period. Follow-
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. Funds that invest in bonds are subject to
credit, inflation, and interest-rate risk and can lose principal value when
interest rates rise.
1. See footnote on page 5 for more information on the J.P. Morgan EMBI Global
Diversified Index.
www.mainstayfunds.com 7
ing the Turkish general election at the end of 2002, many wondered whether the
new conservative government would be able to pursue European Union membership
and whether the European Union would welcome a conservative Muslim government.
When discussions got underway, there appeared to be room for negotiation.
Turkish debt rallied on the positive news. Brazilian debt sold off dramatically
during the second quarter of 2004, as rising Brazilian and U.S. interest rates
had a negative impact on performance. Despite this setback, Brazil's securities
advanced on evidence that interest rates would rise at a measured pace and that
the country's fiscal situation was improving.
HAVE YOU FOUND ANY OPPORTUNITIES IN THE ARGENTINE MARKET?
Long-term investors in the Fund may recall that we avoided the Argentine default
back in 2001. Indeed, with the exception of oil giant Repsol YPF, the Fund has
avoided the Argentine market. Early in 2004, we carefully analyzed the country's
fundamentals and determined that the yields being offered presented a compelling
opportunity. We first added Argentine Bodens--debt that had already been
restructured and was up-to-date on its interest and principal payments. Later in
the year, as we sensed that a deal was likely on external debt, we added
defaulted debt to the portfolio.
WHAT TYPES OF CORPORATE BONDS DID THE PORTFOLIO HOLD?
During the reporting period, we increased the Fund's exposure to corporate
bonds. Since these bonds are typically perceived as having more risk than
government debt, they usually provide a higher yield and may offer solid
opportunities for emerging-market-debt investors. Our credit research helped us
uncover select securities in the oil, steel, utilities, beverages, and telecom
industries. In particular, we believe we've identified a number of well-managed
companies that are benefiting from strong global and domestic demand, prudent
balance-sheet management, and favorable pricing. These factors helped the Fund's
corporate bonds outperform their sovereign (or government) counterparts over the
12 months ended October 31, 2004.
WERE THERE ANY HOLDINGS THAT DETRACTED FROM RESULTS?
Given our global mandate, we occasionally look for opportunities in developed
markets. During the reporting period, the Fund added bonds issued by
Ireland-based crystal and ceramics maker Waterford Wedgwood. We believed that,
as a manufacturer of luxury brands, the company had strong underlying value.
What's more, its bonds were yielding approximately 600 basis points over
comparable Treasury debt. (A basis point is 1/100th of one percent.)
Unfortunately, the company began to weaken early in 2004, leading us to question
management's business plan. We sold the Fund's holdings toward the end of the
reporting period, which resulted in a small loss for the Fund.
WHERE WILL YOU PLACE YOUR FOCUS IN THE COMING MONTHS?
Looking into 2005, we remain optimistic. While we can't predict where commodity
prices will go from here, we remain confident that demand--especially from
Asia--will support prices for the medium term. We expect U.S. interest rates to
move higher, since we believe that the Federal Reserve will maintain its
tightening bias until at least the second quarter of 2005. We feel that
political uncertainty will remain a factor. How President Bush handles fiscal
policy in his second term may affect the shape of the U.S. yield curve, but not
the overall direction of interest rates.
Technically, we believe that emerging markets will continue to benefit from
investors' search for higher-yielding investments. Credit fundamentals remain
positive as well, with Argentina coming out of default and Russian government
debt likely to be upgraded. On the corporate front, we are also optimistic and
expect more credit upgrades than downgrades. It's our belief that the increasing
depth of local-market issuance will help support debt tied to the U.S. dollar,
since countries such as Mexico may have less of a need to issue foreign-currency
debt for deficit funding. As always, we will continue to pursue our investment
discipline, and we appreciate the support of the Fund's shareholders.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
8 MainStay Global High Income Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (95.8%)+
- --------------------------------------------------------------------------------
BRADY BONDS (9.7%)(l)
BRAZIL (5.9%)
Republic of Brazil
Series RG
3.125%, due 4/15/12 (c) $ 1,610,307 $ 1,470,371
Series 20 year
V 8.00%, due 4/15/14 (c)(d) 4,022,009 3,984,202
------------
5,454,573
------------
NIGERIA (1.3%)
Central Bank of Nigeria
Series WW
6.25%, due 11/15/20 1,250,000 1,181,250
------------
PERU (2.1%)
Republic of Peru
Series 20 year
V 4.50%, due 3/7/17 (d)(e) 2,250,000 1,991,250
------------
VIETNAM (0.4%)
Socialist Republic of Vietnam
Series 30 year
3.75%, due 3/12/28 500,000 346,610
------------
Total Brady Bonds (Cost $6,952,461) 8,973,683
------------
CORPORATE BONDS (17.7%)
- --------------------------------------------------------------------------------
BERMUDA (0.3%)
AES China Generating Co., Ltd.
8.25%, due 6/26/10 300,000 304,738
------------
CAYMAN ISLANDS (1.3%)
Banco Mercantil del Norte SA
Series REGS
5.875%, due 2/17/14 400,000 407,500
CSN Islands VIII Corp.
9.75%, due 12/16/13 (b) 580,000 588,700
Votorantim Overseas III
7.875%, due 1/23/14 (b) 200,000 198,500
------------
1,194,700
------------
CHILE (0.4%)
AES General S.A.
7.50%, due 3/25/14 (b) 350,000 358,312
------------
COLOMBIA (1.3%)
Bavaria S.A.
8.875%, due 11/1/10 (b) 1,085,000 1,155,525
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CZECH REPUBLIC (0.4%)
Oskar Mobile
Series REGS
7.50%, due 10/15/11 (b)(g) E $300,000 $ 394,017
------------
GERMANY (4.3%)
Aries Vermogensverwaltungs
9.60%, due 10/25/14 (b) $ 1,250,000 1,459,375
Citibank Global Markets (Severstal) Deutschland
9.25%, due 4/19/14 (b) 360,000 352,800
Gazprom Oao
9.625%, due 3/1/13 (b) 760,000 874,000
Kyivstar GSM
10.375%, due 8/17/09 (b) 430,000 475,150
Salomon Brothers (Sibneft) AG
Series REGS
10.75%, due 1/15/09 725,000 799,312
------------
3,960,637
------------
LUXEMBURG (3.0%)
Gazprom International S.A.
7.201%, due 2/1/20 (b) 685,000 719,250
Mobile Telesystems Finance
9.75%, due 1/30/08 (b) 750,000 812,812
Sistema Finance SA
10.25%, due 4/14/08 500,000 535,900
Vimple Communications
8.375%, due 10/22/21 (b) 200,000 201,500
Wimm-Bill-Dann Foods OJSC
8.50%, due 5/21/08 (b) 500,000 488,750
------------
2,758,212
------------
MAURITIUS (0.3%)
Antam Finance Ltd.
7.375%, due 9/30/10 300,000 298,206
------------
MEXICO (0.6%)
Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
12.50%, due 6/15/12 450,000 510,750
------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May be
subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- --------------------------------------------------------------------------------
NETHERLANDS (1.5%)
Intergas Finance BV
6.875%, due 11/4/11 (b) $ 500,000 $ 498,125
Kazkommerts International BV
7.00%, due 11/3/09 (b) 400,000 397,500
Paiton Energy Funding BV
9.34%, due 2/15/14 (b) 500,000 496,250
------------
1,391,875
------------
PHILIPPINES (0.7%)
Philippine Long Distance
Telephone Co.
8.35%, due 3/6/17 70,000 63,700
11.375%, due 5/15/12 550,000 616,000
------------
679,700
------------
RUSSIA (1.0%)
Tyumen Oil Co.
11.00%, due 11/6/07 (b) 800,000 912,000
------------
UNITED STATES (2.6%)
Adelphia Communications Corp.
10.25%, due 6/15/11 (f) 100,000 89,250
FrontierVision Operating
Partners L.P.
11.00%, due 10/15/06 (f) 100,000 125,500
PEMEX Project Funding Master Trust
V 7.375%, due 12/15/14 2,000,000 2,216,000
------------
2,430,750
------------
Total Corporate Bonds (Cost $15,670,412) 16,349,422
------------
GOVERNMENTS & FEDERAL AGENCIES (67.1%)
- --------------------------------------------------------------------------------
ARGENTINA (2.0%)
Republic of Argentina
1.98%, due 8/3/12 (c) 1,800,000 1,369,800
12.25%, due 6/19/18 (f) 1,591,875 475,971
------------
1,845,771
------------
BRAZIL (15.3%)
Republic of Brazil
8.25%, due 1/20/34 1,000,000 901,000
Series B
8.875%, due 4/15/24 (d) 1,475,000 1,419,688
9.25%, due 10/22/10 1,160,000 1,242,940
V 9.375%, due 4/7/08 2,425,000 2,643,250
10.125%, due 5/15/27 1,500,000 1,596,750
V 11.00%, due 1/11/12 1,650,000 1,881,000
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
BRAZIL (CONTINUED)
V 11.00%, due 8/17/40 $ 1,480,000 $ 1,669,440
11.50%, due 3/12/08 850,000 983,025
12.25%, due 3/6/30 500,000 617,500
14.50%, due 10/15/09 900,000 1,156,500
------------
14,111,093
------------
COLOMBIA (4.1%)
Republic of Colombia
8.125%, due 5/21/24 (d) 1,370,000 1,243,275
10.00%, due 1/23/12 1,050,000 1,170,750
10.375%, due 1/28/33 500,000 543,750
10.50%, due 7/9/10 430,000 498,800
11.75%, due 2/25/20 300,000 366,750
------------
3,823,325
------------
DOMINICAN REPUBLIC (0.4%)
Dominican Republic
9.04%, due 1/23/13 (b) 500,000 405,625
------------
ECUADOR (3.6%)
Republic of Ecuador
Series REGS
V 8.00%, due 8/15/30 2,570,000 2,152,375
12.00%, due 11/15/12 (b) 1,055,000 1,057,638
Series REGS
12.00%, due 11/15/12 150,000 150,000
------------
3,360,013
------------
EGYPT (0.8%)
Arab Republic of Egypt
Series REGS
8.75%, due 7/11/11 610,000 734,288
------------
EL SALVADOR (0.3%)
Republic of El Salvador
8.25%, due 4/10/32 (b) 250,000 252,500
------------
IVORY COAST (0.3%)
Republic of Ivory Coast
Series 20 Year
2.00%, due 3/29/18 (f) 1,400,000 245,000
------------
MEXICO (4.8%)
United Mexican States
V 8.125%, due 12/30/19 3,800,000 4,451,700
------------
PANAMA (2.0%)
Republic of Panama
8.25%, due 4/22/08 300,000 329,250
8.875%, due 9/30/27 400,000 416,000
</Table>
10 MainStay Global High Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GOVERNMENTS & FEDERAL AGENCIES (CONTINUED)
- --------------------------------------------------------------------------------
PANAMA (CONTINUED)
9.375%, due 7/23/12 $ 200,000 $ 225,000
9.625%, due 2/8/11 770,000 879,725
------------
1,849,975
------------
PERU (1.6%)
Republic of Peru
9.125%, due 2/21/12 1,300,000 1,456,000
------------
PHILIPPINES (3.0%)
Republic of Philippines
9.375%, due 1/18/17 510,000 525,938
9.875%, due 1/15/19 1,150,000 1,157,188
10.625%, due 3/16/25 1,000,000 1,046,250
------------
2,729,376
------------
RUSSIA (12.3%)
Russian Federation
5.00%, due 3/31/30 (b) 28,205 28,240
Series REGS
V 5.00%, due 3/31/30 8,884,750 8,884,750
8.25%, due 3/31/10 (b) 3,289 3,643
Series REGS
8.25%, due 3/31/10 816,251 897,876
Series REGS
10.00%, due 6/26/07 742,000 850,035
Series REGS
11.00%, due 7/24/18 500,000 678,750
------------
11,343,294
------------
SOUTH AFRICA (1.2%)
Republic of South Africa
7.375%, due 4/25/12 950,000 1,085,375
------------
TURKEY (6.2%)
Republic of Turkey
9.00%, due 6/30/11 1,000,000 1,111,250
10.50%, due 1/13/08 980,000 1,118,964
11.00%, due 1/14/13 250,000 308,438
11.75%, due 6/15/10 400,000 496,000
11.875%, due 1/15/30 900,000 1,228,500
12.375%, due 6/15/09 (d) 1,170,000 1,452,263
------------
5,715,415
------------
UKRAINE (1.5%)
Ukraine Government
6.875%, due 3/4/11 (b) 150,000 151,313
7.65%, due 6/11/13 (b) 700,000 720,125
Series REGS
11.00%, due 3/15/07 510,081 555,376
------------
1,426,814
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
URUGUAY (1.1%)
Republic of Uruguay
7.50%, due 3/15/15 $ 700,000 $ 616,000
7.875%, due 1/15/33 (h) 522,805 424,779
------------
1,040,779
------------
VENEZUELA (6.6%)
Republic of Venezuela
8.50%, due 10/8/14 1,000,000 1,015,000
V 9.25%, due 9/15/27 3,713,000 3,798,399
9.375%, due 1/13/34 1,000,000 1,021,000
10.75%, due 9/19/13 250,000 289,000
------------
6,123,399
------------
Total Governments and Federal Agencies
(Cost $52,268,614) 61,999,742
------------
LOAN PARTICIPATIONS (0.4%)
- --------------------------------------------------------------------------------
ALGERIA (0.3%)
Republic of Algeria
Tranch 1
2.0465%, due 9/4/06 (c)(i) 76,923 75,769
Tranch 3
2.0625%, due 3/4/10 (c)(i) 183,333 181,500
------------
257,269
------------
MOROCCO (0.1%)
Kingdom of Morocco
Tranche A
2.78%, due 1/1/09 (c)(i) 97,369 95,421
------------
THAILAND (0.0%) (A)
Thai Oil Co. Ltd.
Base Facility
3.00%, due 3/31/10 (c)(i) 8,894 8,671
------------
Total Loan Participations (Cost $338,819) 361,361
------------
YANKEE BONDS (0.9%) (j)
- --------------------------------------------------------------------------------
ARGENTINA (0.8%)
YPF Sociedad Anonima
9.125%, due 2/24/09 650,000 721,500
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
- --------------------------------------------------------------------------------
MEXICO (0.1%)
Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
11.75%, due 6/15/09 $ 100,000 $ 101,750
------------
Total Yankee Bonds (Cost $689,922) 823,250
------------
Total Long Term Bonds (Cost $75,920,228) 88,507,458
------------
SHORT-TERM INVESTMENTS (15.7%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (5.7%)
Chevron Texaco Funding Corp.
1.75%, due 11/8/04 2,000,000 1,999,319
International Business Machines Corp.
1.70%, due 11/1/04 435,000 435,000
Prudential Funding LLC
1.76%, due 11/2/04 150,000 149,993
UBS Finance (Delaware) LLC
1.89%, due 11/1/04 2,675,000 2,675,000
------------
Total Commercial Paper (Cost $5,259,312) 5,259,312
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.3%)
AIM International Funds Group (k) 281,783 281,783
------------
Total Investment Company (Cost $281,783) 281,783
------------
<Caption>
PRINCIPAL
AMOUNT
MASTER NOTE (0.1%)
Bank of America Securities LLC
1.9549%, due 11/1/04 (k) $ 100,000 100,000
------------
Total Master Note (Cost $100,000) 100,000
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
REPURCHASE AGREEMENTS (9.6%)
Credit Suisse First Boston LLC
1.9249%, dated 10/29/04
due 11/1/04
Proceeds at Maturity $1,000,160 (k)
(Collateralized by Various Bonds with a
Principal Amount of $1,002,797 and a Market
Value of $1,020,036) $ 1,000,000 $ 1,000,000
Lehman Brothers, Inc.
1.9249%, dated 10/29/04
due 11/1/04
Proceeds at Maturity $3,000,481 (k)
(Collateralized by Various Bonds with a
Principal Amount of $5,977,427 and a Market
Value of $3,094,238) 3,000,000 3,000,000
Merrill Lynch & Co.
1.955%, dated 10/29/04
due 11/1/04
Proceeds at Maturity $2,646,431 (k)
(Collateralized by Various Bonds with a
Principal Amount of $2,616,643 and a Market
Value of $2,778,392) 2,646,000 2,646,000
Morgan Stanley & Co.
1.9249%, dated 10/29/04
due 11/1/04
Proceeds at Maturity $2,173,349 (k)
(Collateralized by Various Bonds with a
Principal Amount of $3,315,522 and a Market
Value of $2,285,704) 2,173,000 2,173,000
------------
Total Repurchase Agreements (Cost $8,819,000) 8,819,000
------------
Total Short-Term Investments (Cost $14,460,095) 14,460,095
------------
Total Investments
(Cost $90,380,323) (l) 111.5% 102,967,553(m)
Liabilities in Excess of
Cash and Other Assets (11.5) (10,619,489)
------------- ------------
100.0% $ 92,348,064
============= ============
</Table>
12 MainStay Global High Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
(a) Less than one tenth of a percent.
(b) May be sold to institutional investors only.
(c) Floating rate. Rate shown is the rate in effect at
October 31, 2004.
(d) Represents security of which a portion is out on loan.
(e) 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.
(f) Issue in default.
(g) Partially segregated as collateral for foreign currency
forward contracts.
(h) CIK ("Cash in Kind")-Interest payment is made with cash
or additional securities.
(i) Restricted 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) Brady bond -- U.S. dollar-denominated bonds of
developing countries.
(m) The cost for federal income tax purposes is
$90,625,006.
(n) At October 31, 2004 net unrealized appreciation for
securities was $12,342,547, 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
$12,877,419 and aggregate gross unrealized depreciation
for all investments on which there was an excess of
cost over market value of $534,872.
The following abbreviation is 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. www.mainstayfunds.com
13
STATEMENT OF ASSETS AND LIABILITIES
AS OF OCTOBER 31, 2004
<Table>
ASSETS:
Investment in securities, at value (identified
cost $90,380,323) -- including $8,593,986
market value of securities loaned $102,967,553
Cash 613
Receivables:
Dividends and interest 1,641,822
Fund shares sold 360,715
Investment securities sold 194,040
Other assets 16,728
------------
Total assets 105,181,471
------------
LIABILITIES:
Securities lending collateral 9,200,784
Payables:
Investment securities purchased 2,917,453
Fund shares redeemed 293,692
Manager 56,718
NYLIFE Distributors 49,179
Transfer agent 42,476
Custodian 10,407
Trustees 1,039
Accrued expenses 55,340
Unrealized depreciation on foreign currency
forward contracts 11,762
Dividend payable 194,557
------------
Total liabilities 12,833,407
------------
Net assets $ 92,348,064
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 39,797
Class B 28,336
Class C 14,822
Additional paid-in capital 77,827,662
Accumulated undistributed net investment
income 424,834
Accumulated net realized gain on investments 1,437,119
Net unrealized appreciation on investments 12,587,230
Net unrealized depreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts (11,736)
------------
Net assets $ 92,348,064
============
CLASS A
Net assets applicable to outstanding shares $ 44,434,117
============
Shares of beneficial interest outstanding 3,979,726
============
Net asset value per share outstanding $ 11.17
Maximum sales charge (4.50% of offering price) 0.53
------------
Maximum offering price per share outstanding $ 11.70
============
CLASS B
Net assets applicable to outstanding shares $ 31,458,905
============
Shares of beneficial interest outstanding 2,833,604
============
Net asset value and offering price per share
outstanding $ 11.10
============
CLASS C
Net assets applicable to outstanding shares $ 16,455,042
============
Shares of beneficial interest outstanding 1,482,200
============
Net asset value and offering price per share
outstanding $ 11.10
============
</Table>
14 MainStay Global High Income Fund 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 YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 12,723
Interest 7,257,382
Income from securities loaned -- net 25,009
-----------
Total income 7,295,114
-----------
EXPENSES:
Manager 578,715
Transfer agent 249,442
Distribution -- Class B 217,640
Distribution -- Class C 105,359
Service -- Class A 99,025
Service -- Class B 72,513
Service -- Class C 35,146
Professional 45,819
Shareholder communication 44,913
Registration 37,166
Custodian 37,118
Recordkeeping 30,899
Trustees 8,285
Miscellaneous 29,125
-----------
Total expenses 1,591,165
-----------
Net investment income 5,703,949
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions 1,765,973
Foreign currency transactions 12,412
-----------
Net realized gain on investments and foreign
currency transactions 1,778,385
-----------
Net change in unrealized appreciation:
Security transactions 2,589,141
Translation of other assets and liabilities
in foreign currencies and foreign currency
forward contracts (12,656)
-----------
Net unrealized gain on investments and foreign
currency transactions 2,576,485
-----------
Net realized and unrealized gain on investments
and foreign currency transactions 4,354,870
-----------
Net increase in net assets resulting from
operations $10,058,819
===========
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 5,703,949 $ 3,982,555 $ 2,483,368
Net realized gain (loss)
on investments and
foreign currency
transactions 1,778,385 1,668,229 (191,294)
Net change in unrealized
appreciation
(depreciation) on
investments and foreign
currency transactions 2,576,485 8,313,890 882,718
------------------------------------------
Net increase in net assets
resulting from operations 10,058,819 13,964,674 3,174,792
------------------------------------------
Dividends to shareholders:
From net investment income:
Class A (2,799,067) (1,883,678) (1,251,113)
Class B (1,859,204) (1,250,907) (915,778)
Class C (898,462) (559,113) (365,897)
------------------------------------------
Total dividends to
shareholders (5,556,733) (3,693,698) (2,532,788)
------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 16,372,761 32,475,502 28,308,395
Class B 8,174,613 12,605,060 12,560,634
Class C 9,442,582 7,431,989 8,031,949
Net asset value of shares issued to
shareholders in reinvestment of
dividends:
Class A 1,422,701 813,923 347,107
Class B 1,246,570 779,370 559,957
Class C 466,294 340,130 261,504
------------------------------------------
37,125,521 54,445,974 50,069,546
Cost of shares redeemed:
Class A (9,883,518) (26,755,569) (16,260,403)
Class B (6,548,822) (6,760,518) (3,289,731)
Class C (5,130,052) (6,439,999) (1,205,832)
------------------------------------------
(21,562,392) (39,956,086) (20,755,966)
Increase in net assets
derived from capital
share transactions 15,563,129 14,489,888 29,313,580
------------------------------------------
Net increase in net
assets 20,065,215 24,760,864 29,955,584
</Table>
<Table>
<Caption>
2004 2003* 2002
NET ASSETS:
Beginning of period $ 72,282,849 $ 47,521,985 $ 17,566,401
------------------------------------------
End of period $ 92,348,064 $ 72,282,849 $ 47,521,985
==========================================
Accumulated undistributed
(distributions in excess
of) net investment income
at end of period $ 424,834 $ 265,005 $ (25,106)
==========================================
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
16 MainStay Global High Income Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH ---------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 10.49 $ 8.89 $ 8.72 $ 8.49 $ 8.58 $ 8.00
------- ------- ------- ------- ------- -------
Net investment income 0.76 0.63 0.73 0.85(e) 0.85 0.78
Net realized and unrealized gain (loss) on
investments 0.67 1.56 0.19 0.24(e) (0.08) 0.58
Net realized and unrealized gain (loss) on
foreign currency transactions (0.00)(a) 0.00(a) (0.01) -- (0.00)(a) 0.01
------- ------- ------- ------- ------- -------
Total from investment operations 1.43 2.19 0.91 1.09 0.77 1.37
------- ------- ------- ------- ------- -------
Less dividends from net investment income (0.75) (0.59) (0.74) (0.86) (0.86) (0.79)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 11.17 $ 10.49 $ 8.89 $ 8.72 $ 8.49 $ 8.58
======= ======= ======= ======= ======= =======
Total investment return (b) 14.26% 25.21%(d) 11.01% 13.59% 9.30% 18.15%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 7.29% 7.75%+ 8.49% 10.11%(e) 10.05% 9.57%
Net expenses 1.53% 1.63%+ 1.70% 1.70% 1.71%(c) 1.70%
Expenses (before waiver and
reimbursement) 1.53% 1.63%+ 1.91% 2.27% 2.53% 2.78%
Portfolio turnover rate 24% 34% 92% 111% 96% 104%
Net assets at end of period (in 000's) $44,434 $34,371 $22,754 $ 9,894 $ 8,827 $ 8,186
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH ---------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 10.44 $ 8.86 $ 8.68 $ 8.46 $ 8.54 $ 7.98
------- ------- ------- ------- ------- -------
Net investment income 0.69 0.57 0.67 0.79(e) 0.79 0.71
Net realized and unrealized gain (loss) on
investments 0.65 1.54 0.20 0.23(e) (0.08) 0.56
Net realized and unrealized gain (loss) on
foreign currency transactions (0.00)(a) 0.00(a) (0.01) -- (0.00)(a) 0.01
------- ------- ------- ------- ------- -------
Total from investment operations 1.34 2.11 0.86 1.02 0.71 1.28
------- ------- ------- ------- ------- -------
Less dividends from net investment income (0.68) (0.53) (0.68) (0.80) (0.79) (0.72)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 11.10 $ 10.44 $ 8.86 $ 8.68 $ 8.46 $ 8.54
======= ======= ======= ======= ======= =======
Total investment return (b) 13.36% 24.33%(d) 10.33% 12.69% 8.58% 17.01%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 6.54% 7.00%+ 7.74% 9.36%(e) 9.30% 8.82%
Net expenses 2.28% 2.38%+ 2.45% 2.45% 2.46%(c) 2.45%
Expenses (before waiver and
reimbursement) 2.28% 2.38%+ 2.66% 3.02% 3.28% 3.53%
Portfolio turnover rate 24% 34% 92% 111% 96% 104%
Net assets at end of period (in 000's) $16,455 $11,031 $ 8,060 $ 957 $ 460 $ 79
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
+ Annualized.
(a) Less than one cent per share.
(b) Total return is calculated exclusive of sales charges.
(c) The effect of non-reimbursable interest expense on the
expense ratio was 0.01%.
(d) Total return is not annualized.
(e) 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)(a) ($0.00)(a) ($0.00)(a)
Increase net realized and unrealized gains and losses 0.00(a) (0.00)(a) (0.00)(a)
Decrease ratio of net investment income (0.04%) (0.04%) (0.04%)
</Table>
18 MainStay Global High Income Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH -----------------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 10.44 $ 8.86 $ 8.68 $ 8.46 $ 8.54 $ 7.98
------- ------- ------- ------- ------- -------
0.69 0.57 0.67 0.79(e) 0.79 0.71
0.65 1.54 0.20 0.23(e) (0.08) 0.56
(0.00)(a) 0.00(a) (0.01) -- (0.00)(a) 0.01
------- ------- ------- ------- ------- -------
1.34 2.11 0.86 1.02 0.71 1.28
------- ------- ------- ------- ------- -------
(0.68) (0.53) (0.68) (0.80) (0.79) (0.72)
------- ------- ------- ------- ------- -------
$ 11.10 $ 10.44 $ 8.86 $ 8.68 $ 8.46 $ 8.54
======= ======= ======= ======= ======= =======
13.36% 24.33%(d) 10.33% 12.69% 8.58% 17.01%
6.54% 7.00%+ 7.74% 9.36%(e) 9.30% 8.82%
2.28% 2.38%+ 2.45% 2.45% 2.46%(c) 2.45%
2.28% 2.38%+ 2.66% 3.02% 3.28% 3.53%
24% 34% 92% 111% 96% 104%
$31,459 $26,881 $16,708 $ 6,715 $ 5,498 $ 3,756
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
19
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two funds (collectively referred to as
the "Funds"). These financial statements and notes relate only to MainStay
Global High Income Fund (the "Fund").
The Fund currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. 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 Income 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.
Effective January 1, 2004, the Fund changed its name to MainStay Global High
Income Fund from MainStay Global High Yield 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. Reasons for which securities may be valued
in this manner include, but are not limited to, trading for a security has been
halted or suspended, a security has been de-listed from a national exchange, or
trading on a security's primary market is temporarily closed at a time when
under normal conditions it would be open. The Fund did not hold securities at
October 31, 2004, that were valued in such manner. 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. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. 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.
20 MainStay Global High Income Fund
(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 appreciation on forward contracts reflects the Fund's exposure at
year end to credit loss in the event of a counterparty's failure to perform its
obligations.
(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. (See Note 7.)
(D) LOAN PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
participations. Loan participations are agreements to make money available (a
"commitment") to a borrower in a specified amount, at a specified rate and
within a specified time. Such loan participations are typically senior, secured
and collateralized in nature. The Fund records an investment when the borrower
withdraws money and records interest as earned. These loans pay interest at
rates which are periodically reset by reference to a base lending rate plus a
spread. These base lending rates are generally the prime rate offered by a
designated U.S. bank or London InterBank Offered Rate (LIBOR).
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. The Fund may be contractually obligated
to receive approval from the agent bank and/or borrower prior to the sale of
these investments.
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"). In the event that the Borrower, Selling
Participant or Intermediate Participants becomes insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
(E) 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.
(F) 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
undistributed net investment income and accumulated net realized gain on
investments arising from permanent differences; net assets at October 31, 2004,
are not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN ON
INCOME INVESTMENTS
$12,613 $(12,613)
</Table>
The reclassifications for the Fund are primarily due to premium amortization
adjustments, foreign currency gain (loss), and taxable over distributions of
dividends.
(G) 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
www.mainstayfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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.
(H) 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.
(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.
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.
(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.
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.
Prior to July 31, 2004, 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 had
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. Effective August 1, 2004, the Trust pays the Manager an annual
rate of 0.70% of the Fund's average daily net assets on assets up to $500
million and 0.65% on assets over $500 million. In addition, effective December
1, 2004, NYLIM has voluntarily agreed to reimburse the expenses of the Fund to
the extent that operating expenses would exceed on an annualized basis 1.51%,
2.26% and 2.26% of the average daily net assets of the Class A, Class B and
Class C shares, respectively. For the year ended October 31, 2004, the Manager
earned from the Fund $578,715. It was not necessary for the Manager to reimburse
the Fund for expenses for the year ended October 31, 2004.
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
22 MainStay Global High Income Fund
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 $26,409 for the year ended
October 31, 2004. 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 $258, $55,986 and $7,167 respectively, for the year ended October 31,
2004.
(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 for
the year ended October 31, 2004 amounted to $249,442.
(E) NON-INTERESTED TRUSTEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. The Trust allocates
trustees fees in proportion to the net assets of the respective Funds. Thus the
Global High Income Fund only pays a portion of the fees identified above.
(F) CAPITAL. At October 31, 2004, New York Life held shares of Class A with a
value of $10,214,189. This represents 23.0% of the Class A net assets and 11.1%
of the Fund's total net assets at year 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 $2,559 for the year ended
October 31, 2004.
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 $30,899 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged to the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- 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.
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Restricted securities held at October 31, 2004:
<Table>
<Caption>
DATE(S) OF PRINCIPAL 10/31/04 PERCENT OF
SECURITY ACQUISITION AMOUNT COST VALUE NET ASSETS
Kingdom of Morocco
Tranche A
2.78%, due 1/1/09 11/30/99-1/6/00 $ 97,369 $ 92,983 $ 95,421 0.1%
- ---------------------------------------------------------------------------------------------------------------------------------
Republic of Algeria
Tranche 1
2.0465%, due 9/4/06 8/13/99-1/6/00 76,923 72,055 75,769 0.1
Tranche 3
2.0625%, due 3/4/10 10/3/02 183,333 167,055 181,500 0.2
- ---------------------------------------------------------------------------------------------------------------------------------
Thai Oil Co. Ltd.
Tranche 4
3.00%, due 3/31/10 4/30/04 8,894 6,726 8,671 0.0(a)
- ---------------------------------------------------------------------------------------------------------------------------------
$ 338,819 $361,361 0.4%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
(a) Less than one tenth of a percent.
</Table>
NOTE 6 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED TOTAL
ORDINARY CAPITAL UNREALIZED ACCUMULATED
INCOME GAIN APPRECIATION GAIN
$963,250 $1,334,315 $12,342,573 $14,640,138
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals, and mark to market of unrealized foreign
currency forward contract gain (loss).
The Fund utilized $83,970 of capital loss carryforward during the year ended
October 31, 2004.
The tax character of distributions paid during the year ended October 31, 2004,
the ten months ended October 31, 2003, and year ended December 31, 2002, shown
in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid
from ordinary income: $5,556,733 $3,693,698 $2,532,788
</Table>
NOTE 7 -- PORTFOLIO SECURITIES LOANED AND FOREIGN CURRENCY:
As of October 31, 2004, the Fund had securities on loan with an aggregate market
value of $8,593,986. The Fund received $9,200,784 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.
Pursuant to Rule 2a-7, securities purchased with collateral received are valued
at amortized cost.
Foreign currency forward contracts open at October 31, 2004:
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT UNREALIZED
FOREIGN CURRENCY SALE CONTRACTS SOLD PURCHASED DEPRECIATION
Euro vs. U.S. Dollar, expiring 11/17/04 E233,240 $287,001 $ (9,674)
- ------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 12/15/04 E 95,224 $119,029 (2,088)
- ------------------------------------------------------------------------------------------------------------------
Unrealized depreciation on foreign currency forward
contracts $(11,762)
- ------------------------------------------------------------------------------------------------------------------
</Table>
NOTE 8 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $34,186 and $18,878, respectively.
NOTE 9 -- 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
24 MainStay Global High Income Fund
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 year ended October 31, 2004.
NOTE 10 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 1,519 762 876
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends 134 118 44
- ---------------------------------------------------------
1,653 880 920
- ---------------------------------------------------------
Shares redeemed (951) (621) (495)
- ---------------------------------------------------------
Net increase 702 259 425
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003*
CLASS A CLASS B CLASS C
Shares sold 3,379 1,288 768
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends 82 78 35
- ---------------------------------------------------------
3,461 1,366 803
- ---------------------------------------------------------
Shares redeemed (2,742) (678) (656)
- ---------------------------------------------------------
Net increase 719 688 147
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 3,271 1,436 909
- ---------------------------------------------------------
Shares issued in reinvestment
of dividends 40 65 31
- ---------------------------------------------------------
3,311 1,501 940
- ---------------------------------------------------------
Shares redeemed (1,887) (387) (140)
- ---------------------------------------------------------
Net increase 1,424 1,114 800
- ---------------------------------------------------------
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 11 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 12 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
www.mainstayfunds.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Global High Income Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2004, and the related statement of operations, statement of changes in net
assets and the financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the period ended October 31, 2003 and the year ended December
31, 2002, and the financial highlights for the periods presented through October
31, 2003, were audited by other auditors, whose report dated December 18, 2003
expressed an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Global High Income Fund of The MainStay Funds as of October 31, 2004,
the results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
26 MainStay Global High Income Fund
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 27
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
28 MainStay Global High Income Fund
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 29
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
30 MainStay Global High Income Fund
(MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06337 [RECYCLE LOGO] MSGH11-12/04
20
(MAINSTAY LOGO)
MAINSTAY
COMMON STOCK FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay Common Stock Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quar-
ter of 2004, and according to preliminary estimates from the Bureau of Economic
Analysis, gross domestic product grew at a seasonally adjusted annual rate of
3.9% in the third quarter of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 17
Notes to Financial Statements 22
- ----------------------------------------------------
Report of Independent Registered Public
Accounting Firm 26
- ----------------------------------------------------
Trustees and Officers 27
- ----------------------------------------------------
Proxy Voting Policies and Procedures 29
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 29
- ----------------------------------------------------
MainStay Funds 30
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 0.86% -3.88% 1.42%
Excluding sales charges 6.74 -2.79 2.31
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
CLASS A RUSSELL 1000 INDEX S&P 500 INDEX
------- ------------------ -------------
6/1/98 9450.00 10000.00 10000.00
9894.00 10036.00 10133.00
12606.00 12603.00 12734.00
14580.00 13744.00 13510.00
10706.00 10166.00 10146.00
8902.00 8681.00 8613.00
10255.00 10619.00 10404.00
10/31/04 10946.00 11609.00 11385.00
</Table>
<Table>
-- MainStay Common Stock Fund -- Russell 1000 Index
-- S&P 500 Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 0.95% -3.90% 1.55%
Excluding sales charges 5.95 -3.51 1.55
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
CLASS B RUSSELL 1000 INDEX S&P 500 INDEX
------- ------------------ -------------
6/1/98 10000.00 10000.00 10000.00
10430.00 10036.00 10133.00
13200.00 12603.00 12734.00
15149.00 13744.00 13510.00
11038.00 10166.00 10146.00
9108.00 8681.00 8613.00
10418.00 10619.00 10404.00
10/31/04 11038.00 11609.00 11385.00
</Table>
<Table>
-- MainStay Common Stock Fund -- Russell 1000 Index
-- S&P 500 Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 5.05% -3.51% 1.55%
Excluding sales charges 6.05 -3.51 1.55
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
CLASS C RUSSELL 1000 INDEX S&P 500 INDEX
------- ------------------ -------------
6/1/98 10000.00 10000.00 10000.00
10430.00 10036.00 10133.00
13200.00 12603.00 12734.00
15149.00 13744.00 13510.00
11038.00 10166.00 10146.00
9108.00 8681.00 8613.00
10408.00 10619.00 10404.00
10/31/04 11038.00 11609.00 11385.00
</Table>
<Table>
-- MainStay Common Stock Fund -- Russell 1000 Index
-- S&P 500 Index
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
Russell 1000(R) Index(1) 9.33% -1.63% 2.35%
S&P 500(R) Index(2) 9.42 -2.22 2.04
Average Lipper large-cap core
fund(3) 5.98 -3.17 0.68
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. The fee waivers and/or expense
limitations are voluntary and may be discontinued at any time. From inception
(6/1/98) through 8/31/98,
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Common Stock Fund
performance for Class C shares (first offered 9/1/98) includes the historical
performance of Class B shares, adjusted to reflect the applicable CDSC for Class
C shares.
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.
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(R)
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. The S&P 500(R) Index is
considered to be the Fund's broad-based securities-market index for
comparison purposes. 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.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY COMMON STOCK FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,026.35 $ 8.40 $1,016.75 $ 8.36
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,023.00 $12.20 $1,013.00 $12.14
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,023.00 $12.20 $1,013.00 $12.14
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
U.S. Common
Stocks 99.9%
Cash and Other Assets, Less Liabilities 0.1
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. General Electric Co.
2. ExxonMobil Corp.
3. Pfizer, Inc.
4. Microsoft Corp.
5. International Business Machines Corp.
6. American International Group, Inc.
7. ChevronTexaco Corp.
8. Bank of America Corp.
9. Verizon Communications, Inc.
10. Citigroup, Inc.
</Table>
6 MainStay Common Stock Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Harvey Fram, CFA, of New York Life
Investment Management LLC
DID THE FUND'S PORTFOLIO MANAGEMENT STRATEGY CHANGE DURING THE REPORTING PERIOD?
The Fund underwent several changes during the reporting period. The Fund changed
its name from MainStay Growth Opportunities Fund to MainStay Common Stock Fund
as of January 1, 2004. Then, on March 1, 2004, a new portfolio manager was
assigned to the Fund. The former portfolio management team used a fundamental
stock-picking investment strategy and invested in approximately 100 stocks. As
the new portfolio manager, we use a quantitative factor-based model,
supplemented by bottom-up stock selection. The Fund now invests in approximately
500 stocks. The Fund continues to be measured against the S&P 500(R) Index.(1)
There was no change to the Fund's investment objective of seeking long-term
growth of capital, with income as a secondary consideration.
CAN YOU DESCRIBE THE FUND'S NEW INVESTMENT APPROACH IN MORE DETAIL?
The Fund normally invests at least 80% of its assets in common stocks of
well-established, well-managed U.S. companies that appear to have better-than-
average potential for capital appreciation and that have large- to mid-cap
market capitalizations. We seek to identify companies that are considered to
represent good value based on historical investment standards, including
price/book value ratios and price/earnings ratios. We manage the Fund with a
core orientation, including growth and value equities, determined by market
conditions. In employing our bottom-up approach, we assess stocks based on their
individual strengths, rather than focusing on the underlying sectors or
industries of those stocks or on general economic trends. We may sell a stock
if--based on economic conditions, changes in the issuer's financial condition,
changes in the issuer's industry, or other considerations--we do not believe
that the security will help the Fund meet its investment objective.
WHICH SECTORS MADE THE BIGGEST CONTRIBUTIONS TO THE FUND'S PERFORMANCE DURING
THE 12 MONTHS ENDED OCTOBER 31, 2004?
The health care, materials, and energy sectors made the largest positive
contributions to the Fund's performance.
WHICH SECURITIES WERE STRONG PERFORMERS IN THE HEALTH CARE SECTOR?
The Fund's overweighted position in Boston Scientific proved beneficial, as the
company's earnings continued to surge despite the summer recall of some of its
Taxus drug-coated stents. Indeed, the medical-device company more than doubled
its profits in the third calendar quarter of 2004, beating Wall Street's
expectations. Taxus, a recently approved coronary stent, is coated with special
drugs designed to reduce the risk that arteries will reclose after angioplasty.
The device is expected to challenge Johnson & Johnson's market share in the
drug-coated stent market.
The Fund's overweighted position in managed-care provider Aetna also
strengthened performance, as the company's earnings rose in the first, second,
and third quarters of 2004. Each quarter's results reflected higher revenues,
based on increased fees, premiums, and medical-plan membership, as well as
reduced costs and greater efficiencies. Aetna's third-quarter results were
further buoyed by a one-time tax refund related to discontinued unprofitable
operations.
The Fund's overweighted position in Guidant helped the Fund's 12-month
performance, as the company's share price rose following positive test results
for its experimental drug-coated arterial stent that may rival those currently
available from Boston Scientific and Johnson & Johnson. The company also stands
to benefit from new Medicare coverage of implantable cardiac defibrillators.
These devices currently account for half of the company's business.
WHICH SECURITIES HELPED PERFORMANCE IN THE MATERIALS SECTOR?
The Fund's overweighted position in Phelps Dodge, the world's second-largest
copper producer, provided favorable results. The company posted solid third-
quarter 2004 earnings as a result of strong demand from China, limited copper
supply, and lower costs for copper production. A similarly overweighted position
in Eastman Chemical also contributed positively to the Fund's return, as the
company handily beat analysts' expectations in the third calendar quarter.
WHAT ABOUT ENERGY STOCKS?
The Fund's overweighted positions in oil companies ConocoPhillips, Devon Energy,
and Valero helped relative results. These stocks surged over the 12-month
period, as oil prices reached unprecedented levels. ConocoPhillips also
benefited from its
1. See footnote on page 5 for information on the S&P 500(R) Index.
www.mainstayfunds.com 7
successful bid on a stake in Russia's largest oil company, Lukoil. This
investment should boost ConocoPhillips' exposure to the higher-growth and
higher-returning Russian and Iraqi oil markets. Indeed, the company reported a
54% increase in third-quarter 2004 profits, as income from its exploration and
production operations advanced against a backdrop of higher crude oil prices.
Valero, the nation's largest independent oil refiner, experienced stellar
results based on both strong demand and widening spreads between sweet and sour
crude oil prices.
WHICH SECTORS DETRACTED FROM THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
The positive contributions we've already discussed were not enough to offset the
negative results from holdings in the information technology and consumer
staples sectors.
WHICH INFORMATION TECHNOLOGY SECTOR HOLDINGS HURT THE FUND'S RELATIVE
PERFORMANCE?
The Fund's overweighted position in Texas Instruments detracted from
performance. The company's share price continued to decline into the third
quarter of 2004. The stock suffered when Texas Instruments warned that sales
could fall below original forecasts if customers trim inventory levels to
reflect slower growth rates for end products. The Fund's underweighted position
in Yahoo! also hurt relative performance, since the Internet powerhouse's stock
price advanced on strong profit growth. Yahoo!'s third-quarter 2004 profits
nearly quadrupled compared to the same period last year. A $191 million pre-tax
gain from selling part of the company's stake in rival Internet search engine
Google helped, but even without this gain, the company would have nearly doubled
its earnings for the quarter.
WHICH CONSUMER STAPLES STOCKS DETRACTED FROM THE FUND'S PERFORMANCE?
The Fund's underweighted position in tobacco concern Altria hurt relative
performance, as the company's valuation increased almost 10% for the year.(2)
Altria experienced a solid first quarter 2004 based on rising domestic and
international sales of its tobacco brand leader, Marlboro. Philip Morris
represents about three-fifths of Altria's revenues. The company then experienced
modestly higher results in the second quarter as the U.S. dollar weakened and
tax rates declined. Altria's third-quarter earnings rose approximately 6%,
primarily as a result of a higher profit contribution from overseas beer brewer
SABMiller, where Altria holds a 36% minority interest.
Finally, an overweighted position in Avon detracted from the Fund's 12-month
performance. The company's stock tumbled on sluggish domestic sales, especially
in color cosmetics, children's apparel, and toys.
WHAT DO YOU ANTICIPATE GOING FORWARD?
The recent Bush presidential victory served as a short-term catalyst for a surge
in the equity markets. It remains to be seen, however, whether the direction of
oil prices, the pace of interest rate hikes, the rate of inflation, the relative
weakness of the U.S. dollar, the burgeoning current account deficit, and the
potential effects of these dynamics on corporate earnings will quell some of the
market's anxieties or exacerbate them.
We continue to believe that large-cap equities may offer solid investment
opportunities, even in highly volatile and unpredictable markets. Our
disciplined, quantitative model-based investment approach will continue to seek
promising stocks of established companies that we believe represent good value
and appear to have better-than-average potential for capital appreciation
without regard to market psychology or other subjective factors.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
2. Performance percentages represent the total return performance of the
securities mentioned for the 12-month period ended October 31, 2004. Due to
purchases and sales, the performance of Fund holdings may differ from that of
the securities themselves.
8 MainStay Common Stock Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (99.9%)+
- -------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.0%)
Boeing Co. (The) 18,086 $ 902,491
General Dynamics Corp. 921 94,053
Honeywell International, Inc. 4,438 149,472
L-3 Communications Holdings, Inc. 495 32,635
Northrop Grumman Corp. 4,307 222,887
Precision Castparts Corp. 385 23,100
Raytheon Co. 11,966 436,520
-----------
1,861,158
-----------
AIR FREIGHT & LOGISTICS (1.0%)
C.H. Robinson Worldwide, Inc. 392 21,144
CNF, Inc. 1,352 59,191
FedEx Corp. 3,783 344,707
J.B. Hunt Transport Services, Inc. 2,152 87,931
Ryder System, Inc. 1,740 87,174
United Parcel Service, Inc. Class B 3,990 315,928
-----------
916,075
-----------
AIRLINES (0.0%) (b)
AirTran Holdings, Inc. (a) 189 2,196
Alaska Air Group, Inc. (a) 577 15,198
Delta Air Lines, Inc. (a) 628 3,423
-----------
20,817
-----------
AUTO COMPONENTS (0.4%)
Bandag, Inc. 88 4,048
BorgWarner, Inc. 754 34,970
Cooper Tire & Rubber Co. 1,674 32,609
Dana Corp. 4,016 59,879
Delphi Corp. 7,219 60,712
Goodyear Tire & Rubber Co. (The) (a) 811 8,175
Johnson Controls, Inc. 2,203 126,342
Lear Corp. 292 15,745
Visteon Corp. 3,603 25,617
-----------
368,097
-----------
AUTOMOBILES (0.8%)
Ford Motor Co. 46,444 605,166
General Motors Corp. 2,602 100,307
-----------
705,473
-----------
BEVERAGES (1.2%)
Adolph Coors Co. Class B 983 65,566
Brown-Forman Corp. Class B 569 25,548
</Table>
<Table>
<Caption>
SHARES VALUE
BEVERAGES (CONTINUED)
Coca-Cola Co. (The) 7,868 $ 319,913
Coca-Cola Enterprises, Inc. 11,905 248,934
Constellation Brands, Inc. Class A (a) 496 19,458
Pepsi Bottling Group, Inc. (The) 6,881 192,943
PepsiAmericas, Inc. 3,138 63,544
PepsiCo, Inc. 3,239 160,590
-----------
1,096,496
-----------
BIOTECHNOLOGY (0.8%)
Amgen, Inc. (a) 1,346 76,453
Biogen Idec, Inc. (a) 9,007 523,847
Cephalon, Inc. (a) 582 27,744
Charles River Laboratories International, Inc. (a) 820 38,368
Gilead Sciences, Inc. (a) 1,794 62,126
Protein Design Labs, Inc. (a) 413 7,909
-----------
736,447
-----------
BUILDING PRODUCTS (0.4%)
Masco Corp. 10,042 344,039
-----------
CAPITAL MARKETS (2.6%)
A.G. Edwards, Inc. 956 34,665
Bank of New York Co., Inc. (The) 20,758 673,805
DIAMONDS Trust Series I 10,383 1,042,245
E*TRADE Financial Corp. (a) 8,290 106,941
Federated Investors, Inc. Class B 475 13,770
Janus Capital Group, Inc. 3,130 47,732
LaBranche & Co., Inc. (a) 812 5,757
Legg Mason, Inc. 463 29,498
Merrill Lynch & Co., Inc. 8,100 436,914
Raymond James Financial, Inc. 980 25,578
-----------
2,416,905
-----------
CHEMICALS (1.4%)
Cabot Corp. 1,115 37,999
Crompton Corp. 523 4,864
Cytec Industries, Inc. 358 16,651
Dow Chemical Co. (The) 11,131 500,227
E.I. du Pont de Nemours & Co. 2,563 109,876
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May
be subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------
CHEMICALS (CONTINUED)
Eastman Chemical Co. 2,073 $ 98,405
Engelhard Corp. 1,221 34,554
FMC Corp. (a) 977 42,841
Lyondell Chemical Co. 823 18,913
Monsanto Co. 7,094 303,268
PPG Industries, Inc. 1,362 86,828
Praxair, Inc. 1,498 63,216
Rohm & Haas Co. 167 7,079
-----------
1,324,721
-----------
COMMERCIAL BANKS (5.9%)
VBank of America Corp. 34,287 1,535,715
BB&T Corp. 5,426 223,063
Fifth Third Bancorp 2,498 122,877
First Horizon National Corp. 1,986 85,954
First National Bankshares of Florida 11,594 286,256
Hibernia Corp. Class A 2,083 60,407
Huntington Bancshares, Inc. 1,062 25,435
M&T Bank Corp. 47 4,841
National City Corp. 23,211 904,533
North Fork Bancorporation, Inc. 1,570 69,237
Regions Financial Corp. 3,889 136,426
SunTrust Banks, Inc. 4,283 301,437
TCF Financial Corp. 1,248 39,337
U.S. Bancorp 13,277 379,855
Unizan Financial Corp. 840 22,327
Wells Fargo & Co. 19,741 1,178,932
Wilmington Trust Corp. 306 10,575
-----------
5,387,207
-----------
COMMERCIAL SERVICES & SUPPLIES (1.2%)
Allied Waste Industries, Inc. (a) 8,599 70,168
Apollo Group, Inc. Class A (a) 43 2,838
Brink's Co. (The) 1,497 48,054
Cendant Corp. 25,882 532,910
Copart, Inc. (a) 813 15,106
H&R Block, Inc. 1,629 77,459
Korn/Ferry International (a) 339 5,899
Pitney Bowes, Inc. 4,154 181,737
Republic Services, Inc. 694 21,375
United Rentals, Inc. (a) 2,104 32,507
Waste Management, Inc. 5,400 153,792
-----------
1,141,845
-----------
COMMUNICATIONS EQUIPMENT (4.2%)
Advanced Fibre Communications, Inc. (a) 414 6,467
Cisco Systems, Inc. (a) 69,226 1,329,831
CommScope, Inc. (a) 1,013 18,244
Corning, Inc. (a) 6,311 72,261
</Table>
<Table>
<Caption>
SHARES VALUE
COMMUNICATIONS EQUIPMENT (CONTINUED)
Harris Corp. 1,787 $ 109,954
Lucent Technologies, Inc. (a) 24,324 86,350
Motorola, Inc. 53,860 929,624
Plantronics, Inc. 409 17,792
QUALCOMM, Inc. 29,856 1,248,279
-----------
3,818,802
-----------
COMPUTERS & PERIPHERALS (3.7%)
Apple Computer, Inc. (a) 4,828 253,615
Dell, Inc. (a) 5,223 183,118
Hewlett-Packard Co. 42,087 785,344
VInternational Business Machines Corp. 21,193 1,902,072
Lexmark International, Inc. Class A (a) 76 6,316
NCR Corp. (a) 1,780 100,303
Storage Technology Corp. (a) 2,979 80,493
Sun Microsystems, Inc. (a) 20,346 92,167
-----------
3,403,428
-----------
CONSTRUCTION & ENGINEERING (0.0%) (b)
Quanta Services, Inc. (a) 1,654 11,115
-----------
CONSTRUCTION MATERIALS (0.1%)
Martin Marietta Materials, Inc. 208 9,470
Vulcan Materials Co. 1,345 66,954
-----------
76,424
-----------
CONSUMER FINANCE (0.7%)
AmeriCredit Corp. (a) 4,242 82,295
Capital One Financial Corp. 6,379 470,515
Providian Financial Corp. (a) 7,800 121,290
-----------
674,100
-----------
CONTAINERS & PACKAGING (0.4%)
Ball Corp. 3,017 120,227
Bemis Co., Inc. 854 22,605
Longview Fibre Co. 1,203 18,526
Pactiv Corp. (a) 2,007 47,546
Sealed Air Corp. (a) 1,464 72,527
Sonoco Products Co. 881 23,479
Temple-Inland, Inc. 1,476 87,261
-----------
392,171
-----------
DISTRIBUTORS (0.0%) (b)
Genuine Parts Co. 1,107 44,158
-----------
DIVERSIFIED FINANCIAL SERVICES (2.4%)
CIT Group, Inc. 989 39,956
VCitigroup, Inc. 31,681 1,405,686
GATX Corp. 1,365 37,237
</Table>
10 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
JPMorgan Chase & Co. 11,938 $ 460,807
Principal Financial Group, Inc. 5,752 217,195
-----------
2,160,881
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES (4.9%)
ALLTEL Corp. 3,021 165,943
AT&T Corp. 17,279 295,644
BellSouth Corp. 18,963 505,743
CenturyTel, Inc. 2,507 80,450
Cincinnati Bell, Inc. (a) 3,189 10,874
Citizens Communications Co. 4,412 59,121
Qwest Communications International, Inc. (a) 41,835 143,076
SBC Communications, Inc. 37,888 957,051
Sprint Corp. 36,380 762,161
VVerizon Communications, Inc. 38,083 1,489,045
-----------
4,469,108
-----------
ELECTRIC UTILITIES (2.6%)
Allegheny Energy, Inc. (a) 3,439 62,968
Alliant Energy Corp. 1,007 26,565
American Electric Power Co., Inc. 8,684 285,964
CenterPoint Energy, Inc. 8,290 87,128
DPL, Inc. 555 11,988
Duquesne Light Holdings, Inc. 1,742 29,893
Edison International 8,707 265,564
Entergy Corp. 462 30,196
Exelon Corp. 5,561 220,327
FirstEnergy Corp. 3,250 134,323
FPL Group, Inc. 1,710 117,819
Great Plains Energy, Inc. 315 8,974
IDACORP, Inc. 877 27,169
Northeast Utilities 3,460 66,882
OGE Energy Corp. 379 9,615
Pinnacle West Capital Corp. 1,763 75,139
PNM Resources, Inc. 1,095 25,492
PPL Corp. 3,981 207,012
Progress Energy, Inc. 1,120 46,256
TXU Corp. 8,242 504,575
Xcel Energy, Inc. 5,384 92,066
-----------
2,335,915
-----------
ELECTRICAL EQUIPMENT (0.4%)
AMETEK, Inc. 628 20,674
Emerson Electric Co. 3,691 236,408
Hubbell, Inc. Class A 39 1,653
Hubbell, Inc. Class B 739 33,787
</Table>
<Table>
<Caption>
SHARES VALUE
ELECTRICAL EQUIPMENT (CONTINUED)
Rockwell Automation, Inc. 1,559 $ 64,995
Thomas & Betts Corp. (a) 1,565 44,352
-----------
401,869
-----------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.4%)
Arrow Electronics, Inc. (a) 1,032 24,727
Avnet, Inc. (a) 229 3,884
Jabil Circuit, Inc. (a) 931 22,632
PerkinElmer, Inc. 2,720 55,869
Sanmina-SCI Corp. (a) 2,781 22,248
Tech Data Corp. (a) 244 9,855
Tektronix, Inc. 96 2,912
Thermo Electron Corp. (a) 2,013 58,377
Varian, Inc. (a) 144 5,253
Vishay Intertechnology, Inc. (a) 3,523 45,552
Waters Corp. (a) 2,147 88,650
-----------
339,959
-----------
ENERGY EQUIPMENT & SERVICES (0.2%)
BJ Services Co. 745 37,995
FMC Technologies, Inc. (a) 287 8,676
Hanover Compressor Co. (a) 319 4,153
Smith International, Inc. (a) 485 28,169
Transocean, Inc. (a) 2,982 105,116
-----------
184,109
-----------
FOOD & STAPLES RETAILING (3.0%)
Albertson's, Inc. 8,080 184,305
BJ's Wholesale Club, Inc. (a) 619 17,970
Costco Wholesale Corp. 9,261 443,972
Kroger Co. (The) (a) 19,775 298,800
Ruddick Corp. 780 15,701
Safeway, Inc. (a) 11,922 217,457
SUPERVALU, Inc. 3,642 107,403
Wal-Mart Stores, Inc. 26,034 1,403,753
Whole Foods Market, Inc. 843 68,646
Winn-Dixie Stores, Inc. 1,948 6,701
-----------
2,764,708
-----------
FOOD PRODUCTS (1.3%)
Archer-Daniels-Midland Co. 2,829 54,798
ConAgra Foods, Inc. 4,818 127,195
H.J. Heinz Co. 1,537 55,870
Hershey Foods Corp. 1,202 60,929
Hormel Foods Corp. 1,251 35,166
Kellogg Co. 3,606 155,058
Sara Lee Corp. 21,126 491,813
Sensient Technologies Corp. 212 4,605
Smithfield Foods, Inc. (a) 1,036 25,102
Tyson Foods, Inc. Class A 9,474 137,373
-----------
1,147,909
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------
GAS UTILITIES (0.5%)
KeySpan Corp. 2,085 $ 83,296
Kinder Morgan, Inc. 1,678 108,013
Nicor, Inc. 1,106 41,497
NiSource, Inc. 3,427 73,509
Sempra Energy 3,967 133,053
WGL Holdings, Inc. 225 6,401
-----------
445,769
-----------
HEALTH CARE EQUIPMENT & SUPPLIES (1.0%)
Applera Corp. Applied Biosystems Group 3,098 59,110
Bausch & Lomb, Inc. 1,169 71,262
Baxter International, Inc. 714 21,963
Becton, Dickinson & Co. 6,738 353,745
Biomet, Inc. 493 23,013
C.R. Bard, Inc. 1,607 91,278
Cytyc Corp. (a) 517 13,488
DENTSPLY International, Inc. (a) 1,050 54,610
Fisher Scientific International, Inc. (a) 884 50,706
Millipore Corp. (a) 230 10,578
STERIS Corp. (a) 318 6,592
Stryker Corp. (a) 1,330 57,310
Zimmer Holdings, Inc. (a) 1,769 137,257
-----------
950,912
-----------
HEALTH CARE PROVIDERS & SERVICES (3.2%)
Aetna, Inc. 4,086 388,170
AmerisourceBergen Corp. 3,002 165,230
Anthem, Inc. (a) 174 13,990
Apria Healthcare Group, Inc. (a) 654 17,893
Cardinal Health, Inc. 5,620 262,735
Caremark Rx, Inc. (a) 7,446 223,157
CIGNA Corp. 3,743 237,531
Community Health Systems, Inc. (a) 430 11,533
Covance, Inc. (a) 1,688 67,047
Coventry Health Care, Inc. (a) 1,216 49,734
First Health Group Corp. (a) 1,643 26,157
HCA, Inc. 2,226 81,761
LifePoint Hospitals, Inc. (a) 180 5,836
Lincare Holdings, Inc. (a) 1,208 44,406
Manor Care, Inc. 1,219 39,910
McKesson Corp. 2,581 68,809
Medco Health Solutions, Inc. (a) 1,267 42,964
PacifiCare Health Systems, Inc. (a) 2,268 80,786
Quest Diagnostics, Inc. 936 81,937
Tenet Healthcare Corp. (a) 8,441 90,488
Triad Hospitals, Inc. (a) 2,016 66,589
</Table>
<Table>
<Caption>
SHARES VALUE
HEALTH CARE PROVIDERS & SERVICES (CONTINUED)
UnitedHealth Group, Inc. 10,615 $ 768,526
Universal Health Services, Inc. Class B 778 32,334
WellPoint Health Networks, Inc. (a) 615 60,060
-----------
2,927,583
-----------
HOTELS, RESTAURANTS & LEISURE (2.1%)
Boyd Gaming Corp. 996 33,356
Brinker International, Inc. (a) 2,062 66,603
Caesars Entertainment, Inc. (a) 8,190 146,601
Carnival Corp. 5,648 285,563
CBRL Group, Inc. 428 15,519
Darden Restaurants, Inc. 1,413 34,618
GTECH Holdings Corp. 1,047 24,782
Harrah's Entertainment, Inc. 1,002 58,637
Hilton Hotels Corp. 1,302 25,910
International Game Technology 1,422 46,983
Krispy Kreme Doughnuts, Inc. (a) 256 2,714
Mandalay Resort Group 1,781 122,533
Marriott International, Inc. Class A 1,055 57,487
McDonald's Corp. 17,739 517,092
Six Flags, Inc. (a) 2,540 12,802
Starbucks Corp. (a) 1,840 97,299
Starwood Hotels & Resorts Worldwide, Inc. (a) 4,633 221,133
Yum! Brands, Inc. 3,151 137,068
-----------
1,906,700
-----------
HOUSEHOLD DURABLES (1.1%)
American Greetings Corp. Class A 1,808 47,822
Black & Decker Corp. (The) 2,120 170,194
Centex Corp. 582 30,229
Furniture Brands International, Inc. 1,501 32,737
Harman International Industries, Inc. 1,481 177,986
Lennar Corp. Class A 1,412 63,512
Maytag Corp. 2,153 37,462
Newell Rubbermaid, Inc. 7,328 157,992
Pulte Homes, Inc. 546 29,964
Snap-on, Inc. 320 9,401
Stanley Works (The) 1,811 80,626
Toll Brothers, Inc. (a) 205 9,502
Tupperware Corp. 533 8,896
Whirlpool Corp. 1,832 107,630
-----------
963,953
-----------
</Table>
12 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS (1.4%)
Colgate-Palmolive Co. 124 $ 5,533
Energizer Holdings, Inc. (a) 1,535 71,270
Kimberly-Clark Corp. 10,417 621,582
Procter & Gamble Co. (The) 11,371 581,968
-----------
1,280,353
-----------
INDUSTRIAL CONGLOMERATES (4.3%)
3M Co. 408 31,649
VGeneral Electric Co. 86,997 2,968,338
Textron, Inc. 3,677 250,587
Tyco International Ltd. 22,556 702,619
-----------
3,953,193
-----------
INSURANCE (7.9%)
ACE, Ltd. 7,549 287,315
AFLAC, Inc. 13,616 488,542
Allmerica Financial Corp. (a) 505 15,201
Allstate Corp. (The) 3,171 152,493
Ambac Financial Group, Inc. 1,221 95,311
American Financial Group, Inc. 975 28,860
VAmerican International Group, Inc. 27,742 1,684,217
AmerUs Group Co. 709 29,622
Aon Corp. 7,119 145,299
Arthur J. Gallagher & Co. 421 11,830
Brown & Brown, Inc. 292 12,194
Chubb Corp. (The) 4,248 306,408
Cincinnati Financial Corp. 2,143 89,470
Everest Re Group Ltd. 727 57,702
Fidelity National Financial, Inc. 2,351 88,727
First American Corp. 1,606 50,091
Hartford Financial Services Group, Inc. (The) 6,582 384,915
HCC Insurance Holdings, Inc. 1,774 52,688
Horace Mann Educators Corp. 747 12,699
Lincoln National Corp. 2,129 93,250
Loews Corp. 4,949 296,445
Marsh & McLennan Cos., Inc. 2,400 66,384
MetLife, Inc. 19,159 734,748
Ohio Casualty Corp. (a) 1,685 35,183
Old Republic International Corp. 773 18,050
Progressive Corp. (The) 4,716 441,182
Protective Life Corp. 1,208 47,475
Prudential Financial, Inc. 7,937 368,832
SAFECO Corp. 3,603 166,603
St. Paul Travelers Cos., Inc. (The) 17,118 581,327
StanCorp Financial Group, Inc. 272 20,503
Torchmark Corp. 493 26,632
Unitrin, Inc. 934 40,330
UnumProvident Corp. 7,891 107,791
</Table>
<Table>
<Caption>
SHARES VALUE
INSURANCE (CONTINUED)
W. R. Berkley Corp. 1,543 $ 65,948
XL Capital Ltd. Class A 1,224 88,740
-----------
7,193,007
-----------
INTERNET & CATALOG RETAIL (0.1%)
eBay, Inc. (a) 1,174 114,594
-----------
INTERNET SOFTWARE & SERVICES (0.0%) (b)
Yahoo!, Inc. (a) 622 22,510
-----------
IT SERVICES (0.7%)
Acxiom Corp. 2,351 58,775
CheckFree Corp. (a) 883 27,373
Computer Sciences Corp. (a) 3,348 166,295
CSG Systems International, Inc. (a) 1,191 20,021
DST Systems, Inc. (a) 875 39,244
Electronic Data Systems Corp. 7,415 157,717
First Data Corp. 970 40,042
Sabre Holdings Corp. 1,887 40,589
Unisys Corp. (a) 8,918 94,709
-----------
644,765
-----------
LEISURE EQUIPMENT & PRODUCTS (0.3%)
Brunswick Corp. 1,239 58,134
Eastman Kodak Co. 5,064 153,338
Hasbro, Inc. 3,770 66,691
-----------
278,163
-----------
MACHINERY (1.0%)
Cummins, Inc. 1,154 80,872
Deere & Co. 2,075 124,043
Eaton Corp. 2,067 132,185
Flowserve Corp. (a) 1,005 21,688
Graco, Inc. 1,223 42,071
Harsco Corp. 280 13,566
Nordson Corp. 482 16,880
PACCAR, Inc. 3,535 245,011
Parker-Hannifin Corp. 551 38,917
Pentair, Inc. 1,770 66,163
SPX Corp. 2,054 78,771
Tecumseh Products Co. Class A 491 21,250
-----------
881,417
-----------
MEDIA (2.0%)
Catalina Marketing Corp. 440 11,268
Clear Channel Communications, Inc. 474 15,832
Comcast Corp. Class A (a) 3,760 110,920
McGraw-Hill Cos., Inc. (The) 696 60,030
Media General, Inc. Class A 109 6,355
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------
MEDIA (CONTINUED)
Reader's Digest Association, Inc. (The) 1,369 $ 19,275
Scholastic Corp. (a) 352 10,673
Time Warner, Inc. (a) 39,309 654,102
Viacom, Inc. Class B 6,331 231,018
Walt Disney Co. (The) 28,091 708,455
-----------
1,827,928
-----------
METALS & MINING (0.6%)
Allegheny Technologies, Inc. 1,259 21,164
Arch Coal, Inc. 735 23,902
Nucor Corp. 3,529 149,029
Peabody Energy Corp. 1,419 90,504
Phelps Dodge Corp. 2,031 177,794
United States Steel Corp. 3,047 111,886
-----------
574,279
-----------
MULTILINE RETAIL (1.7%)
Dillard's, Inc. Class A 2,305 47,230
Dollar Tree Stores, Inc. (a) 481 13,901
Federated Department Stores, Inc. 4,821 243,219
J.C. Penney Co., Inc. Holding Co. 7,551 261,189
May Department Stores Co. (The) 5,172 134,782
Nordstrom, Inc. 1,890 81,610
Saks, Inc. (a) 1,884 23,023
Sears, Roebuck and Co. 1,867 65,345
Target Corp. 13,356 668,067
-----------
1,538,366
-----------
MULTI-UTILITIES & UNREGULATED POWER (0.9%)
AES Corp. (The) (a) 16,879 183,981
Duke Energy Corp. 16,956 415,931
Dynegy, Inc. Class A (a) 7,811 38,508
El Paso Corp. 3,002 26,838
MDU Resources Group, Inc. 1,058 27,138
National Fuel Gas Co. 384 10,759
ONEOK, Inc. 911 24,433
Questar Corp. 1,141 54,768
Sierra Pacific Resources (a) 3,238 31,085
-----------
813,441
-----------
OFFICE ELECTRONICS (0.3%)
Xerox Corp. (a) 21,687 320,317
-----------
OIL & GAS (9.0%)
Amerada Hess Corp. 2,003 161,662
Anadarko Petroleum Corp. 3,570 240,796
</Table>
<Table>
<Caption>
SHARES VALUE
OIL & GAS (CONTINUED)
Apache Corp. 241 $ 12,219
Ashland, Inc. 1,552 89,426
Burlington Resources, Inc. 10,576 438,904
VChevronTexaco Corp. 29,401 1,560,017
ConocoPhillips 12,767 1,076,386
Devon Energy Corp. 5,377 397,737
EOG Resources, Inc. 2,624 174,653
VExxonMobil Corp. 49,535 2,438,113
Kerr-McGee Corp. 932 55,193
Marathon Oil Corp. 5,530 210,748
Newfield Exploration Co. (a) 1,575 91,665
Noble Energy, Inc. 754 43,732
Occidental Petroleum Corp. 6,717 375,010
Overseas Shipholding Group, Inc. 1,056 60,139
Pioneer Natural Resources Co. 1,081 35,024
Plains Exploration & Production Co. (a) 1,005 25,125
Pogo Producing Co. 563 25,814
Sunoco, Inc. 2,022 150,356
Unocal Corp. 152 6,346
Valero Energy Corp. 6,831 293,528
Western Gas Resources, Inc. 686 20,093
XTO Energy, Inc. 6,878 229,588
-----------
8,212,274
-----------
PAPER & FOREST PRODUCTS (0.6%)
Georgia-Pacific Corp. 6,861 237,322
Louisiana-Pacific Corp. 2,900 71,079
MeadWestvaco Corp. 932 29,386
Potlatch Corp. 702 33,057
Rayonier, Inc. 210 9,954
Weyerhaeuser Co. 2,986 187,043
-----------
567,841
-----------
PERSONAL PRODUCTS (1.4%)
Avon Products, Inc. 10,552 417,332
Gillette Co. (The) 21,617 896,673
-----------
1,314,005
-----------
PHARMACEUTICALS (5.3%)
Johnson & Johnson 20,280 1,183,946
King Pharmaceuticals, Inc. (a) 2,180 23,784
Lilly (Eli) & Co. 859 47,168
Merck & Co., Inc. 32,316 1,011,814
Perrigo Co. 601 10,926
VPfizer, Inc. 80,994 2,344,776
Sepracor, Inc. (a) 2,304 105,823
Wyeth 3,309 131,202
-----------
4,859,439
-----------
</Table>
14 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------
REAL ESTATE (0.1%)
Equity Office Properties Trust 3,355 $ 94,343
Mack-Cali Realty Corp. 88 3,887
-----------
98,230
-----------
ROAD & RAIL (0.9%)
Burlington Northern Santa Fe Corp. 5,834 243,920
CSX Corp. 913 33,324
Norfolk Southern Corp. 10,484 355,932
Swift Transportation Co., Inc. (a) 1,144 21,622
Union Pacific Corp. 1,888 118,887
Werner Enterprises, Inc. 1,466 31,079
-----------
804,764
-----------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (1.5%)
Advanced Micro Devices, Inc. (a) 8,132 136,780
Altera Corp. (a) 1,592 36,186
Analog Devices, Inc. 1,249 50,285
Atmel Corp. (a) 11,357 36,115
Broadcom Corp. Class A (a) 2,201 59,537
Cabot Microelectronics Corp. (a) 206 7,422
Cree, Inc. (a) 642 22,155
Cypress Semiconductor Corp. (a) 2,007 21,134
Intel Corp. 39,339 875,686
Lam Research Corp. (a) 1,638 42,637
Linear Technology Corp. 932 35,304
LSI Logic Corp. (a) 310 1,411
Micron Technology, Inc. (a) 936 11,401
National Semiconductor Corp. (a) 1,494 24,950
-----------
1,361,003
-----------
SOFTWARE (3.5%)
Activision, Inc. (a) 1,235 17,883
Autodesk, Inc. 3,047 160,729
BMC Software, Inc. (a) 6,025 113,993
Citrix Systems, Inc. (a) 2,826 68,191
Computer Associates International, Inc. 5,426 150,355
Compuware Corp. (a) 7,103 41,126
Macromedia, Inc. (a) 317 8,603
Macrovision Corp. (a) 433 11,708
VMicrosoft Corp. 75,778 2,121,026
Parametric Technology Corp. (a) 1,594 8,273
PeopleSoft, Inc. (a) 546 11,340
Reynolds & Reynolds Co. (The) Class A 1,473 36,251
RSA Security, Inc. (a) 865 17,698
Symantec Corp. (a) 6,425 365,840
</Table>
<Table>
<Caption>
SHARES VALUE
SOFTWARE (CONTINUED)
Synopsys, Inc. (a) 2,028 $ 32,935
Transaction Systems Architects, Inc. Class A (a) 337 5,525
-----------
3,171,476
-----------
SPECIALTY RETAIL (1.8%)
Abercrombie & Fitch Co. Class A 2,544 99,674
American Eagle Outfitters, Inc. 1,616 66,062
AnnTaylor Stores Corp. (a) 513 11,522
AutoNation, Inc. (a) 1,197 20,624
AutoZone, Inc. (a) 1,509 123,451
Barnes & Noble, Inc. (a) 1,556 51,768
Best Buy Co., Inc. 654 38,730
Boise Cascade Corp. (a) 31 915
Borders Group, Inc. 1,059 24,135
Circuit City Stores, Inc. 4,499 73,109
Claire's Stores, Inc. 902 23,470
Gap, Inc. (The) 19,850 396,603
Home Depot, Inc. (The) 3,150 129,402
Limited Brands, Inc. 6,712 166,323
Michaels Stores, Inc. 1,773 51,594
Office Depot, Inc. (a) 1,442 23,346
Payless ShoeSource, Inc. (a) 1,839 17,489
PETsMART, Inc. 679 21,714
RadioShack Corp. 2,165 64,799
Rent-A-Center, Inc. (a) 1,103 26,461
Sherwin-Williams Co. (The) 1,934 82,620
Toys "R" Us, Inc. (a) 5,750 103,558
-----------
1,617,369
-----------
TEXTILES, APPAREL & LUXURY GOODS (0.1%)
Coach, Inc. (a) 889 41,454
Jones Apparel Group, Inc. 589 20,792
Reebok International Ltd. 255 9,435
Timberland Co. (The) Class A (a) 151 9,271
-----------
80,952
-----------
THRIFTS & MORTGAGE FINANCE (3.5%)
Countrywide Financial Corp. 14,962 477,737
Fannie Mae 15,559 1,091,464
Freddie Mac 13,370 890,442
Golden West Financial Corp. 284 33,205
MGIC Investment Corp. 1,349 86,754
Washington Mutual, Inc. 14,632 566,405
Webster Financial Corp. 464 22,179
-----------
3,168,186
-----------
TOBACCO (0.7%)
Altria Group, Inc. 7,862 380,992
Reynolds American, Inc. 2,994 206,167
UST, Inc. 760 31,282
-----------
618,441
-----------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS (0.0%) (b)
Grainger (W.W.), Inc. 422 $ 24,725
-----------
WIRELESS TELECOMMUNICATION SERVICES (0.4%)
Nextel Communications, Inc. Class A (a) 9,132 241,907
Telephone & Data Systems, Inc. 1,276 95,572
-----------
337,479
-----------
Total Investments (Cost $88,876,396) (c) 99.9% 91,417,370(d)
Cash and Other Assets, Less Liabilities 0.1 106,190
------------- -----------
Net Assets 100.0% $91,523,560
============= ===========
</Table>
<Table>
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) The cost for federal income tax purposes is $89,269,777.
(d) At October 31, 2004 net unrealized appreciation was
$2,147,593 based on cost for federal income tax
purposes. This consisted of aggregate gross unrealized
appreciation for all investments on which there was an
excess of market value over cost of $6,055,260 and
aggregate unrealized depreciation for all investments on
which there was an excess of cost over market value of
$3,907,667.
</Table>
16 MainStay Common Stock Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value (identified
cost $88,876,396) $ 91,417,370
Cash 346,717
Receivables:
Investment securities sold 348,407
Dividends and interest 128,727
Fund shares sold 58,952
Other assets 16,983
------------
Total assets 92,317,156
------------
LIABILITIES:
Payables:
Investment securities purchased 512,968
Transfer agent 84,765
NYLIFE Distributors 55,046
Manager 52,824
Fund shares redeemed 27,753
Custodian 11,848
Accrued expenses 48,392
------------
Total liabilities 793,596
------------
Net assets $ 91,523,560
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 30,628
Class B 49,327
Class C 2,691
Additional paid-in capital 108,903,016
Accumulated net realized loss on investments (20,003,076)
Net unrealized appreciation on investments 2,540,974
------------
Net assets $ 91,523,560
============
CLASS A
Net assets applicable to outstanding shares $ 34,957,071
============
Shares of beneficial interest outstanding 3,062,820
============
Net asset value per share outstanding $ 11.41
Maximum sales charge (5.50% of offering price) 0.66
------------
Maximum offering price per share outstanding $ 12.07
============
CLASS B
Net assets applicable to outstanding shares $ 53,640,148
============
Shares of beneficial interest outstanding 4,932,630
============
Net asset value and offering price per share
outstanding $ 10.87
============
CLASS C
Net assets applicable to outstanding shares $ 2,926,341
============
Shares of beneficial interest outstanding 269,149
============
Net asset value and offering price per share
outstanding $ 10.87
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 1,490,409
Interest 5,941
-----------
Total income 1,496,350
-----------
EXPENSES:
Manager 655,095
Transfer agent 522,874
Distribution -- Class B 413,718
Distribution -- Class C 20,679
Service -- Class A 89,163
Service -- Class B 137,906
Service -- Class C 6,893
Shareholder communication 57,410
Custodian 41,440
Professional 38,359
Recordkeeping 34,528
Registration 34,421
Trustees 9,186
Miscellaneous 27,210
-----------
Total expenses before reimbursement 2,088,882
Expense reimbursement from Manager (110,333)
-----------
Net expenses 1,978,549
-----------
Net investment loss (482,199)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 13,500,040
Net change in unrealized appreciation on
investments (7,321,272)
-----------
Net realized and unrealized gain on investments 6,178,768
-----------
Net increase in net assets resulting from
operations $ 5,696,569
===========
</Table>
(a) Dividends recorded net of foreign withholding taxes of $1,378.
18 MainStay Common Stock Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment loss $ (482,199) $ (362,553) $ (681,165)
Net realized gain (loss)
on investments 13,500,040 916,561 (18,412,322)
Net change in unrealized
appreciation
(depreciation) on
investments (7,321,272) 13,344,388 (9,712,182)
--------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 5,696,569 13,898,396 (28,805,669)
--------------------------------------------
Capital share transactions:
Net proceeds from sale
of shares:
Class A 5,169,738 15,132,019 14,219,392
Class B 6,295,159 5,900,587 8,949,625
Class C 722,432 577,629 1,202,762
--------------------------------------------
12,187,329 21,610,235 24,371,779
Cost of shares redeemed:
Class A (10,891,285) (10,924,221) (7,164,908)
Class B (9,778,693) (8,490,629) (15,108,651)
Class C (378,475) (203,580) (614,541)
--------------------------------------------
(21,048,453) (19,618,430) (22,888,100)
Increase (decrease)
in net assets
derived from capital
share transactions (8,861,124) 1,991,805 1,483,679
--------------------------------------------
Net increase
(decrease) in net
assets (3,164,555) 15,890,201 (27,321,990)
NET ASSETS:
Beginning of period 94,688,115 78,797,914 106,119,904
--------------------------------------------
End of period $ 91,523,560 $ 94,688,115 $ 78,797,914
============================================
</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. www.mainstayfunds.com
19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 10.69 $ 9.02 $ 12.12 $ 14.74 $ 15.37 $ 11.86
------- ------- ------- ------- ------- -------
Net investment loss (a) (0.01) (0.01) (0.02) (0.05) (0.04) (0.02)
Net realized and unrealized gain (loss) on
investments 0.73 1.68 (3.08) (2.57) (0.38) 3.54
------- ------- ------- ------- ------- -------
Total from investment operations 0.72 1.67 (3.10) (2.62) (0.42) 3.52
------- ------- ------- ------- ------- -------
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 $ 11.41 $ 10.69 $ 9.02 $ 12.12 $ 14.74 $ 15.37
======= ======= ======= ======= ======= =======
Total investment return (b) 6.74% 18.51%(c) (25.58%) (17.77%) (2.70%) 29.67%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss (0.05%) (0.06%)+ (0.24%) (0.42%) (0.26%) (0.16%)
Net expenses 1.65% 1.65%+ 1.65% 1.58% 1.49% 1.59%
Expenses (before reimbursement) 1.77% 1.86%+ 1.75% 1.58% 1.49% 1.59%
Portfolio turnover rate 136% 71% 130% 95% 70% 72%
Net assets at end of period (in 000's) $34,957 $38,313 $28,639 $31,389 $38,040 $26,214
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 10.25 $ 8.71 $ 11.79 $ 14.45 $ 15.19 $ 11.80
------- ------- ------- ------- ------- -------
Net investment loss (a) (0.09) (0.06) (0.10) (0.15) (0.15) (0.11)
Net realized and unrealized gain (loss) on
investments 0.71 1.60 (2.98) (2.51) (0.38) 3.51
------- ------- ------- ------- ------- -------
Total from investment operations 0.62 1.54 (3.08) (2.66) (0.53) 3.40
------- ------- ------- ------- ------- -------
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 $ 10.87 $ 10.25 $ 8.71 $ 11.79 $ 14.45 $ 15.19
======= ======= ======= ======= ======= =======
Total investment return (b) 6.05% 17.68%(c) (26.12%) (18.41%) (3.46%) 28.80%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss (0.80%) (0.81%)+ (0.99%) (1.17%) (1.01%) (0.91%)
Net expenses 2.40% 2.40%+ 2.40% 2.33% 2.24% 2.34%
Expenses (before reimbursement) 2.52% 2.61%+ 2.50% 2.33% 2.24% 2.34%
Portfolio turnover rate 136% 71% 130% 95% 70% 72%
Net assets at end of period (in 000's) $ 2,926 $ 2,429 $ 1,724 $ 1,683 $ 2,293 $ 806
</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.
(c) Total return is not annualized.
</Table>
20 MainStay Common Stock Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH ------------------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 10.26 $ 8.71 $ 11.79 $ 14.45 $ 15.19 $ 11.80
------- ------- ------- ------- ------- -------
(0.09) (0.06) (0.10) (0.15) (0.15) (0.11)
0.70 1.61 (2.98) (2.51) (0.38) 3.51
------- ------- ------- ------- ------- -------
0.61 1.55 (3.08) (2.66) (0.53) 3.40
------- ------- ------- ------- ------- -------
-- -- -- -- (0.17) (0.01)
-- -- -- -- (0.04) --
------- ------- ------- ------- ------- -------
-- -- -- (0.21) (0.01)
------- ------- ------- ------- ------- -------
$ 10.87 $ 10.26 $ 8.71 $ 11.79 $ 14.45 $ 15.19
======= ======= ======= ======= ======= =======
5.95% 17.80%(c) (26.12%) (18.41%) (3.46%) 28.80%
(0.80%) (0.81%)+ (0.99%) (1.17%) (1.01%) (0.91%)
2.40% 2.40%+ 2.40% 2.33% 2.24% 2.34%
2.52% 2.61%+ 2.50% 2.33% 2.24% 2.34%
136% 71% 130% 95% 70% 72%
$53,640 $53,946 $48,434 $73,048 $91,246 $58,937
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
21
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and is comprised of twenty-two funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to MainStay
Common Stock Fund (the "Fund"), a diversified fund.
The Fund currently offers three classes of shares. Beginning December 28, 2004,
the Fund will also offer Class I 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 growth of capital, with
income as a secondary consideration.
Effective January 1, 2004, the Fund changed its name to MainStay Common Stock
Fund from MainStay Growth Opportunities 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. Reasons for
which securities may be valued in this manner include, but are not limited to,
trading for a security has been halted or suspended, a security has been
de-listed from a national exchange, or trading on a security's primary market is
temporarily closed at a time when under normal conditions it would be open. The
Fund did not hold securities at October 31, 2004, that were valued in such
manner.
(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, accumulated net realized loss on investments
and additional paid-in capital arising from permanent differences; net assets at
October 31, 2004, are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
NET INVESTMENT NET REALIZED LOSS ADDITIONAL
LOSS ON INVESTMENTS PAID-IN-CAPITAL
$482,199 $45,141 $(527,340)
----------------------------------------------------
</Table>
The reclassifications for the Fund is primarily due to the fact that net
operating losses cannot be carried forward for federal income tax purposes and
real estate investment trusts investments.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the
22 MainStay Common Stock Fund
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 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. 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.
Through July 31, 2004, 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 had
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. Effective August 1, 2004, the Trust pays the Manager an annual
rate of 0.70% of the Fund's average daily net assets on assets up to $500
million and 0.65% on assets over $500 million. In addition, effective December
1, 2004, NYLIM has voluntarily agreed to reimburse the expenses of the Fund to
the extent that operating expenses would exceed on an annualized basis 1.38%,
2.13% and 2.13% of the average daily net assets of the Class A, Class B and
Class C shares, respectively. For the year ended October 31, 2004, the Manager
earned from the Fund $655,095 and reimbursed the Fund for $110,333.
(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 $8,993 for the year ended
October 31, 2004. 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 $336, $63,300 and $396, respectively, for the year ended October 31,
2004.
(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 for the year ended October 31, 2004,
amounted to $522,874.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. The Trust allocates
trustees fees in proportion to the net assets of the respective Funds. Thus the
Common Stock Fund only pays a portion of the fees identified above.
(F) CAPITAL. At October 31, 2004, New York Life held shares of Class A with a
value of $11,060,591. This represents 31.6% of the Class A net assets and 12.1%
of the Fund's total net assets at year 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 $2,797 for the year ended October 31,
2004.
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 $34,528 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged to the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
$(19,609,695) $2,147,593 $ (17,462,102)
------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals.
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $19,609,695 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 $ 1,061
2010 16,193
2011 2,355
---------------------------
$19,609
---------------------------
</Table>
The Fund utilized $13,614,652 of capital loss carryforward during the year ended
October 31, 2004.
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $127,199 and $134,494, respectively.
NOTE 7 -- 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 year ended October 31, 2004.
NOTE 8 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 458 586 67
- ---------------------------------------------------------
Shares redeemed (981) (913) (35)
- ---------------------------------------------------------
Net increase (decrease) (523) (327) 32
- ---------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003*
CLASS A CLASS B CLASS C
Shares sold 1,518 649 62
- ---------------------------------------------------------
Shares redeemed (1,108) (951) (23)
- ---------------------------------------------------------
Net increase (decrease) 410 (302) (39)
- ---------------------------------------------------------
</Table>
24 MainStay Common Stock Fund
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 1,271 891 118
- ---------------------------------------------------------
Shares redeemed (685) (1,523) (63)
- ---------------------------------------------------------
Net increase (decrease) 586 (632) 55
- ---------------------------------------------------------
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 9 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 10 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
www.mainstayfunds.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Common Stock Fund (the "Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2004, and
the related statement of operations, statement of changes in net assets and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the period ended October 31, 2003 and the year ended December 31, 2002, and
the financial highlights for the periods presented through October 31, 2003,
were audited by other auditors, whose report dated December 18, 2003 expressed
an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Common Stock Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
26 MainStay Common Stock Fund
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 27
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
28 MainStay Common Stock Fund
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 29
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
30 MainStay Common Stock Fund
(NEW YORK LIFE LOGO)
- ------------------------------------------------
/Not FDIC insured. / No bank guarantee. / May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A06408 (RECYCLE LOGO) MSCS11-12/04
21
(MAINSTAY LOGO)
MAINSTAY
RESEARCH VALUE FUND
The MainStay Funds
Annual Report
October 31, 2004
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quar-
ter of 2004, and according to preliminary estimates from the Bureau of Economic
Analysis, gross domestic product grew at a seasonally adjusted annual rate of
3.9% in the third quarter of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 2
- ----------------------------------------------------
Investment and Performance Comparison 3
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 6
- ----------------------------------------------------
Portfolio of Investments 8
- ----------------------------------------------------
Financial Statements 9
- ----------------------------------------------------
Notes to Financial Statements 14
Report of Independent Registered Public
Accounting Firm 18
- ----------------------------------------------------
Trustees and Officers 19
- ----------------------------------------------------
Proxy Voting Policies and Procedures 21
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 21
- ----------------------------------------------------
Federal Income Tax Information 22
- ----------------------------------------------------
MainStay Funds 23
</Table>
2 MainStay Research Value Fund
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 7.19% 0.42% 2.63%
Excluding sales charges 13.43 1.57 3.54
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
CLASS A RUSSELL 1000(R) VALUE INDEX
------- ---------------------------
6/1/98 9450 10000
8959 9648
10934 11243
13512 11863
11244 10456
8782 9408
10418 11561
10/31/04 11817 13347
</Table>
<Table>
-- MainStay Research Value Fund -- Russell 1000(R) Value Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 7.44% 0.44% 2.76%
Excluding sales charges 12.44 0.80 2.76
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
CLASS B RUSSELL 1000(R) VALUE INDEX
------- ---------------------------
6/1/98 10000 10000
9440 9648
11450 11243
14044 11863
11607 10456
8985 9408
10595 11561
10/31/04 11913 13347
</Table>
<Table>
-- MainStay Research Value Fund -- Russell 1000(R) Value Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 11.44% 0.80% 2.76%
Excluding sales charges 12.44 0.80 2.76
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
CLASS C RUSSELL 1000(R) VALUE INDEX
------- ---------------------------
6/1/98 10000 10000
9440 9648
11450 11243
14044 11863
11607 10456
8985 9408
10595 11561
10/31/04 11913 13347
</Table>
<Table>
-- MainStay Research Value Fund -- Russell 1000(R) Value Index
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
Russell 1000(R) Value Index(1) 15.45% 3.49% 4.60%
Average Lipper multi-cap value
fund(2) 12.73 4.25 3.97
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. The fee waivers and/or expense
limitations are voluntary and may be discontinued at any time. From inception
(6/1/98) through 8/31/98, performance for Class C shares (first offered 9/1/98)
includes the historical performance of Class B shares adjusted to reflect the
applicable CDSC for Class C shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 3
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. The Russell 1000(R) Value Index is
considered to be the Fund's broad-based securities-market index for
comparison purposes. 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.
4 MainStay Research Value Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY RESEARCH VALUE FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,045.00 $ 8.74 $1,016.50 $ 8.62
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,040.15 $12.56 $1,012.75 $12.40
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,040.15 $12.56 $1,012.75 $12.40
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
COMMON STOCKS 95.5%
CASH AND OTHER ASSETS (LESS LIABILITIES) 4.5%
</Table>
See Portfolio of Investments on page 8 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Limited Brands
2. Xerox Corp.
3. Lehman Brothers Holdings, Inc.
4. Ingersoll-Rand Co. Class A
5. ExxonMobil Corp.
6. ChevronTexaco Corp.
7. Wachovia Corp.
8. International Business Machines Corp.
9. ConocoPhillips
10. FPL Group, Inc.
</Table>
www.mainstayfunds.com 5
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Joel Heymsfeld of Mercury Advisors
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund invests primarily in common stocks and other securities with equity
characteristics, such as convertible debt, convertible preferred securities,
preferred stocks, and warrants and rights. The Fund may also invest in foreign
securities. In implementing this strategy, we follow a research-intensive,
value-oriented approach that focuses on securities that are deemed to be
undervalued and that appear to have favorable earnings growth prospects,
above-average return on equity and dividend yield, and solid financial
condition. Various qualitative factors may also be considered. Securities may be
sold when economic, financial, industry, or company factors suggest that the
securities will no longer contribute to meeting the Fund's investment objective.
WHAT MAJOR FACTORS INFLUENCED THE STOCK MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2004?
Continuing strength in the U.S. economy helped the stock market trend upward
from November 2003 through February 2004. After that, the market failed to make
additional net progress through the end of October. Strength in overall
corporate earnings remained a positive influence on share prices. Rising oil
prices, on the other hand, had a dampening effect on economic activity and also
raised concerns about a resurgence of inflation. Energy-related stocks were
market leaders, as the upward trend in oil prices helped keep energy-company
earnings above expectations.
Uncertainties over the outcome of the U.S. presidential election in November had
a negative impact on the stock market. This was particularly true for health
care stocks, which suffered from growing concern that the sector would be
vulnerable to a change in administration.
WHICH SECTORS HAD THE GREATEST IMPACT ON THE FUND'S PERFORMANCE DURING THE
12-MONTH REPORTING PERIOD?
Consumer discretionary, consumer staples, industrials, and financials were the
Fund's top-performing sectors relative to the Russell 1000(R) Value Index.(1) On
an absolute basis, the energy sector produced the highest return during the
12-month period. The Fund's positions in the health care sector took the
greatest toll on relative performance. An underweighted position in the utility
sector relative to the Russell 1000(R) Value Index also had a negative impact on
the Fund's results.
WHICH OF THE FUND'S HOLDINGS SHOWED STRONG PERFORMANCE DURING THE REPORTING
PERIOD?
Positions in the energy sector performed well, including ConocoPhillips
(+51%),(2) ChevronTexaco (+48%), and ExxonMobil (+38%). Retail holdings such as
J.C. Penney (+48%) and Limited Brands (+44%) also provided outstanding results.
Other strong performers included Archer-Daniels-Midland (+37%), Boeing (+32%),
Burlington Northern Santa Fe (+46%), and Xerox (+41%).
WHICH STOCKS UNDERPERFORMED?
Several health care holdings were weak, including Merck (-27%) and Bristol-Myers
Squibb (-18%). Other positions that detracted from performance included General
Motors (-19%) and Hewlett-Packard (-15%).
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
New positions for the Fund during the 12-month period included General Motors,
Viacom, Fannie Mae, and Lehman Brothers. General Motors had dramatically
improved its cost-control management, product quality, and product offerings.
Viacom offered one of the best balance sheets among media companies, and the
company was planning to use cash from its Blockbuster spin-off to repurchase a
substantial number of shares. We bought shares of Fannie Mae on expectations of
low double-digit earnings growth, expanding home ownership, and attractive
valuations. We were encouraged by a settlement between Fannie Mae and a
regulatory agency that was critical of the company's accounting practices.
Lehman Brothers is strengthening its position in investment banking and asset
management. We believe these improvements should augment the company's
already-strong positions the fixed-income markets and in trading.
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.
1. See footnote on page 4 for more information on the Russell 1000(R) Value
Index.
2. Percentages reflect total returns of Fund holdings in the securities
mentioned, including purchases and sales, for the 12 months ended 10/31/04,
or for the portion of the reporting period such securities were held in the
Fund, if shorter.
6 MainStay Research Value Fund
During the reporting period, we sold the Fund's positions in Mattel, SBC
Communications, Burlington Northern Santa Fe, and Beckman Coulter. We sold
Mattel when weak demographics and a lack of purchasing power reinforced our
pessimistic outlook for the toy industry. We eliminated SBC Communications to
reduce the Fund's exposure to the telecommunications industry. We sold
Burlington Northern Santa Fe after its shares rose to a point where they
appeared to be fully valued relative to the company's earnings prospects. We
sold Beckman Coulter for similar reasons. We felt that after substantially
outperforming other health care holdings during the last several years, the
stock offered limited upside potential.
HOW DO THE FUND'S WEIGHTINGS DIFFER FROM THOSE OF THE S&P 500(R) INDEX?
Throughout the 12-month period, the Fund continued to maintain a meaningfully
underweighted position in the information technology sector, with a target of 9%
of assets relative to 17% for the S&P 500(R) Index.(3) The Fund's most
significantly overweighted sector during the reporting period was energy, with a
target weight of 9% versus 6% for the Index. The Fund reduced its exposure to
utilities and telecommunication services to positions that were nearly neutral
to the Index. With purchases of Fannie Mae and Lehman Brothers, the Fund moved
to a modestly overweighted position in the financials sector. The Fund was also
modestly overweighted relative to the S&P 500(R) in health care.
WHAT DO YOU ANTICIPATE GOING FORWARD?
We are increasingly optimistic about the U.S. equity market's prospects in the
coming months. The reelection of President Bush has effectively eliminated
election-year uncertainty, which we believe may have a favorable impact on share
prices. U.S. stocks may also benefit from evidence that inflation has remained
subdued and that economic growth may continue at a reasonable pace through 2005.
On balance, our longer-term view is also positive, as we continue to look for
average total investment returns for U.S. equities in the mid-to-high
single-digit range. We will continue to adhere to a disciplined, investment
approach guided by intensive fundamental research as we seek to identify
attractively valued companies for the Fund's portfolio.
3. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
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.
MainStay Research Value Fund's portfolio manager changed effective May 17, 2004.
The Fund is still managed by Mercury Advisors, but its management team is now
led by Joel Heymsfeld.
At a meeting on September 21, 2004, the Board of Trustees of The MainStay Funds
(the "Trust") approved an Agreement and Plan of Reorganization whereby all of
the assets and liabilities of the Fund will be transferred to the MainStay Value
Fund (a series of the Trust) in exchange for shares of the MainStay Value Fund
(the "Reorganization"). Under this Agreement, the Fund would be completely
liquidated after the Reorganization. A meeting of shareholders of the Fund has
been scheduled for January 18, 2005 in order to vote on the proposed
Reorganization. Should shareholders approve a Reorganization, it is scheduled to
be effective on or about the close of business on January 21, 2005.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
www.mainstayfunds.com 7
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (95.5%)+
- -------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.9%)
Boeing Co. (The) 36,253 $ 1,809,025
-----------
AUTOMOBILES (2.8%)
General Motors Corp. 45,400 1,750,170
-----------
CAPITAL MARKETS (3.3%)
V Lehman Brothers Holdings, Inc. 25,400 2,086,610
-----------
COMMERCIAL BANKS (7.9%)
Huntington Bancshares, Inc. 57,268 1,371,569
Marshall & Ilsley Corp. 36,985 1,552,260
V Wachovia Corp. 40,817 2,008,605
-----------
4,932,434
-----------
COMPUTERS & PERIPHERALS (5.9%)
Hewlett-Packard Co. 93,000 1,735,380
V International Business
Machines Corp. 22,184 1,991,014
-----------
3,726,394
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES (3.1%)
Verizon Communications, Inc. 49,621 1,940,181
-----------
ELECTRIC UTILITIES (3.1%)
V FPL Group, Inc. 28,603 1,970,747
-----------
FOOD PRODUCTS (5.8%)
Archer-Daniels-Midland Co. 70,129 1,358,399
ConAgra Foods, Inc. 70,177 1,852,673
Sara Lee Corp. 16,800 391,104
-----------
3,602,176
-----------
HEALTH CARE EQUIPMENT & SUPPLIES (3.0%)
Baxter International, Inc. 61,448 1,890,140
-----------
HOUSEHOLD PRODUCTS (3.0%)
Kimberly-Clark Corp. 31,953 1,906,635
-----------
INSURANCE (5.9%)
Allstate Corp. (The) 39,900 1,918,791
Hartford Financial Services Group, Inc. (The) 30,656 1,792,763
-----------
3,711,554
-----------
MACHINERY (3.3%)
V Ingersoll-Rand Co. Class A 29,733 2,034,926
-----------
MEDIA (2.8%)
Viacom, Inc. Class B 47,500 1,733,275
-----------
</Table>
<Table>
<Caption>
SHARES VALUE
MULTILINE RETAIL (2.8%)
J.C. Penney Co., Inc. Holding Co. 50,928 $ 1,761,600
-----------
OFFICE ELECTRONICS (3.4%)
V Xerox Corp. (a) 144,547 2,134,959
-----------
OIL & GAS (9.6%)
V ChevronTexaco Corp. 37,876 2,009,701
V ConocoPhillips 23,419 1,974,456
V ExxonMobil Corp. 41,010 2,018,512
-----------
6,002,669
-----------
PAPER & FOREST PRODUCTS (2.9%)
Weyerhaeuser Co. 29,424 1,843,119
-----------
PHARMACEUTICALS (11.5%)
Abbott Laboratories 45,623 1,944,909
Bristol-Myers Squibb Co. 82,300 1,928,289
Merck & Co., Inc. 43,113 1,349,868
Wyeth 48,991 1,942,493
-----------
7,165,559
-----------
ROAD & RAIL (3.1%)
Union Pacific Corp. 30,357 1,911,580
-----------
SPECIALTY RETAIL (3.5%)
V Limited Brands 88,700 2,197,986
-----------
THRIFTS & MORTGAGE FINANCE (5.9%)
Fannie Mae 25,360 1,779,004
Washington Mutual, Inc. 48,659 1,883,590
-----------
3,662,594
-----------
Total Investments
(Cost $51,008,911) (b) 95.5% 59,774,333(c)
Cash and Other Assets,
Less Liabilities 4.5 2,798,324
------------- -----------
Net Assets 100.0% $62,572,657
============= ===========
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding
short-term investments. May be subject to change daily.
(a) Non-income producing security.
(b) The cost for federal income tax purposes is $51,027,867.
(c) At October 31, 2004 net unrealized appreciation was
$8,746,466, based on cost for federal income tax
purposes. This consisted of aggregate gross unrealized
appreciation for all investments on which there was an
excess of market value over cost of $11,314,968 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $2,568,502.
</Table>
8 MainStay Research Value Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $51,008,911) $ 59,774,333
Cash 2,153,494
Receivables:
Investment securities sold 1,133,486
Dividends 150,109
Fund shares sold 7,720
Other assets 16,675
------------
Total assets 63,235,817
------------
LIABILITIES:
Payables:
Investment securities purchased 391,057
Fund shares redeemed 109,043
Manager 45,252
Transfer agent 40,976
NYLIFE Distributors 37,368
Professional 16,104
Custodian 2,046
Accrued expenses 21,314
------------
Total liabilities 663,160
------------
Net assets $ 62,572,657
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 22,558
Class B 24,022
Class C 11,837
Additional paid-in capital 63,969,434
Accumulated undistributed net investment
income 212,097
Accumulated net realized loss on investments (10,432,713)
Net unrealized appreciation on investments 8,765,422
------------
Net assets $ 62,572,657
============
CLASS A
Net assets applicable to outstanding shares $ 24,849,132
============
Shares of beneficial interest outstanding 2,255,853
============
Net asset value per share outstanding $ 11.02
Maximum sales charge (5.50% of offering price) 0.64
------------
Maximum offering price per share outstanding $ 11.66
============
CLASS B
Net assets applicable to outstanding shares $ 25,269,399
============
Shares of beneficial interest outstanding 2,402,196
============
Net asset value and offering price per share
outstanding $ 10.52
============
CLASS C
Net assets applicable to outstanding shares $ 12,454,126
============
Shares of beneficial interest outstanding 1,183,687
============
Net asset value and offering price per share
outstanding $ 10.52
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $1,611,735
Interest 1,338
----------
Total income 1,613,073
----------
EXPENSES:
Manager 554,845
Transfer agent 255,785
Distribution -- Class B 191,114
Distribution -- Class C 100,153
Service -- Class A 66,101
Service -- Class B 63,705
Service -- Class C 33,384
Shareholder communication 39,151
Professional 35,351
Registration 34,873
Recordkeeping 25,092
Custodian 8,161
Trustees 7,289
Miscellaneous 18,191
----------
Total expenses before waiver and
reimbursement 1,433,195
Fees waived and reimbursed by Manager (32,239)
----------
Net expenses 1,400,956
----------
Net investment income 212,117
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 5,280,224
Net change in unrealized appreciation on
investments 2,264,012
----------
Net realized and unrealized gain on investments 7,544,236
----------
Net increase in net assets resulting from
operations $7,756,353
==========
</Table>
10 MainStay Research Value Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment income
(loss) $ 212,117 $ 206,240 $ (94,708)
Net realized gain (loss)
on investments 5,280,224 298,498 (15,895,812)
Net change in unrealized
appreciation
(depreciation) on
investments 2,264,012 7,503,492 (1,420,991)
------------------------------------------
Net increase (decrease) in
net assets resulting from
operations 7,756,353 8,008,230 (17,411,511)
------------------------------------------
Dividends and distributions to
shareholders:
From net investment income:
Class A (157,052) -- --
Class B (36,713) -- --
Class C (18,128) -- --
From net realized gain on investments:
Class A -- -- (29,926)
Class B -- -- (33,343)
Class C -- -- (6,670)
------------------------------------------
Total dividends and
distributions to
shareholders (211,893) -- (69,939)
------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 4,285,294 9,081,876 7,500,281
Class B 4,040,993 5,478,696 4,990,637
Class C 4,450,934 6,757,467 2,164,087
</Table>
<Table>
<Caption>
2004 2003* 2002
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A $ 63,533 $ -- $ 27,070
Class B 25,384 -- 27,824
Class C 2,998 -- 2,853
------------------------------------------
12,869,136 21,318,039 14,712,752
Cost of shares redeemed:
Class A (8,851,596) (5,189,955) (4,983,316)
Class B (5,449,324) (3,794,299) (6,310,427)
Class C (4,040,571) (1,071,349) (2,460,364)
------------------------------------------
(18,341,491) (10,055,603) (13,754,107)
Increase (decrease) in
net assets derived
from capital share
transactions (5,472,355) 11,262,436 958,645
------------------------------------------
Net increase (decrease)
in net assets 2,072,105 19,270,666 (16,522,805)
NET ASSETS:
Beginning of period 60,500,552 41,229,886 57,752,691
------------------------------------------
End of period $ 62,572,657 $ 60,500,552 $ 41,229,886
==========================================
Accumulated undistributed
net investment income at
end of period $ 212,097 $ 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. www.mainstayfunds.com
11
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 9.77 $ 8.38 $ 11.67 $ 12.56 $ 11.62 $ 10.30
------- ------- ------- ------- ------- -------
Net investment income (loss) (a) 0.08 0.07 0.02 0.01 0.00(b) (0.03)
Net realized and unrealized gain (loss) on
investments 1.23 1.32 (3.30) (0.78) 1.70 1.90
------- ------- ------- ------- ------- -------
Total from investment operations 1.31 1.39 (3.28) (0.77) 1.70 1.87
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income (0.06) -- -- -- -- --
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 dividends and distributions to
shareholders (0.06) -- (0.01) (0.12) (0.76) (0.55)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 11.02 $ 9.77 $ 8.38 $ 11.67 $ 12.56 $ 11.62
======= ======= ======= ======= ======= =======
Total investment return (c) 13.43% 16.59%(d) (28.07%) (6.14%) 14.89% 18.35%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.77% 0.91%+ 0.24% 0.05% 0.06% (0.33%)
Net expenses 1.70% 1.70%+ 1.70% 1.74% 1.80% 1.80%
Expenses (before waiver and
reimbursement) 1.75% 1.95%+ 1.91% 1.74% 1.89% 2.14%
Portfolio turnover rate 22% 5% 120% 44% 60% 63%
Net assets at end of period (in 000's) $24,849 $26,172 $18,532 $23,360 $22,619 $13,987
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 9.37 $ 8.08 $11.34 $12.30 $11.48 $10.25
------- ------- ------ ------ ------ ------
Net investment income (loss) (a) 0.00(b) 0.01 (0.05) (0.08) (0.08) (0.09)
Net realized and unrealized gain (loss) on
investments 1.16 1.28 (3.20) (0.76) 1.66 1.87
------- ------- ------ ------ ------ ------
Total from investment operations 1.16 1.29 (3.25) (0.84) 1.58 1.78
------- ------- ------ ------ ------ ------
Less dividends and distributions:
From net investment income (0.01) -- -- -- -- --
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 dividends and distributions to
shareholders (0.01) -- (0.01) (0.12) (0.76) (0.55)
------- ------- ------ ------ ------ ------
Net asset value at end of period $ 10.52 $ 9.37 $ 8.08 $11.34 $12.30 $11.48
======= ======= ====== ====== ====== ======
Total investment return (c) 12.44% 15.97%(d) (28.62%) (6.84%) 14.03% 17.56%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.02% 0.16%+ (0.51%) (0.70%) (0.69%) (1.08%)
Net expenses 2.45% 2.45%+ 2.45% 2.49% 2.55% 2.55%
Expenses (before waiver and
reimbursement) 2.50% 2.70%+ 2.66% 2.49% 2.64% 2.89%
Portfolio turnover rate 22% 5% 120% 44% 60% 63%
Net assets at end of period (in 000's) $12,454 $10,591 $3,737 $5,831 $4,345 $1,146
</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) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges.
(d) Total return is not annualized.
</Table>
12 MainStay Research Value Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 9.37 $ 8.08 $ 11.34 $ 12.30 $ 11.48 $ 10.25
-------- ------- ------- ------- ------- -------
0.00(b) 0.01 (0.05) (0.08) (0.08) (0.09)
1.16 1.28 (3.20) (0.76) 1.66 1.87
-------- ------- ------- ------- ------- -------
1.16 1.29 (3.25) (0.84) 1.58 1.78
-------- ------- ------- ------- ------- -------
(0.01) -- -- -- -- --
-- -- (0.01) (0.12) (0.76) (0.37)
-- -- -- -- -- (0.18)
-------- ------- ------- ------- ------- -------
(0.01) -- (0.01) (0.12) (0.76) (0.55)
-------- ------- ------- ------- ------- -------
$ 10.52 $ 9.37 $ 8.08 $ 11.34 $ 12.30 $ 11.48
======== ======= ======= ======= ======= =======
12.44% 15.97%(d) (28.62%) (6.84%) 14.03% 17.56%
0.02% 0.16%+ (0.51%) (0.70%) (0.69%) (1.08%)
2.45% 2.45%+ 2.45% 2.49% 2.55% 2.55%
2.50% 2.70%+ 2.66% 2.49% 2.64% 2.89%
22% 5% 120% 44% 60% 63%
$ 25,269 $23,738 $18,961 $28,562 $23,087 $10,176
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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. Reasons for
which securities may be valued in this manner include, but are not limited to,
trading for a security has been halted or suspended, a security has been
de-listed from a national exchange, or trading on a security's primary market is
temporarily closed at a time when under normal conditions it would be open. The
Fund did not hold securities at October 31, 2004, that were valued in such
manner.
(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.
(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 distribution plan) 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,
14 MainStay Research Value 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. 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.
Through July 31, 2004, 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 0.85% of the Fund's average daily net assets. The Manager had
voluntarily agreed to reimburse the expenses of the Fund to the extent that
operating expenses would exceed on an annualized basis 1.70%, 2.45% and 2.45% of
the average daily net assets of the Class A, Class B and Class C shares,
respectively. Effective August 1, 2004, the Trust pays the Manager an annual
rate of 0.85% of the Fund's average daily net assets on assets up to $500
million and 0.80% on assets over $500 million. Also effective August 1, 2004,
NYLIM had voluntarily agreed to waive its management fee by 0.05% of the Fund's
average daily net assets. In addition, effective December 1, 2004, NYLIM has
voluntarily agreed to reimburse the expenses of the Fund to the extent that
operating expenses would exceed on an annualized basis 1.37%, 2.12% and 2.12% of
the average daily net assets of the Class A, Class B and Class C shares,
respectively. For the year ended October 31, 2004, the Manager earned from the
Fund $554,845, waived $7,998 and reimbursed the Fund $24,241. The fees waived
and reimbursed by the Manager total $32,239.
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
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 $4,934 for the year ended
October 31, 2004. 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 $640, $35,602 and $6,446, respectively, for the year ended October 31,
2004.
(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 for the year ended October 31, 2004
amounted to $255,785.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance Com-
www.mainstayfunds.com 15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
mittee attended, respectively. In addition, each Non-Interested Trustee is paid
$1,000 for attending meetings of the Non-Interested Trustees held in advance of
or in connection with Board/Committee meetings. 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, 2004, New York Life held shares of Class A with a
value of $11,412,216. This represents 45.9% of the net assets for Class A and
18.2% of the Fund's total net assets at year 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 $1,938 for the year ended October 31,
2004.
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 $25,092 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged to the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED TOTAL
ORDINARY CAPITAL AND UNREALIZED ACCUMULATED
INCOME OTHER LOSSES APPRECIATION LOSS
$212,097 $(10,413,757) $8,746,466 $(1,455,194)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is due
to wash sale deferrals.
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $10,413,757 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)
2011 $10,414
-----------------------------------------
</Table>
The Fund utilized $5,280,224 of capital loss carryforward during the year ended
October 31, 2004.
The tax character of distributions paid during the year ended October 31, 2004,
the ten months ended October 31, 2003 and the year ended December 31, 2002,
shown in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid from:
Ordinary income $211,893 $-- $--
Long-term capital gains -- -- 69,939
- ----------------------------------------------------------
$211,893 $-- $69,939
- ----------------------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $14,283 and $21,812, respectively.
NOTE 7 -- 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 year ended October 31, 2004.
NOTE 8 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 409 402 447
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 7 3 --(a)
- -----------------------------------------------------------
416 405 447
- -----------------------------------------------------------
Shares redeemed (837) (537) (394)
- -----------------------------------------------------------
Net increase (decrease) (421) (132) 53
- -----------------------------------------------------------
</Table>
16 MainStay Research Value Fund
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003*
CLASS A CLASS B CLASS C
Shares sold 1,063 643 797
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions -- -- --
- -----------------------------------------------------------
1,063 643 797
- -----------------------------------------------------------
Shares redeemed (597) (455) (128)
- -----------------------------------------------------------
Net increase 466 188 669
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 731 511 220
- -----------------------------------------------------------
Shares issued in reinvestment
of dividends and
distributions 3 3 --(a)
- -----------------------------------------------------------
734 514 220
- -----------------------------------------------------------
Shares redeemed (525) (687) (272)
- -----------------------------------------------------------
Net increase (decrease) 209 (173) (52)
- -----------------------------------------------------------
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
(a) Less than one thousand.
NOTE 9 -- SPECIAL MEETING OF SHAREHOLDERS:
The Board of Trustees of the Trust has called a Special Meeting of Shareholders
("Special Meeting") of the Fund, scheduled to be held on January 18, 2005. At
the Special Meeting, shareholders will vote on a proposed reorganization of the
Fund into the MainStay Value Fund, also a series of the Trust.
NOTE 10 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 11 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
www.mainstayfunds.com 17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Research Value Fund (the "Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2004, and
the related statement of operations, statement of changes in net assets and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the period ended October 31, 2003 and the year ended December 31, 2002, and
the financial highlights for the periods presented through October 31, 2003,
were audited by other auditors, whose report dated December 18, 2003 expressed
an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Research Value Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
18 MainStay Research Value Fund
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 19
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
20 MainStay Research Value Fund
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that New York Life Investment
Management LLC (NYLIM) uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling 1-800-MAINSTAY
(1-800-624-6782); (ii) by visiting the Fund's website at www.mainstayfunds.com;
and (iii) on the Securities and Exchange Commission's ("SEC") website at
www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 21
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2004,
should be multiplied by 100% to arrive at the amount eligible for qualified
dividend income and 100% for the corporate dividends received deduction.
In January 2005, shareholders will receive on IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2004. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2004.
22 MainStay Research Value Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
www.mainstayfunds.com 23
(MAINSTAY LOGO)
- ------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06333 (RECYCLE.LOGO) MSRV11-12/04
22
(MAINSTAY LOGO)
MAINSTAY
SMALL CAP GROWTH FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay Small Cap Growth Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quar-
ter of 2004, and according to preliminary estimates from the Bureau of Economic
Analysis, gross domestic product grew at a seasonally adjusted annual rate of
3.9% in the third quarter of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 9
- ----------------------------------------------------
Financial Statements 13
- ----------------------------------------------------
Notes to Financial Statements 18
Report of Independent Registered Public
Accounting Firm 22
- ----------------------------------------------------
Trustees and Officers 23
- ----------------------------------------------------
Proxy Voting Policies and Procedures 25
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 25
- ----------------------------------------------------
MainStay Funds 26
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -4.31% -4.09% 4.29%
Excluding sales charges 1.26 -2.99 5.22
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP RUSSELL 2000 GROWTH
GROWTH FUND INDEX RUSSELL 2000 INDEX
------------------ ------------------- ------------------
6/1/98 9450 10000 10000
8703 8252 8329
15252 10669 9567
19514 12393 11232
11698 8489 9806
9699 6658 8671
12938 9758 12432
10/31/04 13102 10298 13890
</Table>
<Table>
-- MainStay Small Cap Growth Fund -- Russell 2000 Growth Index
- - Russell 2000 Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -4.46% -4.11% 4.41%
Excluding sales charges 0.54 -3.73 4.41
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP RUSSELL 2000 GROWTH
GROWTH FUND INDEX RUSSELL 2000 INDEX
------------------ ------------------- ------------------
6/1/98 10000 10000 10000
9180 8252 8329
15960 10669 9567
20260 12393 11232
12048 8489 9806
9921 6658 8671
13126 9758 12432
10/31/04 13198 10298 13890
</Table>
<Table>
-- MainStay Small Cap Growth Fund -- Russell 2000 Growth Index
- - Russell 2000 Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -0.46% -3.73% 4.41%
Excluding sales charges 0.54 -3.73 4.41
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP RUSSELL 2000 GROWTH
GROWTH FUND INDEX RUSSELL 2000 INDEX
------------------ ------------------- ------------------
6/1/98 10000 10000 10000
9180 8252 8329
15960 10669 9567
20260 12393 11232
12048 8489 9806
9921 6658 8671
13126 9758 12432
10/31/04 13198 10298 13890
</Table>
<Table>
-- MainStay Small Cap Growth Fund -- Russell 2000 Growth Index
- - Russell 2000 Index
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
Russell 2000(R) Growth Index(1) 5.53% -0.71% 0.46%
Russell 2000(R) Index(2) 11.73 7.74 5.25
Average Lipper small-cap growth
fund(3) 2.52 1.47 3.69
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
From inception (6/1/98) through 8/31/98, performance for Class C shares (first
offered 9/1/98) includes the historical performance of Class B shares adjusted
to reflect the applicable CDSC for Class C shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Small Cap Growth Fund
1. 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. The Russell 2000(R) Growth Index is
considered to be the Fund's broad-based securities-market index for
comparison purposes. An investment cannot be made directly into an index.
2. 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.
3. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital-gain distributions reinvested.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY SMALL CAP GROWTH FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $999.35 $ 9.60 $1,015.45 $ 9.68
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $995.50 $13.34 $1,011.70 $13.45
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $995.50 $13.34 $1,011.70 $13.45
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 100.5%
Short-Term Investments (collateral from securities lending 14.4
is 14.4%)
Liabilities in Excess of Cash and Other Assets -14.9
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. WCI Communities, Inc.
2. Station Casinos, Inc.
3. Cooper Cos., Inc. (The)
4. Corporate Executive Board Co. (The)
5. M.D.C. Holdings, Inc.
6. Jefferies Group, Inc.
7. Arch Coal, Inc.
8. Hovnanian Enterprises, Inc., Class A
9. Ryland Group, Inc. (The)
10. MSC Industrial Direct Co., Inc., Class A
</Table>
6 MainStay Small Cap Growth Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Rudolph C. Carryl and Edmund C. Spelman
of MacKay Shields LLC
WHAT MAJOR FACTORS INFLUENCED THE STOCK MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2004?
The equity markets managed to register a healthy gain for the 12-month reporting
period, despite concerns over Federal Reserve interest-rate hikes, sharply
higher oil prices, an ongoing war in Iraq, and uncertainty surrounding the
outcome of the U.S. presidential election. Much of the market's advance took
place toward the end of the reporting period, when investors began to refocus on
those market fundamentals (such as earnings growth) that appeared to be
favorable.
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests at least 80% of its assets in companies with market
capitalizations at the time of investment comparable to those of companies in
the Russell 2000(R) Index.(1) We select investments according to the economic
environment, and the attractiveness of particular markets, and the financial
condition and competitiveness of individual companies. In implementing this
strategy, we look for securities of companies with above-average revenue and
earnings per share growth, potential for positive earnings surprises, and strong
management. Ideally, the companies will have high levels of ownership by
insiders. We may also invest in companies that we believe are attractive because
of special factors, such as new management, new products, changes in consumer
demand, or changes in the economy. We may sell a stock if its fundamentals
deteriorate, if its valuation is deemed too high in relation to its growth rate
or its peer group, or if we no longer believe the security will help the Fund
meet its investment objective.
WHICH SECTORS HAD THE GREATEST IMPACT ON THE FUND'S PERFORMANCE DURING THE
12-MONTH REPORTING PERIOD?
During the year ended October 31, 2004, effective stock selection in consumer
staples, industrials, and information technology helped the Fund's performance
relative to the Russell 2000(R) Growth Index.(2) An underweighted position in
energy, however, detracted from the Fund's relative results, as the energy
sector rallied sharply with the rising price of oil. The Fund's underweighted
position in materials also detracted from performance.
WHAT WERE SOME OF THE FUND'S STOCK-SPECIFIC SUCCESS STORIES?
For the 12 months ended October 31, 2004, the greatest positive contributors to
the Fund's performance were FLIR Systems, Station Casinos, OSI Pharmaceuticals,
Cytyc, and VCA Antech. FLIR's earnings rose steadily on strong government and
commercial demand for the company's thermal imaging and infrared camera systems.
Station Casinos benefited from healthy demand from local Las Vegas citizens as
well as from expansion of the company's management contracts at Native American
casinos in California. The stock price of OSI Pharmaceuticals rose sharply
following positive clinical trial data, which showed that the company's lead
drug, Tarceva, was effective in treating lung cancer. Cytyc's stock price
benefited from continued growth in the company's core ThinPrep Pap smear
product. Cytyc's growth prospects were also enhanced by the introduction of a
new diagnostic imaging product and the acquisition of a new women's health
product known as NovaSure. VCA Antech experienced positive growth in its two
core businesses, veterinary labs and animal hospitals, while strategic
acquisitions continued to add to the company's corporate earnings.
WHAT WERE SOME EXAMPLES OF STOCKS THAT DETRACTED FROM RESULTS?
Taro Pharmaceuticals Industries, Wireless Facilities, Odyssey Healthcare, Select
Comfort, and Hot Topic were the largest detractors from the Fund's 12-month
performance. Taro Pharmaceuticals swung from profitability to an unexpected loss
in the second calendar quarter of 2004 as a result of excess inventory and a
sharp decline in sales. Taro Pharmaceuticals Industries also spent heavily to
promote an acquired product that generated revenues which were much weaker than
the company had anticipated. Wireless Facilities experienced disappointing
demand for its outsourcing services for wireless telecommunications service
providers and equipment manufacturers. The company also disclosed accounting
irregularities, which resulted in a restatement of earnings. Odyssey
Healthcare's stock price fell because of an SEC investigation. Odyssey also saw
earnings decline at its hospice operations because of higher-than-expected
pharmaceutical and labor costs and adverse Medicare-reimbursement developments.
Select Comfort was hurt by negative publicity related to mold
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.
1. See footnote on page 5 for information on the Russell 2000(R) Index.
2. See footnote on page 5 for information on the Russell 2000(R) Growth Index.
www.mainstayfunds.com 7
problems in the company's airbed mattresses. Hot Topic, an alternative teen
retailer, experienced disappointing sales growth mainly because of sluggish
demand for the company's less-traditional style of apparel and accessories. We
sold each of these Fund holdings during the reporting period.
WERE THERE ANY SIGNIFICANT NEW HOLDINGS OR SALES DURING THE PERIOD?
With energy prices at record-high levels, we established Fund positions in Cal
Dive, International Grey Wolf, and Atwood Oceanics. In the materials sector, we
purchased shares of Arch Coal. In the industrials sector, we added Terex, a
manufacturer of equipment for construction and surface mining, and Actuant, a
manufacturer of recreational-vehicle components and other tools and supplies. We
added casino operator Penn National Gaming to the portfolio's consumer
discretionary holdings. In health care, we added managed care company Sierra
Health Services.
In addition to selling the Fund's primary detractors, we eliminated NetScreen
Technologies, AdvancePCS, Mid Atlantic Medical Services, and Documentum from the
Fund's portfolio. Each of these companies was acquired during the reporting
period. We also sold the Fund's holdings in DVD retailer NetFlix and in
semiconductor equipment manufacturers MKS Instruments, Brooks Automation, and
August Technology. Each of these sales reflected our belief that the issuer's
business prospects were deteriorating.
DID THE FUND CHANGE ITS INDUSTRY GROUP WEIGHTINGS DURING THE FISCAL YEAR?
We significantly reduced the Fund's weighting in the information technology
sector from 34.6% to 18.6%
of the portfolio's net assets. This key decision--particularly our reduction in
exposure to semiconductor stocks--had a positive effect on the Fund's 12-month
performance. The Fund also benefited by establishing a position in the materials
sector. We took the Fund's exposure to materials from 0% to 3.6% of net assets.
We also increased the Fund's weighting in health care from 16.5% to 20.0% of net
assets. We increased the Fund's weighting in the strongly performing energy
sector from 2.4% to 7.1% of net assets during the Fund's fiscal year.
Unfortunately, the Fund's underweighted position early in the reporting period
hurt relative performance.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
At the end of October 2004, the Fund held over-weighted positions relative to
the Russell 2000(R) Growth Index in the consumer discretionary and energy
sectors and underweighted positions in consumer staples, industrials, and
information technology. At the end of the reporting period, the Fund had no
holdings in the telecommunications services or utilities sectors.
WHAT DO YOU ANTICIPATE GOING FORWARD?
With the uncertainty of the presidential election now behind us, investors can
now focus their attention on market fundamentals. Although high energy prices
and terrorism concerns remain risk factors, we believe that the combination of
moderate economic growth and relatively low interest rates may help support
decent stock-price action going forward. We intend to continue to focus on
stocks of companies with strong growth prospects.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
8 MainStay Small Cap Growth Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (100.5%)+
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.5%)
Alliant Techsystems, Inc. (a) 21,400 $ 1,230,286
------------
AUTOMOBILES (1.1%)
Winnebago Industries, Inc. 84,200 2,643,880
------------
BIOTECHNOLOGY (4.1%)
Alkermes, Inc. (a) 111,600 1,380,492
Mannkind Corp. (a)(b) 120,000 2,102,400
Nabi Biopharmaceuticals (a) 105,500 1,461,175
Neurocrine Biosciences, Inc. (a) 31,500 1,466,325
OSI Pharmaceuticals, Inc. (a) 32,600 2,118,348
Telik, Inc. (a) 94,700 1,747,215
------------
10,275,955
------------
CAPITAL MARKETS (3.7%)
Affiliated Managers
Group, Inc. (a)(b) 63,621 3,552,597
Investors Financial
Services Corp. (b) 42,700 1,643,523
VJefferies Group, Inc. (b) 99,900 4,008,987
------------
9,205,107
------------
COMMERCIAL BANKS (4.2%)
UCBH Holdings, Inc. 87,900 3,787,611
Westcorp 78,800 3,145,696
Wintrust Financial Corp. 64,200 3,659,400
------------
10,592,707
------------
COMMERCIAL SERVICES & SUPPLIES (1.6%)
VCorporate Executive
Board Co. (The) 63,187 4,021,852
------------
COMMUNICATIONS EQUIPMENT (1.8%)
Avocent Corp. (a) 67,573 2,405,599
Ixia (a) 173,600 2,216,872
------------
4,622,471
------------
COMPUTERS & PERIPHERALS (0.8%)
Applied Films Corp. (a) 82,600 1,915,494
------------
CONSTRUCTION MATERIALS (0.6%)
Eagle Materials, Inc. 22,500 1,554,975
------------
ELECTRICAL EQUIPMENT (0.8%)
Roper Industries, Inc. 31,700 1,954,622
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (5.9%)
Amphenol Corp. Class A (a) 45,332 1,556,247
FARO Technologies, Inc. (a)(b) 85,900 2,134,615
</Table>
<Table>
<Caption>
SHARES VALUE
ELECTRONIC EQUIPMENT & INSTRUMENTS (CONTINUED)
FLIR Systems, Inc. (a) 40,100 $ 2,133,721
Global Imaging Systems, Inc. (a) 73,300 2,580,160
ScanSource, Inc. (a) 57,200 3,542,396
Trimble Navigation Ltd. (a) 97,500 2,797,275
------------
14,744,414
------------
ENERGY EQUIPMENT & SERVICES (6.5%)
Atwood Oceanics, Inc. (a) 38,600 1,850,870
Cal Dive International, Inc. (a) 85,800 3,038,178
Grey Wolf, Inc. (a) 264,600 1,370,628
Key Energy Services, Inc. (a) 209,200 2,405,800
Maverick Tube Corp. (a)(b) 97,600 2,573,712
Superior Energy Services, Inc. (a) 200,600 2,585,734
TETRA Technologies, Inc. (a) 82,600 2,473,044
------------
16,297,966
------------
HEALTH CARE EQUIPMENT & SUPPLIES (8.0%)
ArthroCare Corp. (a)(b) 70,400 2,169,024
VCooper Cos., Inc. (The) 57,700 4,059,195
Cytyc Corp. (a) 141,800 3,699,562
Dade Behring Holdings, Inc. (a) 43,900 2,471,131
Integra LifeSciences Holdings (a)(b) 74,600 2,393,168
Mine Safety Appliances Co. 37,400 1,410,728
Nektar Therapeutics (a) 110,600 1,593,746
Respironics, Inc. (a) 43,100 2,201,979
------------
19,998,533
------------
HEALTH CARE PROVIDERS & SERVICES (4.4%)
Coventry Health Care, Inc. (a) 57,250 2,341,525
First Health Group Corp. (a) 115,000 1,830,800
Molina Healthcare, Inc. (a) 66,500 2,448,530
Sierra Health Services, Inc. (a) 38,400 1,832,448
United Surgical Partners International, Inc. (a) 15,100 528,651
VCA Antech, Inc. (a) 87,800 1,968,476
------------
10,950,430
------------
HOTELS, RESTAURANTS & LEISURE (7.3%)
P.F. Chang's China
Bistro, Inc. (a)(b) 59,584 3,029,251
Panera Bread Co. Class A (a)(b) 77,000 2,689,610
Penn National Gaming, Inc. (a) 72,300 3,002,619
Scientific Games Corp. Class A (a) 126,400 2,677,152
VStation Casinos, Inc. 84,400 4,300,180
WMS Industries, Inc. (a)(b) 91,700 2,682,225
------------
18,381,037
------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May
be subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
HOUSEHOLD DURABLES (10.1%)
VHovnanian Enterprises, Inc. Class A (a) 106,100 $ 3,982,994
Jarden Corp. (a) 84,700 2,974,664
VM.D.C. Holdings, Inc. 52,242 4,009,574
Meritage Homes Corp. (a) 36,100 3,202,070
VRyland Group, Inc. (The) 40,900 3,901,451
VWCI Communities, Inc. (a) 185,300 4,373,080
Yankee Candle Co., Inc. (The) (a) 106,100 2,938,970
------------
25,382,803
------------
INTERNET & CATALOG RETAIL (1.1%)
Coldwater Creek, Inc. (a) 116,450 2,680,679
Shopping.com Ltd. (a) 4,100 110,577
------------
2,791,256
------------
INTERNET SOFTWARE & SERVICES (1.6%)
Akamai Technologies, Inc. (a) 49,700 688,345
Ask Jeeves, Inc. (a) 33,700 868,786
Digitas, Inc. (a) 273,200 2,458,800
------------
4,015,931
------------
IT SERVICES (1.0%)
StarTek, Inc. 88,600 2,449,790
------------
MACHINERY (7.4%)
Actuant Corp. Class A (a) 81,300 3,225,171
CLARCOR, Inc. 56,500 2,785,450
Cummins, Inc. 43,200 3,027,456
Terex Corp. (a) 92,500 3,515,000
Wabash National Corp. (a) 131,900 3,242,102
Wabtec Corp. 139,400 2,825,638
------------
18,620,817
------------
MARINE (1.1%)
Kirby Corp. (a) 67,100 2,818,200
------------
METALS & MINING (2.4%)
VArch Coal, Inc. (b) 122,600 3,986,952
Massey Energy Co. 73,400 1,976,662
------------
5,963,614
------------
OIL & GAS (1.6%)
InterOil Corp. (a) 65,000 1,592,500
OMI Corp. 136,900 2,457,355
------------
4,049,855
------------
</Table>
<Table>
<Caption>
SHARES VALUE
PERSONAL PRODUCTS (1.3%)
Chattem, Inc. (a) 97,400 $ 3,259,004
------------
PHARMACEUTICALS (3.0%)
Able Laboratories, Inc. (a) 60,600 1,313,505
AtheroGenics, Inc. (a)(b) 42,600 1,275,444
Medicis Pharmaceutical Corp. Class A (b) 61,100 2,484,937
MGI Pharma, Inc. (a) 86,600 2,309,622
------------
7,383,508
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (2.7%)
AMIS Holdings, Inc. (a) 38,300 582,160
Integrated Circuit Systems, Inc. (a) 24,100 543,455
Sigmatel, Inc. (a)(b) 109,400 3,227,300
Tessera Technologies, Inc. (a) 88,700 2,477,391
------------
6,830,306
------------
SOFTWARE (4.8%)
Altiris, Inc. (a) 63,700 1,732,321
Epicor Software Corp. (a) 163,200 2,508,384
FactSet Research Systems, Inc. 37,700 1,878,968
MICROS Systems, Inc. (a) 30,900 1,826,808
Open Solutions, Inc. (a) 82,400 2,320,796
Progress Software Corp. (a) 88,800 1,763,568
------------
12,030,845
------------
SPECIALTY RETAIL (5.7%)
A.C. Moore
Arts & Crafts, Inc. (a)(b) 77,300 1,991,635
Guess?, Inc. (a) 107,800 1,800,260
Guitar Center, Inc. (a) 80,500 3,592,715
Hibbett Sporting Goods, Inc. (a) 78,750 1,760,850
PETCO Animal Supplies, Inc. (a) 88,000 3,147,760
Sharper Image Corp. (a) 97,500 1,996,312
------------
14,289,532
------------
TEXTILES, APPAREL & LUXURY GOODS (1.3%)
Fossil, Inc. (a) 107,850 3,209,616
------------
THRIFTS & MORTGAGE FINANCE (1.3%)
Commercial Capital Bancorp, Inc. 148,966 3,341,307
------------
</Table>
10 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS (2.8%)
Hughes Supply, Inc. 108,200 $ 3,073,962
VMSC Industrial Direct Co., Inc. Class A 113,700 3,881,718
------------
6,955,680
------------
Total Common Stocks (Cost $200,280,295) 251,781,793
------------
SHORT-TERM INVESTMENTS (14.4%)
- -----------------------------------------------------------------------------
INVESTMENT COMPANY (0.3%)
AIM Institutional Funds Group (c) 698,121 698,121
------------
Total Investment Company (Cost $698,121) 698,121
------------
<Caption>
PRINCIPAL
AMOUNT
MASTER NOTE (2.2%)
Banc of America Securities LLC
1.9549%, due 11/1/04 (c) $5,500,000 5,500,000
------------
Total Master Note (Cost $5,500,000) 5,500,000
------------
REPURCHASE AGREEMENTS (11.9%)
Credit Suisse First Boston LLC
1.9249%, dated 10/29/04 due 11/1/04
Proceeds at Maturity
$7,001,123 (c)
(Collateralized by Various Bonds with a
Principal Amount of $7,019,580 and a Market
Value of $7,140,254) 7,000,000 7,000,000
Dresdner Kleinwort Wasserstein Securities, LLC
1.9449%, dated 10/29/04 due 11/1/04
Proceeds at Maturity
$4,000,648 (c)
(Collateralized by Various Bonds with a
Principal Amount of $4,152,267 and a Market
Value of $4,200,214) 4,000,000 4,000,000
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
REPURCHASE AGREEMENTS (CONTINUED)
Lehman Brothers, Inc.
1.9249%, dated 10/29/04 due 11/1/04
Proceeds at Maturity
$3,793,608 (c)
(Collateralized by Various Bonds with a
Principal Amount of $7,557,461 and a Market
Value of $3,912,148) $3,793,000 $ 3,793,000
Merrill Lynch Pierce
Fenner & Smith, Inc.
1.9549%, dated 10/29/04 due 11/1/04
Proceeds at Maturity
$9,601,564 (c)
(Collateralized by Various Bonds with a
Principal Amount of $9,493,489 and a Market
Value of $10,080,332) 9,600,000 9,600,000
Morgan Stanley & Co., Inc.
1.9249%, dated 10/29/04 due 11/1/04
Proceeds at Maturity
$5,550,890 (c)
(Collateralized by Various Bonds with a
Principal Amount of $8,468,083 and a Market
Value of $5,837,854) 5,550,000 5,550,000
------------
Total Repurchase Agreements (Cost $29,943,000) 29,943,000
------------
Total Short-Term Investments (Cost $36,141,121) 36,141,121
------------
Total Investments (Cost $236,421,416) (d) 114.9% 287,922,914(e)
Liabilities in Excess of
Cash and Other Assets (14.9) (37,432,684)
---------- ------------
Net Assets 100.0% $250,490,230
========== ============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
(a) Non-income producing security.
(b) Represents security, or a portion thereof, which is out
on loan.
(c) Represents security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(d) The cost for federal income tax purposes is
$237,023,821.
(e) At October 31, 2004 net unrealized appreciation was
$50,899,093, based on cost for federal income tax
purposes. This consisted of aggregate gross unrealized
appreciation for all investments on which there was an
excess of market value over cost of $55,443,211 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $4,544,118.
</Table>
12 MainStay Small Cap Growth Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $236,421,416)--including
$34,994,792 market value of securities
loaned $287,922,914
Cash 44,365
Receivables:
Fund shares sold 110,745
Investment securities sold 70,841
Dividends and interest 28,115
Other assets 20,547
------------
Total assets 288,197,527
------------
LIABILITIES:
Securities lending collateral 36,141,121
Payables:
Fund shares redeemed 810,986
Transfer agent 243,230
Manager 183,972
NYLIFE Distributors 166,457
Investment securities purchased 56,000
Custodian 5,415
Trustees 3,587
Accrued expenses 96,529
------------
Total liabilities 37,707,297
------------
Net assets $250,490,230
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 51,819
Class B 133,012
Class C 5,704
Additional paid-in capital 378,573,612
Accumulated net realized loss on investments (179,775,415)
Net unrealized appreciation on investments 51,501,498
------------
Net assets $250,490,230
============
CLASS A
Net assets applicable to outstanding shares $ 70,615,701
============
Shares of beneficial interest outstanding 5,181,849
============
Net asset value per share outstanding $ 13.63
Maximum sales charge (5.50% of offering price) 0.79
------------
Maximum offering price per share outstanding $ 14.42
============
CLASS B
Net assets applicable to outstanding shares $172,478,553
============
Shares of beneficial interest outstanding 13,301,177
============
Net asset value and offering price per share
outstanding $ 12.97
============
CLASS C
Net assets applicable to outstanding shares $ 7,395,976
============
Shares of beneficial interest outstanding 570,369
============
Net asset value and offering price per share
outstanding $ 12.97
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 559,869
Income from securities loaned -- net 129,060
Interest 42,359
------------
Total income 731,288
------------
EXPENSES:
Manager 2,615,279
Transfer agent 1,491,345
Distribution -- Class B 1,354,513
Distribution -- Class C 58,912
Service -- Class A 182,678
Service -- Class B 451,505
Service -- Class C 19,637
Shareholder communication 111,203
Professional 56,006
Recordkeeping 52,820
Registration 38,855
Custodian 29,317
Trustees 20,746
Miscellaneous 27,755
------------
Total expenses before waiver 6,510,571
Expense waiver from Manager (91,982)
------------
Net expenses 6,418,589
------------
Net investment loss (5,687,301)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 23,113,053
Net change in unrealized appreciation on
investments (15,879,751)
------------
Net realized and unrealized gain on
investments 7,233,302
------------
Net increase in net assets resulting from
operations $ 1,546,001
============
</Table>
14 MainStay Small Cap Growth Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment loss $ (5,687,301) $ (4,211,729) $ (5,396,905)
Net realized gain (loss)
on investments 23,113,053 8,511,432 (49,615,212)
Net change in unrealized
appreciation on
investments (15,879,751) 60,943,960 (24,193,592)
--------------------------------------------
Net increase (decrease)
in net assets
resulting from
operations 1,546,001 65,243,663 (79,205,709)
--------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 20,245,691 28,703,693 64,317,186
Class B 24,389,759 23,984,882 30,046,744
Class C 1,934,333 1,703,227 3,099,852
--------------------------------------------
46,569,783 54,391,802 97,463,782
Cost of shares redeemed:
Class A (21,999,005) (19,106,983) (62,368,859)
Class B (31,265,949) (22,189,821) (37,581,624)
Class C (2,275,389) (1,113,608) (2,302,617)
--------------------------------------------
(55,540,343) (42,410,412) (102,253,100)
Increase (decrease)
in net assets
derived from capital
share transactions (8,970,560) 11,981,390 (4,789,318)
--------------------------------------------
Net increase
(decrease) in net
assets (7,424,559) 77,225,053 (83,995,027)
NET ASSETS:
Beginning of period 257,914,789 180,689,736 264,684,763
--------------------------------------------
End of period $250,490,230 $ 257,914,789 $ 180,689,736
============================================
* 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. www.mainstayfunds.com
15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 13.46 $ 9.88 $ 13.90 $ 17.11 $ 21.82 $ 10.51
------- ------- ------- ------- ------- -------
Net investment loss (a) (0.22) (0.18) (0.22) (0.22) (0.26) (0.20)
Net realized and unrealized gain (loss) on
investments 0.39 3.76 (3.80) (2.99) (4.17) 11.51
------- ------- ------- ------- ------- -------
Total from investment operations 0.17 3.58 (4.02) (3.21) (4.43) 11.31
------- ------- ------- ------- ------- -------
Less distributions:
From net realized gain on investments -- -- -- -- (0.28) --
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 13.63 $ 13.46 $ 9.88 $ 13.90 $ 17.11 $ 21.82
======= ======= ======= ======= ======= =======
Total investment return (b) 1.26% 36.23%(c) (28.92%) (18.76%) (20.24%) 107.61%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss (1.63%) (1.93%)+ (1.86%) (1.56%) (1.20%) (1.48%)
Net expenses 1.91% 2.12%+ 2.07% 1.90% 1.70% 1.91%
Expenses (before waiver) 1.95% 2.12% 2.07% 1.90% 1.70% 1.91%
Portfolio turnover rate 75% 69% 132% 111% 122% 86%
Net assets at end of period (in 000's) $70,616 $71,451 $44,037 $61,197 $99,415 $64,470
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 12.90 $ 9.54 $13.51 $16.75 $21.55 $ 10.46
-------- ------ ------ ------ ------ -------
Net investment loss (a) (0.31) (0.24) (0.30) (0.32) (0.42) (0.29)
Net realized and unrealized gain (loss) on
investments 0.38 3.60 (3.67) (2.92) (4.10) 11.38
-------- ------ ------ ------ ------ -------
Total from investment operations 0.07 3.36 (3.97) (3.24) (4.52) 11.09
-------- ------ ------ ------ ------ -------
Less distributions:
From net realized gain on investments -- -- -- -- (0.28) --
-------- ------ ------ ------ ------ -------
Net asset value at end of period $ 12.97 $12.90 $ 9.54 $13.51 $16.75 $ 21.55
======== ====== ====== ====== ====== =======
Total investment return (b) 0.54% 35.22%(c) (29.39%) (19.34%) (20.91%) 106.02%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss (2.38%) (2.68%)+ (2.61%) (2.31%) (1.95%) (2.23%)
Net expenses 2.66% 2.87%+ 2.82% 2.65% 2.45% 2.66%
Expenses (before waiver) 2.70% 2.87% 2.82% 2.65% 2.45% 2.66%
Portfolio turnover rate 75% 69% 132% 111% 122% 86%
Net assets at end of period (in 000's) $ 7,396 $7,734 $5,248 $6,628 $9,843 $ 2,032
</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.
(c) Total return is not annualized.
</Table>
16 MainStay Small Cap Growth Fund 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>
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH ----------------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 12.90 $ 9.54 $ 13.51 $ 16.75 $ 21.55 $ 10.46
-------- -------- -------- -------- -------- --------
(0.31) (0.24) (0.30) (0.32) (0.42) (0.29)
0.38 3.60 (3.67) (2.92) (4.10) 11.38
-------- -------- -------- -------- -------- --------
0.07 3.36 (3.97) (3.24) (4.52) 11.09
-------- -------- -------- -------- -------- --------
-- -- -- -- (0.28) --
-------- -------- -------- -------- -------- --------
$ 12.97 $ 12.90 $ 9.54 $ 13.51 $ 16.75 $ 21.55
======== ======== ======== ======== ======== ========
0.54% 35.22%(c) (29.39%) (19.34%) (20.91%) 106.02%
(2.38%) (2.68%)+ (2.61%) (2.31%) (1.95%) (2.23%)
2.66% 2.87%+ 2.82% 2.65% 2.45% 2.66%
2.70% 2.87% 2.82% 2.65% 2.45% 2.66%
75% 69% 132% 111% 122% 86%
$172,478 $178,730 $131,404 $196,859 $260,999 $130,487
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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 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. Reasons for
which securities may be valued in this manner include, but are not limited to,
trading for a security has been halted or suspended, a security has been
de-listed from a national exchange, or trading on a security's primary market is
temporarily closed at a time when under normal conditions it would be open. The
Fund did not hold securities at October 31, 2004, that were valued in such
manner.
(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
18 MainStay Small Cap Growth Fund
additional paid-in-capital arising from permanent differences; net assets at
October 31, 2004, are not affected.
<Table>
<Caption>
ACCUMULATED NET ADDITIONAL
INVESTMENT LOSS PAID-IN CAPITAL
$5,687,301 $(5,687,301)
</Table>
The reclassification for the Fund is due to the fact that net operating losses
cannot be carried forward for federal income tax purposes.
(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 up to $1.0 billion and 0.95% on assets in excess of
$1.0 billion. Effective as of August 1, 2004, NYLIM has voluntarily agreed to
waive its management fee by 0.15% of the Fund's average net assets. In addition,
effective December 1, 2004, NYLIM 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 year ended October
31, 2004, the Manager earned from the Fund $2,615,279 and waived $91,982 of its
fee.
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. 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 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 $30,966 for the year ended
October 31, 2004. 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 $2,899, $229,242 and $1,011, respectively, for the year ended October
31, 2004.
www.mainstayfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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 for the year ended October 31, 2004
amounted to $1,491,345.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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.
(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 $7,862 for the year ended October 31,
2004.
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 $52,820 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated loss on a tax basis were
as follows:
<Table>
<Caption>
TOTAL
ACCUMULATED CAPITAL UNREALIZED ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
$(179,173,011) $50,899,093 $(128,273,918)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is due
to wash sale deferrals.
At October 31, 2004, for federal income tax purposes, capital loss carryforwards
of $179,173,011 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 $22,442
2009 113,554
2010 40,252
2011 2,925
---------------------------------------------
$179,173
---------------------------------------------
</Table>
The Fund utilized $21,868,077 of capital loss carryforward during the year ended
October 31, 2004.
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $193,175 and $199,282, respectively.
NOTE 7 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2004, the Fund had securities on loan with an aggregate market
value of $34,994,792. The Fund received $36,141,121 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.
Pursuant to Rule 2a-7, securities purchased with collateral received are valued
at amortized cost.
NOTE 8 -- 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
20 MainStay Small Cap Growth Fund
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 year ended October 31, 2004.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 1,470 1,849 146
- -----------------------------------------------------------
Shares redeemed (1,596) (2,400) (175)
- -----------------------------------------------------------
Net increase (126) (551) (29)
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003*
CLASS A CLASS B CLASS C
Shares sold 2,592 2,236 156
- -----------------------------------------------------------
Shares redeemed (1,740) (2,165) (107)
- -----------------------------------------------------------
Net increase 852 71 49
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 5,195 2,610 266
- -----------------------------------------------------------
Shares redeemed (5,140) (3,396) (206)
- -----------------------------------------------------------
Net increase (decrease) 55 (786) 60
- -----------------------------------------------------------
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 10 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 11 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
www.mainstayfunds.com 21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Small Cap Growth Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2004, and the related statement of operations, statement of changes in net
assets and the financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the period ended October 31, 2003 and the year ended December
31, 2002, and the financial highlights for the periods presented through October
31, 2003, were audited by other auditors, whose report dated December 18, 2003
expressed an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Small Cap Growth Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
22 MainStay Small Cap Growth Fund
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 23
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
24 MainStay Small Cap Growth Fund
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 25
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
26 MainStay Small Cap Growth Fund
(NEW YORK LIFE LOGO)
- ------------------------------------------------
/Not FDIC insured. / No bank guarantee. / May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06365 (RECYCLE LOGO) MSSG11-12/04
24
(MAINSTAY LOGO)
MAINSTAY
SMALL CAP VALUE FUND
The MainStay Funds
Annual Report
October 31, 2004
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quar-
ter of 2004, and according to preliminary estimates from the Bureau of Economic
Analysis, gross domestic product grew at a seasonally adjusted annual rate of
3.9% in the third quarter of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 2
- ----------------------------------------------------
Investment and Performance Comparison 3
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 6
- ----------------------------------------------------
Portfolio of Investments 8
- ----------------------------------------------------
Financial Statements 11
- ----------------------------------------------------
Notes to Financial Statements 16
- ----------------------------------------------------
Report of Independent Registered Public
Accounting Firm 20
Special Meeting of Shareholders 21
- ----------------------------------------------------
Trustees and Officers 22
- ----------------------------------------------------
Proxy Voting Policies and Procedures 24
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 24
- ----------------------------------------------------
Federal Income Tax Information 25
- ----------------------------------------------------
MainStay Funds 26
</Table>
2 MainStay Small Cap Value Fund
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 8.17% 14.88% 8.95%
Excluding sales charges 14.46 16.18 9.91
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP VALUE FUND RUSSELL 2000 VALUE INDEX
----------------------------- ------------------------
6/1/98 9450 10000
7758 8408
8193 8469
11214 9934
12264 10803
11622 10530
15154 14772
10/31/04 17346 17430
</Table>
<Table>
-- MainStay Small Cap Value Fund -- Russell 2000 Value Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 8.59% 15.07% 9.10%
Excluding sales charges 13.59 15.30 9.10
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP VALUE FUND RUSSELL 2000 VALUE INDEX
----------------------------- ------------------------
6/1/98 10000 10000
8190 8408
8590 8469
11656 9934
12648 10803
11911 10530
15409 14772
10/31/04 17503 17430
</Table>
<Table>
-- MainStay Small Cap Value Fund -- Russell 2000 Value Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 12.67% 15.30% 9.10%
Excluding sales charges 13.67 15.30 9.10
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $) (with sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP VALUE FUND RUSSELL 2000 VALUE INDEX
----------------------------- ------------------------
6/1/98 10000 10000
8190 8408
8590 8469
11656 9934
12648 10803
11911 10530
15398 14772
10/31/04 17503 17430
</Table>
<Table>
-- MainStay Small Cap Value Fund -- Russell 2000 Value Index
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
Russell 2000(R) Value Index(1) 17.99% 15.53% 9.05%
Average Lipper small-cap core
fund(2) 12.93 10.77 7.09
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge, are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. The fee waivers and/or expense
limitations are voluntary and may be discontinued at any time. From inception
(6/1/98) through 8/31/98, performance for Class C shares (first offered 9/1/98)
includes the historical performance of Class B shares adjusted to reflect the
applicable CDSC for Class C shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 3
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. The Russell 2000(R) Value Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. 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.
4 MainStay Small Cap Value Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY SMALL CAP VALUE FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,035.60 $ 8.70 $1,016.50 $ 8.62
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,031.85 $12.51 $1,012.75 $12.40
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,032.65 $12.52 $1,012.75 $12.40
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 88.5%
Short-Term Investments 11.1
Cash and Other Assets, Less Liabilities 0.4
</Table>
See Portfolio of Investments on page 8 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. iShares Russell 2000 Value Index Fund
2. Too, Inc.
3. SafeNet, Inc.
4. Pride International, Inc.
5. Hooper Holmes, Inc.
6. Pharmaceutical Product Development, Inc.
7. Offshore Logistics, Inc.
8. Scottish Re Group Ltd.
9. UGI Corp.
10. Post Properties, Inc.
</Table>
www.mainstayfunds.com 5
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Caroline Evascu of MacKay Shields LLC
CAN YOU EXPLAIN HOW THE FUND'S PORTFOLIO MANAGEMENT CHANGED DURING THE REPORTING
PERIOD?
At a special meeting held on June 16, 2004, the shareholders of MainStay Small
Cap Value Fund approved a new subadvisory agreement between the Fund's
investment manager, New York Life Investment Management LLC, and MacKay Shields
LLC to appoint MacKay Shields as the new subadvisor to the Fund effective June
30, 2004, replacing Dalton, Greiner, Hartman, Maher & Co. Another change during
the reporting period was that as of July 6, 2004, the Fund was no longer closed
to new investors.
The Fund's principal investment strategy did not change. The Fund continues
normally to invest at least 80% of its assets in companies with market
capitalizations at the time of investment comparable to companies in the Russell
2000(R) Value Index.(1) Under its new management, however, the Fund's investment
process did change.
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
At MacKay Shields, we use an investment-selection process that focuses on stocks
that meet three criteria: inexpensive valuations, free cash flow, and multiple
appreciation drivers, or catalysts. We look for stocks that are inexpensive
relative to the Russell benchmark, their peer group, or historical valuations.
We take a long-term approach to investing and rely primarily on our proprietary
fundamental research. The portfolio is constructed using a bottom-up stock-
selection process. Stocks will be sold either when they meet our price objective
or when we believe there is a negative change in the fundamental performance of
the issuer.
Since this has been the Fund's investment approach since June 30, 2004, the
remainder of our discussion will address the four-month period from June 30
through October 31, 2004.
HOW DID THE RUSSELL 2000(R) VALUE INDEX PERFORM FROM JUNE 30 THROUGH OCTOBER 31,
2004?
The Russell 2000(R) Value Index returned 1.71% for the period from June 30
through October 31, 2004. Only three sectors posted meaningful positive
returns--energy, financials, and materials. Financials remained the largest
sector weighting in the Index.
WHAT FACTORS MOST SIGNIFICANTLY AFFECTED FUND PERFORMANCE DURING THE PERIOD?
The Fund's overweighted position and strong security selection in the energy
sector boosted the Fund's results relative to the benchmark. Our stock selection
in information technology also helped, although the Fund's overweighted exposure
to this under-performing sector detracted. An underweighted position in the
strongly performing financials sector and security selection in the industrials
and consumer discretionary sectors also hurt the Fund's relative performance.
WHAT WERE SOME OF THE FUND'S STRONG PERFORMERS DURING THE REPORTING PERIOD?
Too, Inc., a lifestyle apparel and personal-care products retailer, posted
record third-quarter sales. The record sales--in combination with the
announcement of a share repurchase program to enhance shareholder value--made
Too the best-performing stock in the Fund's portfolio during the reporting
period. Pharmaceutical Product Development provides global
research-and-development services on a contract or consulting basis for the
pharmaceutical and biotechnology industries. The company's shares recorded a
double-digit percentage increase when third-quarter earnings beat Wall Street
expectations. Offshore Logistics provides helicopter transportation services to
the offshore oil and gas industry. The company's shares appreciated on strong
second-quarter results and anticipation of increased exploration and development
activity, which would directly benefit the company's revenue stream.
WHICH STOCKS UNDERPERFORMED?
In industrials, Integrated Electrical Services, Quality Distribution, and Mesa
Airlines provided disappointing performance, despite strong sector fundamentals.
Integrated Electrical Services provides data communication services, which
include the installation of wiring for computer networks and fiber optic
telecommunications systems. Quality Distribution transports a broad range of
chemical products and also provides transportation management, transloading,
tank cleaning, dry-bulk handling, and other logistical services. The company's
weakness was primarily due to missed second-quarter 2004 earnings-per-share
projections. Mesa Airlines underperformed amid general weakness in the airline
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.
1. See footnote on page 4 for information on the Russell 2000(R) Value Index.
6 MainStay Small Cap Value Fund
industry. When U.S. Airways reentered Chapter 11, many investors feared that
others might follow and that Delta Airlines might be among them.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
When we took over management of the Fund's portfolio, we elected to sell several
securities that did not meet our investment philosophy. The sales took place
during the Fund's transition period from the end of June through the end of
October. As a result of these sales and the Fund's subsequent purchases, the
Fund's turnover rate exceeded 100%.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2004, the Fund held overweighted positions in the information
technology, health care, and consumer discretionary sectors, based on bottom-up
security selection driven by attractive valuations. The Fund held underweighted
positions in financials, utilities, and materials. These sectors have largely
outperformed over the last several years, and most stocks in these areas were
trading at the high end of their historical ranges.
WHAT DO YOU ANTICIPATE GOING FORWARD?
We are optimistic about our efforts to move the Fund toward attractive value
opportunities that, in our opinion, should outperform over the long term. We
will continue to emphasize stocks with better-than-market visibility based on
earnings and cash-flow generation. We remain confident in our disciplined
classic value strategy, which seeks to invest in fundamentally strong companies
selling at unusually attractive valuations.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
www.mainstayfunds.com 7
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (88.5%)+
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.6%)
Herley Industries, Inc. (a) 42,800 $ 751,996
------------
AIRLINES (0.8%)
SkyWest, Inc. 58,200 994,056
------------
AUTO COMPONENTS (1.2%)
Bandag, Inc. 21,600 993,600
Bandag, Inc., Class A 13,500 568,485
------------
1,562,085
------------
BUILDING PRODUCTS (0.9%)
Apogee Enterprises, Inc. 96,135 1,231,489
------------
CAPITAL MARKETS (5.0%)
ViShares Russell 2000 Value Index Fund (c) 27,300 4,755,660
Waddell & Reed Financial, Inc. Class A 87,000 1,827,870
------------
6,583,530
------------
CHEMICALS (3.9%)
Cambrex Corp. 79,601 1,780,674
Crompton Corp. 53,000 492,900
H.B. Fuller Co. 63,300 1,702,770
Omnova Solutions, Inc. (a) 224,400 1,175,856
------------
5,152,200
------------
COMMERCIAL BANKS (5.4%)
Chemical Financial Corp. 36,428 1,359,857
Chittenden Corp. 42,668 1,208,358
Cullen/Frost Bankers, Inc. 37,200 1,822,800
Hudson United Bancorp 43,100 1,715,380
S&T Bancorp, Inc. 29,842 1,075,506
------------
7,181,901
------------
COMMERCIAL SERVICES & SUPPLIES (2.1%)
Banta Corp. 45,000 1,830,600
Learning Tree International, Inc. (a) 67,355 928,152
------------
2,758,752
------------
COMMUNICATIONS EQUIPMENT (2.9%)
Belden CDT, Inc. 70,200 1,560,546
VSafeNet, Inc. (a) 74,100 2,269,683
------------
3,830,229
------------
COMPUTERS & PERIPHERALS (0.9%)
Applied Films Corp. (a) 50,800 1,178,052
------------
CONSTRUCTION & ENGINEERING (1.4%)
Insituform Technologies, Inc. Class A (a) 91,921 1,821,874
------------
</Table>
<Table>
<Caption>
SHARES VALUE
DIVERSIFIED TELECOMMUNICATION SERVICES (0.9%)
Pteck Holdings, Inc. (a) 124,000 $ 1,235,040
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (3.2%)
Benchmark Electronics, Inc. (a) 45,700 1,552,429
Paxar Corp. (a) 36,400 802,620
Technitrol, Inc. (a) 113,900 1,858,848
------------
4,213,897
------------
ENERGY EQUIPMENT & SERVICES (6.5%)
Global Industries, Ltd. (a) 221,834 1,488,506
Hanover Compressor Co. (a) 113,814 1,481,858
VOffshore Logistics, Inc. (a) 54,800 1,981,568
Parker Drilling Co. (a) 397,000 1,548,300
VPride International, Inc. (a) 116,600 2,154,768
------------
8,655,000
------------
FOOD PRODUCTS (0.9%)
Sensient Technologies Corp. 54,925 1,192,971
------------
GAS UTILITIES (1.5%)
VUGI Corp. 51,000 1,970,130
------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.9%)
DJ Orthopedics, Inc. (a) 41,200 702,460
Viasys Healthcare, Inc. (a) 108,000 1,845,720
------------
2,548,180
------------
HEALTH CARE PROVIDERS & SERVICES (5.2%)
VHooper Holmes, Inc. 391,475 2,055,244
VPharmaceutical Product Development, Inc. (a) 47,200 1,993,256
Priority Healthcare Corp. Class B (a) 104,400 1,885,464
Renal Care Group, Inc. (a) 31,400 990,984
------------
6,924,948
------------
HOTELS, RESTAURANTS & LEISURE (1.4%)
La Quinta Corp. Paired-share (a)(d) 232,200 1,869,210
------------
HOUSEHOLD DURABLES (0.5%)
La-Z-Boy, Inc. 45,348 598,140
------------
INSURANCE (2.5%)
Reinsurance Group of America, Inc. 31,500 1,357,020
VScottish Re Group Ltd. 88,000 1,980,000
------------
3,337,020
------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
* Among the Fund's 10 largest holdings,excluding short-term investments. May
be subject to change daily.
</Table>
8 MainStay Small Cap Value Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCK (CONTINUED)
- -----------------------------------------------------------------------------
IT SERVICES (3.4%)
eFunds Corp. (a) 98,063 $ 1,930,861
Forrester Research, Inc. (a) 53,838 830,451
Keane, Inc. (a) 108,372 1,713,361
------------
4,474,673
------------
LEISURE EQUIPMENT & PRODUCTS (1.9%)
Arctic Cat, Inc. 59,400 1,491,534
Callaway Golf Co. 102,674 1,070,890
------------
2,562,424
------------
MACHINERY (3.2%)
Lydall, Inc. (a) 98,500 926,885
Thomas Industries, Inc. 39,700 1,341,860
Wabtec Corp. 95,600 1,937,812
------------
4,206,557
------------
MEDIA (2.1%)
Mediacom Communications Corp. Class A (a) 132,600 868,530
ProQuest Co. (a) 73,124 1,905,611
------------
2,774,141
------------
METALS & MINING (1.9%)
Allegheny Technologies, Inc. 62,000 1,042,220
GrafTech International Ltd. (a) 152,743 1,414,400
------------
2,456,620
------------
MULTI-UTILITIES & UNREGULATED POWER (0.3%)
Sierra Pacific Resources (a) 42,700 409,920
------------
OIL & GAS (1.9%)
Cimarex Energy Co. (a) 33,425 1,199,289
Houston Exploration Co. (The) (a) 23,018 1,348,855
------------
2,548,144
------------
PAPER & FOREST PRODUCTS (1.5%)
Wausau-Mosinee Paper Corp. 123,267 1,927,896
------------
PERSONAL PRODUCTS (0.5%)
Playtex Products, Inc. (a) 108,421 679,800
------------
REAL ESTATE (4.5%)
CRT Properties, Inc. 29,800 660,368
VPost Properties, Inc. 61,300 1,967,117
Sun Communities, Inc. 40,700 1,582,009
Trammell Crow Co. (a) 116,100 1,793,745
------------
6,003,239
------------
</Table>
<Table>
<Caption>
SHARES VALUE
ROAD & RAIL (0.3%)
Quality Distribution, Inc. (a) 63,300 $ 341,820
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (1.7%)
Actel Corp. (a) 81,321 1,233,640
MKS Instruments, Inc. (a) 61,100 966,602
------------
2,200,242
------------
SOFTWARE (3.7%)
Aspen Technology, Inc. (a) 49,600 298,096
FactSet Research Systems, Inc. 33,800 1,684,592
Mentor Graphics Corp. (a) 106,200 1,236,168
THQ, Inc. (a) 87,900 1,661,310
------------
4,880,166
------------
SPECIALTY RETAIL (7.1%)
Christopher & Banks Corp. 116,963 1,900,649
CSK Auto Corp. (a) 45,373 664,261
Hancock Fabrics, Inc. 116,062 1,191,957
Jo-Ann Stores, Inc. (a) 6,800 167,688
Kirkland's, Inc. (a) 75,700 659,725
Sports Authority, Inc. (The) (a) 30,000 725,400
Steiner Leisure Ltd. (a) 75,400 1,839,006
VToo, Inc. (a) 104,413 2,299,174
------------
9,447,860
------------
TEXTILES, APPAREL & LUXURY GOODS (1.5%)
OshKosh B' Gosh, Inc., Class A 65,159 1,183,287
Russell Corp. 46,028 795,824
------------
1,979,111
------------
THRIFTS & MORTGAGE FINANCE (3.4%)
Brookline Bancorp, Inc. 83,400 1,291,866
First Niagara Financial Group, Inc. 50,500 703,970
NetBank, Inc. 181,031 1,679,968
Provident Financial Services, Inc. 43,700 786,600
------------
4,462,404
------------
Total Common Stocks (Cost $105,743,943) 116,945,717
------------
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
* Among the Fund's 10 largest holdings,excluding short-term investments. May
be subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (11.1%)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER (11.1%)
ING Funding LLC
1.783%, due 11/12/04 $1,785,000 $ 1,784,029
International Business Machines Corp.
1.701%, due 11/1/04 2,920,000 2,920,000
Lilly (Eli) & Co.
1.721%, due 11/3/04 (b) 1,995,000 1,994,809
Rabobank USA Financial Corp. 1.751%, due 11/3/04 4,390,000 4,389,573
UBS Finance Delaware LLC
1.84%, due 11/1/04 3,540,000 3,540,000
------------
Total Short-Term Investments (Cost $14,628,411) 14,628,411
------------
Total Investments
(Cost $120,372,354) (e) 99.6% 131,574,128(f)
Cash and Other Assets,
Less Liabilities 0.4 475,358
---------- ------------
Net Assets 100.0% $132,049,486
========== ============
</Table>
<Table>
(a) Non-income producing security.
(b) May be sold to institutional investors only.
(c) Exchange Traded Fund-represents a basket of securities
that are traded on a exchange.
(d) Paired-share security represents equal ownership of La
Quinta Properties, Inc. Class B and La Quinta Corp.
(e) The cost for federal income tax purposes is
$120,756,814.
(f) At October 31, 2004 net unrealized appreciation was
$10,817,314, based on cost for federal income tax pur-
posed. This consisted of aggregate gross unrealized
appreciation for all investments on which there was an
excess of market value over cost of $15,020,014 and
aggregate unrealized depreciation for all investments on
which there was an excess of cost over market value of
$4,202,700.
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
* Among the Fund's 10 largest holdings,excluding short-term
investments. May be subject to change daily.
</Table>
10 MainStay Small Cap Value Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $120,372,354) $131,574,128
Cash 4,733
Receivables:
Investment securities sold 1,345,370
Fund shares sold 691,227
Dividends and interest 69,500
Other assets 18,023
------------
Total assets 133,702,981
------------
LIABILITIES:
Payables:
Investment securities purchased 870,542
Fund shares redeemed 496,257
Transfer agent 80,643
NYLIFE Distributors 75,654
Manager 69,606
Custodian 5,128
Accrued expenses 55,665
------------
Total liabilities 1,653,495
------------
Net assets $132,049,486
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 35,697
Class B 44,847
Class C 6,795
Additional paid-in capital 96,501,157
Accumulated undistributed net realized gain on
investments 24,259,216
Net unrealized appreciation on investments 11,201,774
------------
Net assets $132,049,486
============
CLASS A
Net assets applicable to outstanding shares $ 55,640,122
============
Shares of beneficial interest outstanding 3,569,675
============
Net asset value per share outstanding $ 15.59
Maximum sales charge (5.50% of offering price) 0.90
------------
Maximum offering price per share outstanding $ 16.49
============
CLASS B
Net assets applicable to outstanding shares $ 66,355,167
============
Shares of beneficial interest outstanding 4,484,659
============
Net asset value and offering price per share
outstanding $ 14.80
============
CLASS C
Net assets applicable to outstanding shares $ 10,054,197
============
Shares of beneficial interest outstanding 679,530
============
Net asset value and offering price per share
outstanding $ 14.80
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 1,299,728
Interest 61,979
-----------
Total income 1,361,707
-----------
EXPENSES:
Manager 1,200,499
Transfer agent 501,279
Distribution -- Class B 486,794
Distribution -- Class C 72,343
Service -- Class A 130,069
Service -- Class B 162,265
Service -- Class C 24,114
Shareholder communication 63,017
Professional 40,914
Recordkeeping 39,329
Registration 34,440
Custodian 27,860
Trustees 11,400
Miscellaneous 21,897
-----------
Total expenses before waiver 2,816,220
Expense waiver from manager (108,819)
-----------
Net expenses 2,707,401
-----------
Net investment loss (1,345,694)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 25,852,119
Net change in unrealized appreciation on
investments (8,311,430)
-----------
Net realized and unrealized gain on investments 17,540,689
-----------
Net increase in net assets resulting from
operations $16,194,995
===========
</Table>
12 MainStay Small Cap Value Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment loss $ (1,345,694) $ (1,020,195) $ (1,430,443)
Net realized gain on
investments 25,852,119 3,713,374 335,025
Net change in unrealized
appreciation
(depreciation) on
investments (8,311,430) 20,809,133 (15,273,957)
------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 16,194,995 23,502,312 (16,369,375)
------------------------------------------
Distributions to shareholders:
From net realized gain on investments:
Class A (1,583,448) -- (556,902)
Class B (2,228,626) -- (883,671)
Class C (345,457) -- (157,204)
------------------------------------------
Total distributions to
shareholders (4,157,531) -- (1,597,777)
------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 20,813,873 10,118,600 19,265,086
Class B 7,854,307 4,191,414 10,805,256
Class C 1,374,069 224,629 1,377,359
Net asset value of shares issued to
shareholders in reinvestment of
distributions:
Class A 1,183,620 -- 416,771
Class B 2,052,279 -- 817,759
Class C 227,162 -- 101,963
------------------------------------------
33,505,310 14,534,643 32,784,194
Cost of shares redeemed:
Class A (16,089,539) (9,899,408) (22,188,432)
Class B (9,833,069) (10,045,343) (15,066,025)
Class C (1,951,429) (2,130,757) (2,531,120)
------------------------------------------
(27,874,037) (22,075,508) (39,785,577)
Increase (decrease) in
net assets derived
from capital share
transactions 5,631,273 (7,540,865) (7,001,383)
------------------------------------------
Net increase
(decrease) in net
assets 17,668,737 15,961,447 (24,968,535)
</Table>
<Table>
<Caption>
2004 2003* 2002
NET ASSETS:
Beginning of period $114,380,749 $ 98,419,302 $123,387,837
------------------------------------------
End of period $132,049,486 $114,380,749 $ 98,419,302
==========================================
</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. www.mainstayfunds.com
13
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 14.09 $ 11.10 $ 12.84 $ 11.30 $ 9.56 $ 9.03
------- ------- ------- ------- ------- -------
Net investment income (loss) (a) (0.09) (0.08) (0.09) (0.05) 0.00(b) (0.03)
Net realized and unrealized gain (loss) on
investments 2.09 3.07 (1.47) 1.79 2.80 0.58
------- ------- ------- ------- ------- -------
Total from investment operations 2.00 2.99 (1.56) 1.74 2.80 0.55
------- ------- ------- ------- ------- -------
Less distributions:
From net realized gain on investments (0.50) -- (0.18) (0.20) (1.06) (0.02)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 15.59 $ 14.09 $ 11.10 $ 12.84 $ 11.30 $ 9.56
======= ======= ======= ======= ======= =======
Total investment return (c) 14.46% 26.94%(d) (12.16%) 15.43% 30.04% 6.11%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.62%) (0.78%)+ (0.74%) (0.41%) 0.08% (0.34%)
Net expenses 1.70% 1.90%+ 1.87% 1.88% 1.90% 1.90%
Expenses (before waiver/reimbursement) 1.78% 1.94%+ 1.87% 1.88% 2.07% 2.21%
Portfolio turnover rate 103% 41% 46% 46% 69% 42%
Net assets at end of period (in 000's) $55,640 $44,496 $35,197 $43,761 $27,610 $15,205
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning of period $ 13.49 $10.70 $12.48 $ 11.07 $ 9.46 $ 9.00
------- ------ ------ ------- ------ ------
Net investment loss (a) (0.20) (0.15) (0.18) (0.13) (0.07) (0.10)
Net realized and unrealized gain (loss) on
investments 2.01 2.94 (1.42) 1.74 2.74 0.58
------- ------ ------ ------- ------ ------
Total from investment operations 1.81 2.79 (1.60) 1.61 2.67 0.48
------- ------ ------ ------- ------ ------
Less distributions:
From net realized gain on investments (0.50) -- (0.18) (0.20) (1.06) (0.02)
------- ------ ------ ------- ------ ------
Net asset value at end of period $ 14.80 $13.49 $10.70 $ 12.48 $11.07 $ 9.46
======= ====== ====== ======= ====== ======
Total investment return (c) 13.67% 26.07%(d) (12.83%) 14.57% 28.97% 5.35%
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.37%) (1.53%)+ (1.49%) (1.16%) (0.67%) (1.09%)
Net expenses 2.45% 2.65%+ 2.62% 2.63% 2.65% 2.65%
Expenses (before waiver/reimbursement) 2.53% 2.69%+ 2.62% 2.63% 2.82% 2.96%
Portfolio turnover rate 103% 41% 46% 46% 69% 42%
Net assets at end of period (in 000's) $10,054 $9,501 $9,403 $12,250 $2,090 $ 634
</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.
(b) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges.
(d) Total return is not annualized.
</Table>
14 MainStay Small Cap Value Fund 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
JANUARY 1,
2003 CLASS B
YEAR ENDED THROUGH -----------------------------------------
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 13.50 $ 10.70 $ 12.48 $ 11.07 $ 9.46 $ 9.00
------- ------- ------- ------- ------- -------
(0.20) (0.15) (0.18) (0.13) (0.07) (0.10)
2.00 2.95 (1.42) 1.74 2.74 0.58
------- ------- ------- ------- ------- -------
1.80 2.80 (1.60) 1.61 2.67 0.48
------- ------- ------- ------- ------- -------
(0.50) -- (0.18) (0.20) (1.06) (0.02)
------- ------- ------- ------- ------- -------
$ 14.80 $ 13.50 $ 10.70 $ 12.48 $ 11.07 $ 9.46
======= ======= ======= ======= ======= =======
13.59% 26.17%(d) (12.83%) 14.57% 28.97% 5.35%
(1.37%) (1.53%)+ (1.49%) (1.16%) (0.67%) (1.09%)
2.45% 2.65%+ 2.62% 2.63% 2.65% 2.65%
2.53% 2.69%+ 2.62% 2.63% 2.82% 2.96%
103% 41% 46% 46% 69% 42%
$66,355 $60,384 $53,819 $67,377 $32,777 $15,722
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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 had approved the closure of the Fund to new investors, effective December
1, 2001. The Fund was re-opened to investors on July 6, 2004, after the
appointment of the new Subadvisor, MacKay Shields LLC.
The Fund currently offers three classes of shares. Beginning January 31, 2005,
the Fund will also offer Class I 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 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. Reasons for
which securities may be valued in this manner include, but are not limited to,
trading for a security has been halted or suspended, a security has been
de-listed from a national exchange, or trading on a security's primary market is
temporarily closed at a time when under normal conditions it would be open. The
Fund did not hold securities at October 31, 2004, that were valued in such
manner.
(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, accumulated undistributed net realized gain on
investments and additional paid-in capital arising from permanent differences;
net assets at October 31, 2004, are not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED ADDITIONAL
ACCUMULATED NET NET REALIZED GAIN PAID-IN
INVESTMENT LOSS ON INVESTMENTS CAPITAL
$1,345,694 $(1,357,384) $11,690
</Table>
16 MainStay Small Cap Value Fund
The reclassification for the Fund is primarily attributable to net operating
losses that offset undistributed net short-term securities gains for federal
income tax purposes, real estate investment trusts and distributions paid in
connection with the redemption of Fund shares.
(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.
(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. was responsible for the day-to-day portfolio
management of the Fund through June 29, 2004. Effective June 30, 2004, pursuant
to shareholder approval, NYLIM appointed MacKay Shields LLC ("MacKay") as the
new Subadvisor (the "Subadvisor") to the Fund at a meeting held on June 16,
2004. (See page 21.)
Prior to July 1, 2004, 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 on assets up to $1.0
billion and 0.95% on assets over $1.0 billion. Effective July 1, 2004, the Trust
pays the Manager an annual rate of 0.85% of the Fund's average daily net assets
on assets up to $1.0 billion and 0.80% on assets over $1.0 billion. Also
effective July 1, 2004, for a two-year period, NYLIM has voluntarily agreed to
waive that portion of its fee in excess of 0.60% of the Fund's average daily net
assets. The Manager has also 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 year ended October 31, 2004, the
Manager earned from the Fund $1,200,499 and waived $108,819 of its fee.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and the
Subadvisor, the Manager paid the Subadvisor a monthly fee of one-half of the
management fee, net of management fee waivers, expense limitations and
reimbursements. To the extent that the Manager has agreed to reimburse Fund
expenses, MacKay 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 $12,923 for the year ended
October 31, 2004. The Fund was also advised that the Distributor retained
contingent deferred sales charges on
www.mainstayfunds.com 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
redemptions of Class A, Class B and Class C shares of $874, $58,769 and $199,
respectively, for the year ended October 31, 2004.
(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 for the year ended October 31, 2004,
amounted to $501,279.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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 $3,882 for the year ended October 31,
2004.
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 $39,329 for the year ended October 31,
2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED CAPITAL TOTAL
ORDINARY AND OTHER UNREALIZED ACCUMULATED
INCOME GAINS APPRECIATION GAIN
$42,732 $24,600,944 $10,817,314 $35,460,990
</Table>
The tax character of distributions paid during the year ended October 31, 2004,
the ten months ended October 31, 2003 and the year ended December 31, 2002,
shown in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid from:
Ordinary Income $ -- $-- $ 854,844
Long-term Capital Gains 4,157,531 -- 742,933
- ------------------------------------------------------------
$4,157,531 $-- $1,597,777
- ------------------------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $124,500 and $138,935, respectively.
NOTE 7 -- 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 year ended October 31, 2004.
18 MainStay Small Cap Value Fund
NOTE 8 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 1,392 545 94
- -----------------------------------------------------------
Shares issued in reinvestment
of distributions 82 149 17
- -----------------------------------------------------------
1,474 694 111
- -----------------------------------------------------------
Shares redeemed (1,062) (683) (135)
- -----------------------------------------------------------
Net increase (decrease) 412 11 (24)
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003*
CLASS A CLASS B CLASS C
Shares sold 835 366 19
- -----------------------------------------------------------
Shares issued in reinvestment
of distributions -- -- --
- -----------------------------------------------------------
835 366 19
- -----------------------------------------------------------
Shares redeemed (847) (922) (194)
- -----------------------------------------------------------
Net decrease (12) (556) (175)
- -----------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C
Shares sold 1,552 879 110
- -----------------------------------------------------------
Shares issued in reinvestment
of distributions 38 77 10
- -----------------------------------------------------------
1,590 956 120
- -----------------------------------------------------------
Shares redeemed (1,827) (1,326) (223)
- -----------------------------------------------------------
Net decrease (237) (370) (103)
- -----------------------------------------------------------
</Table>
* The Fund changed its fiscal year end from December 31 to October 31.
NOTE 9 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 10 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
www.mainstayfunds.com 19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Small Cap Value Fund (the "Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2004, and
the related statement of operations, statement of changes in net assets and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the period ended October 31, 2003 and the year ended December 31, 2002, and
the financial highlights for the periods presented through October 31, 2003,
were audited by other auditors, whose report dated December 18, 2003 expressed
an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Small Cap Value Fund of The MainStay Funds as of October 31, 2004, the
results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
20 MainStay Small Cap Value Fund
SPECIAL MEETING OF SHAREHOLDERS (UNAUDITED)
At a special meeting held on June 16, 2004, the shareholders of MainStay Small
Cap Value Fund (the "Fund") approved a New Subadvisory Agreement between the
Fund's investment manager, New York Life Investment Management LLC ("NYLIM") and
MacKay Shields LLC ("MacKay Shields") to appoint MacKay Shields as the new
subadvisor to the Fund (the "New Subadvisory Agreement") effective on or about
June 25, 2004. Dalton, Greiner, Hartman, Maher & Co. ("Dalton Greiner") had been
providing advisory services to the Fund since May 31, 1998, most recently
pursuant to an Interim Sub-Advisory Agreement between NYLIM and Dalton Greiner
(the "Interim Agreement") dated February 6, 2004, as previously approved by the
Board. The terms of the New Subadvisory Agreement are substantially similar to
those of the Interim Agreement except for the fees payable to MacKay Shields.
In connection with the approval of the New Subadvisory Agreement, NYLIM has
agreed to the following terms: (1) contractually reduce the Fund's overall
management fee from 1.00% to 0.85% of the Fund's average daily net assets, (2)
voluntarily waive that portion of the Fund's management fee in excess of 0.60%
of the Fund's average daily net assets for a period of two years following the
effective date of the New Subadvisory Agreement and (3) voluntarily reimburse
the Fund from its management fee to the extent the Fund's total operating
expenses exceed 1.90% of average daily net assets for Class A shares and 2.65%
of average daily net assets for Class B and Class C shares. This expense
reimbursement may be discontinued at any time without notice.
Under the New Subadvisory Agreement, MacKay Shields will receive one-half of the
management fee payable to NYLIM with respect to the Fund, net of management fee
waivers, expense limitations and reimbursements.
<Table>
Shares voted in favor: 4,280,996
Shares voted against: 52,153
Shares abstaining: 82,357
</Table>
This resulted in approval of the proposal.
www.mainstayfunds.com 21
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
22 MainStay Small Cap Value Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 23
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
24 MainStay Small Cap Value Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2004) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $4,157,531 on December 18,
2003.
www.mainstayfunds.com 25
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
26 MainStay Small Cap Value Fund
(NEW YORK LIFE LOGO)
- ------------------------------------------------
GNot FDIC insured. G No bank guarantee. G May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied
by a current Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C) 2004 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06377 RECYCLE.LOGO MSSV11-12/04
25
(MAINSTAY LOGO)
MAINSTAY
MAP FUND
The MainStay Funds
Annual Report
October 31, 2004
This page intentionally left blank
2 MainStay MAP Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2004, the U.S. stock market advanced, but
its pace and direction were by no means steady. Small- and mid-capitalization
stocks tended to outperform large-cap issues, and value stocks generally
outperformed growth stocks.
Economic activity, as measured by gross domestic product, increased from 4.2% in
the fourth quarter of 2003 to 4.5% in the first quarter of 2004. The pace of
economic growth slowed to 3.3% in the second quarter of 2004, and according to
preliminary estimates from the Bureau of Economic Analysis, gross domestic
product grew at a seasonally adjusted annual rate of 3.9% in the third quarter
of 2004.
Interest rates began the reporting period at a low 1.00%. In June 2004, the
Federal Open Market Committee responded to expanding output and improved labor
markets by raising the targeted federal funds rate by 25 basis points. Similar
moves in August and September brought the targeted federal funds rate to 1.75%.
In its September 2004 release, the Federal Open Market Committee affirmed its
belief that monetary policy remained accommodative.
Despite rising interest rates, bond markets generally advanced. High-yield bonds
and emerging-market debt were particularly strong. The U.S. dollar declined
relative to most other currencies, which helped U.S. exporters.
In pursuing its investment objective, each MainStay Fund consistently seeks to
apply a well-defined investment process in all market environments. We believe
that a consistent, disciplined investment approach can help investors make more
prudent and practical decisions regarding their investments.
In the report that follows, you'll find additional information about the market
forces, investment decisions, and individual securities that affected your
MainStay Fund during the 12 months ended October 31, 2004. We thank you for
investing with us, and we look forward to many years of continued service in
your behalf.
Sincerely,
/s/ GARY E. WENDLANDT
Gary E. Wendlandt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 11
- ----------------------------------------------------
Financial Statements 17
- ----------------------------------------------------
Notes to Financial Statements 22
Report of Independent Registered Public
Accounting Firm 27
- ----------------------------------------------------
Trustees and Officers 28
- ----------------------------------------------------
Proxy Voting Policies and Procedures 30
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 30
- ----------------------------------------------------
MainStay Funds 31
</Table>
www.mainstayfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY
BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE
WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST. FOR CURRENT TO THE MOST RECENT MONTH-END PERFORMANCE
INFORMATION, PLEASE CONTACT 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM.
CLASS A SHARES -- MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 8.12% 7.28% 6.63%
Excluding sales charges 14.41 8.50 7.75
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY MAP FUND RUSSELL MIDCAP INDEX S&P 500 INDEX
----------------- -------------------- -------------
6/9/99 9450 10000 10000
9407 9791 10395
11215 12115 11028
10959 9932 8282
9538 9135 7031
12364 12412 8493
10/31/04 14145 14285 9293
</Table>
<Table>
-
-- MainStay MAP Fund -- Russell Midcap Index - - S&P 500 Index
</Table>
CLASS B SHARES -- MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 8.57% 7.40% 6.83%
Excluding sales charges 13.57 7.70 6.96
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MAINSTAY MAP FUND RUSSELL MIDCAP INDEX S&P 500 INDEX
----------------- -------------------- -------------
6/9/99 10000 10000 10000
9929 9791 10395
11757 12115 11028
11395 9932 8282
9840 9135 7031
12667 12412 8493
10/31/04 14286 14285 9293
</Table>
<Table>
-
-- MainStay MAP Fund -- Russell Midcap Index - - S&P 500 Index
</Table>
CLASS C SHARES -- MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 12.57% 7.70% 6.96%
Excluding sales charges 13.57 7.70 6.96
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MAINSTAY MAP FUND RUSSELL MIDCAP INDEX S&P 500 INDEX
----------------- -------------------- -------------
6/9/99 10000 10000 10000
9929 9791 10395
11757 12115 11028
11395 9932 8282
9840 9135 7031
12667 12412 8493
10/31/04 14386 14285 9293
</Table>
<Table>
-
-- MainStay MAP Fund -- Russell Midcap Index - - S&P 500 Index
</Table>
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 the deduction of
all sales charges that would have applied for the period of investment. Class A
shares are sold with a maximum initial sales charge of 5.5% and an annual 12b-1
fee of .25%. Class B shares are sold with no initial sales charge, are subject
to a contingent deferred sales charge (CDSC) of up to 5% if redeemed within the
first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class C
shares are sold with no initial sales charge are subject to a CDSC of 1% if
redeemed within one year of purchase, and have an annual 12b-1 fee of 1.00%.
Class I shares are sold with no initial sales charge or CDSC, have no annual
12b-1 fee, and are generally available to corporate and institutional investors
with a minimum initial investment of $5 million. Class R1 shares are sold with
no initial sales charge or CDSC, and have no annual 12b-1 fee.
Class R2 shares are sold with no initial sales charge or CDSC, and have an
annual 12b-1 fee of .25%. Class R1 and R2 shares are available only through
corporate-sponsored retirement programs, which include certain minimum program
requirements. Performance figures reflect certain fee waivers and/or expense
limitations, without which total returns may have been lower. The fee waivers
and/or expense limitations are voluntary and may be discontinued at any time. On
6/9/99, MAP-Equity Fund was reorganized as MainStay MAP Fund Class I shares.
From inception (1/21/71) through 6/8/99, performance for MainStay MAP Fund Class
I shares (first offered 6/9/99) includes the performance of MAP-Equity Fund.
Prior to the reorganization, shares of MAP-Equity Fund were subject to a maximum
4.75% sales charge. From inception (6/9/99) through 12/31/03, performance for
Class R1 and R2 shares (first offered 1/2/04) includes the historical
performance of Class A shares adjusted to reflect the applicable fees and
expenses for Class R1 and R2 shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay MAP Fund
CLASS I SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
14.83% 8.80% 15.10%
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MAINSTAY MAP FUND RUSSELL MIDCAP INDEX S&P 500 INDEX
----------------- -------------------- -------------
10/31/94 9525 10000 10000
11038 12331 12644
14213 14754 15691
19007 18999 20729
22033 19846 25288
25507 23244 31779
30495 28759 33715
29869 23577 25319
26057 21685 21494
33865 29466 25965
10/31/04 38886 33911 28411
</Table>
<Table>
-- MainStay MAP Fund -- Russell Midcap Index - - S&P 500 Index
</Table>
CLASS R1 SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
14.63% 8.67% 7.92%
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY MAP FUND RUSSELL MIDCAP INDEX S&P 500 INDEX
----------------- -------------------- -------------
6/9/99 10000 10000 10000
9963 9791 10395
11896 12115 11028
11638 9932 8282
10146 9135 7031
13170 12412 8493
10/31/04 15096 14285 9293
</Table>
<Table>
-- MainStay MAP Fund -- Russell Midcap Index - - S&P 500 Index
</Table>
CLASS R2 SHARES -- NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
14.37% 8.40% 7.65%
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MAINSTAY MAP FUND RUSSELL MIDCAP INDEX S&P 500 INDEX
----------------- -------------------- -------------
6/9/99 10000 10000 10000
9950 9791 10395
11851 12115 11028
11566 9932 8282
10057 9135 7031
13022 12412 8493
10/31/04 14894 14285 9293
</Table>
<Table>
-- MainStay MAP Fund -- Russell Midcap Index - - S&P 500 Index
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Russell Midcap(R) Index(1) 15.09% 7.85% 12.99%
S&P 500(R) Index(2) 9.42 -2.22 11.01
Average Lipper multicap core fund(3) 8.25 0.87 9.94
</Table>
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. The Russell Midcap(R)
Index is considered to be the Fund's broad-based securities-market index for
comparison purposes. 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(R)
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. Lipper Inc. is an independent fund performance monitor. Results are based on
total returns with all dividend and capital-gain distributions reinvested.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THESE
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.mainstayfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MAP FUND
Expenses shown in the table are meant to highlight your ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the third data column of the table
is useful in comparing ongoing costs only and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs had been included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE
VALUE (BASED (BASED ON
BEGINNING ON ACTUAL EXPENSES HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN PAID
VALUE EXPENSES) DURING AND ACTUAL DURING
SHARE CLASS(1) 5/1/04 10/31/04 PERIOD EXPENSES) PERIOD
CLASS A SHARES $1,000.00 $1,037.85 $ 6.92 $1,018.25 $ 6.85
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,034.20 $10.74 $1,014.50 $10.63
- ------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,034.20 $10.74 $1,014.50 $10.63
- ------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,039.75 $ 5.08 $1,020.05 $ 5.03
- ------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,038.75 $ 5.59 $1,019.55 $ 5.53
- ------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,037.80 $ 6.86 $1,018.30 $ 6.80
- ------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, divided by 366, multiplied by 184 (to
reflect the one-half year period).
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 88.1
Short-Term Investments 10.3
Cash and Other Assets (less liabilities) 0.2
Convertible Bonds 0.6
Corporate Bonds 0.8
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2004 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Duke Energy Corp.
2. Tyco International Ltd.
3. E.I. du Pont de Nemours & Co.
4. MetLife, Inc.
5. Monsanto Co.
6. Boston Scientific Corp.
7. Harris Corp.
8. Northrop Grumman Corp.
9. Symbol Technologies, Inc.
10. Schlumberger Ltd.
</Table>
6 MainStay MAP Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Roger Lob, Christopher Mullarkey, and
Michael J. Mullarkey of Markston International, LLC, and by portfolio managers
Mark G. DeFranco and Brian M. Gillott of Jennison Associates LLC
CAN YOU DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests at least 65% of its total assets in equity-type
securities, including common stocks, as well as securities convertible into, or
exchangeable for, common stocks. The Fund employs two subadvisors, Markston
International and Jennison Associates, with complementary investment processes
and styles. In pursuing the Fund's investment objective, each subadvisor seeks
to identify securities that are out of favor but have a catalyst that the
subadvisor believes will lead to improved performance.
WHAT MAJOR FACTORS INFLUENCED THE STOCK MARKET DURING THE 12-MONTH REPORTING
PERIOD ENDED OCTOBER 31, 2004?
Markston International:
The most significant factors that influenced the equity markets were the
continuing war in Iraq, the sharp rise in energy costs, the anticipated outcome
of the Presidential election, and rising interest rates. In addition, investors
were concerned about the growing budget deficit, the rising trade deficit, and
the continued decline of the U.S. dollar.
Jennison Associates:
During the reporting period, mixed economic data left the equity markets
unsettled. Earlier in the Fund's fiscal year, we saw solid growth and a dramatic
rebound in corporate earnings that led to strong equity returns. While high
energy costs and reduced mortgage refinancing kept consumer spending at moderate
levels, corporate spending was quite robust, led by outlays for information
technology. More recently, corporate earnings growth has slowed and the stock
market has been relatively flat. As the period progressed, investors' concerns
included increased geopolitical uncertainty, the impact of high energy prices on
corporate profits, the pace of economic activity, and inflation.
WHAT FACTORS MOST SIGNIFICANTLY AFFECTED FUND PERFORMANCE DURING THE REPORTING
PERIOD?
Markston International:
Effective stock selection helped the portion of the Fund that we manage to
nearly double the performance of the S&P 500(R) Index.(1) In the beginning of
the reporting period, significant exposure to strong performers among oil, gas,
coal, and utility stocks enhanced results. The Fund was correctly positioned for
an increase in energy prices, which provided us an opportunity to selectively
pare back the Fund's exposure to this area of the market. After capturing
profits on a select group of energy stocks, we spent a significant amount of
time during the second quarter of 2004 finding new and interesting investment
candidates. We believe this helped our portion of the Fund produce positive
results throughout the reporting period, even while other indices were providing
negative returns. When the equity markets rebounded in late July and early
August of 2004, our portion of the Fund's portfolio was well positioned to
benefit from the broad-based rally. We also feel that our decision to
selectively take profits in energy investments and to broaden and diversify
holdings in the financials sector helped position our portion of the Fund
against an inevitable moderation in energy prices.
Jennison Associates:
Our portion of the Fund's portfolio outperformed the S&P 500(R) Index during the
reporting period. On a relative basis, our holdings in materials, energy,
information technology, and health care made the most significant positive
contributions to results. Relative performance was weaker among our holdings in
the consumer discretionary sector, particularly in the media industry, and in
the financials, telecommunication services, and industrials sectors. The last
months of 2003 were difficult for many bottom-up stock pickers, as the rally
tended to be fairly concentrated. We were, however, able to find quite a few
strong performers for the portfolio. In the second and third quarters of 2004,
the Federal Open Market Committee raised the targeted federal funds rate three
times. We believe our portion of the portfolio was well positioned for this
market environment, as materials and energy together constituted
Mid-capitalization companies are generally less established and their stocks may
be more volatile and less liquid than the securities of larger companies. 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.
Funds that invest in bonds are subject to credit, inflation, and interest-rate
risk and can lose principal value when interest rates rise.
1. See footnote on page 5 for more information about the S&P 500(R) Index.
www.mainstayfunds.com 7
more than 25% of our portion of the Fund's portfolio. We feel that the earnings
growth of our holdings has been significantly enhanced by higher pricing power.
WHAT WERE SOME OF THE FUND'S STRONG PERFORMERS DURING THE REPORTING PERIOD?
Markston International:
Harris Corporation, a manufacturer of communication software and equipment,
enhanced results, as the company benefited from increasing sales to the U.S.
government. The company's new chief executive officer has been cutting costs,
which has helped earnings grow. Monsanto, the world's leading supplier of
genetically modified seeds, saw its stock appreciate when the company managed to
collect royalties from its Brazilian customers. Exposure to Yahoo!, a global
Internet portal, also helped returns in our portion of the Fund's portfolio. The
company experienced solid revenue growth during the reporting period.
Jennison Associates:
Software holding McAfee was a strong performer, as the company completed the
sale of its Sniffer enterprise division. The company also benefited from
better-than-expected growth in both the volume and pricing of its consumer
products. We have pared back on this position to capture some profits as
McAfee's stock price has appreciated. In basic materials, Arch Coal and CONSOL
Energy performed well, because of favorable supply/demand trends for coal and
relatively high natural-gas prices. Our position in Schlumberger also enhanced
results. The company provides advanced techniques for drilling in remote
locations and in difficult geologies. Schlumberger reported better-than-expected
earnings in 2004, as the search for new resources intensified.
WHAT STOCKS UNDERPERFORMED DURING THE REPORTING PERIOD?
Markston International:
Our position in Vitesse Semiconductor, a manufacturer of communications and
storage semiconductors, detracted from results. The stock underperformed when
the recovery in the company's main markets was less robust than expected. Our
exposure to Chiron, a diversified biotechnology and vaccine supplier, hurt
results when the firm's U.K.-based flu vaccine plant, which was expected to
supply the U.S. for the 2004/2005 winter season, was found not to be sterile. We
expect Chiron to return to the U.S. market in the 2005/2006 period. Although we
sold slightly more than a third of our position in Sanmina-SCI at a gain for the
reporting period, the remainder of the position detracted from results when the
stock was hurt by competitive conditions in the electronic manufacturing
services subindustry.
Jennison Associates:
Media stocks in our portion of the Fund's portfolio hurt performance, owing to
concerns about the pace of the advertising recovery. While we thought that
strong advertising sales growth reported in the first quarter of 2004 would
continue throughout the year, this did not occur. As a result, the Fund's
holdings in Westwood One and Interpublic Group detracted from results. Insurance
stocks St. Paul Travelers and American International Group also hurt
performance. St. Paul Travelers, which was created when St. Paul acquired
Travelers Property & Casualty, fell as investors' opinion of management
weakened. Problems were compounded when New York Attorney General Eliot Spitzer
announced an investigation into the insurance industry's practices. In our
opinion, however, the Spitzer investigations may have little direct impact on
St. Paul Travelers. American International Group fell with the overall decline
in the insurance industry. When it became evident that rising interest rates had
hurt the company's third-quarter-2004 results, we eliminated the position.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
Markston International:
We added American Express, a global provider of financial and travel services,
to our portion of the Fund's portfolio. We believe the company can materially
benefit from Visa's antitrust problems. Boston Scientific, a leading medical
device maker, is another stock we added to the Fund. Many of the company's
products hold number-one or number-two positions in their markets. For the last
two years, we have been watching the market for drug-eluting stents develop. We
purchased Boston Scientific after its stock declined because of manufacturing
issues and related safety concerns. Once we determined that the problems might
have only a short-term impact, we made the stock a significant new holding in
our portion of the Fund's portfolio. Another purchase made during the reporting
period was Citigroup, a global financial institution. With a lower
price-to-earnings ratio and a higher dividend yield than the S&P 500(R) Index,
we believe Citigroup's stock represents good value.
8 MainStay MAP Fund
Jennison Associates:
We continue to build the portfolio one stock at a time, using a bottom-up,
research-intensive process. During the reporting period, we significantly added
to the Fund's position in Harmony Gold Mining and initiated positions in
Aluminum Corp. of China (Chalco), Alcoa, and Cooper Cameron. Harmony Gold Mining
rallied as the price of gold rose. We initiated a position in Chalco as the fear
of a "hard landing" correction in the Chinese economy resulted in a decline of
over 40% in the company's share price. We believe a rally in the alumina (a raw
material of aluminum) market, coupled with the current positive supply/demand
fundamentals for alumina, should benefit both Chalco and Alcoa. We initiated a
position in Cooper Cameron in April 2004 and have added to the position a number
of times. We believe that Cooper Cameron--a leading manufacturer of oil and gas
pressure control equipment, including equipment used in offshore and subsea
applications--should benefit from future contract awards by major oil companies.
WHAT STOCKS DID YOUR PORTION OF THE FUND'S PORTFOLIO SELL DURING THE REPORTING
PERIOD?
Markston International:
We sold our position in Hartford Financial Services Group, a provider of
financial and insurance products, in light of uncertainties surrounding the
investigation into insurance-industry pricing practices. The Fund's holdings in
Anadarko Petroleum and Unocal were reduced as the stocks of these oil and gas
exploration and production companies appreciated significantly. We eliminated
the Fund's position in Aetna, a major heath care provider, after the stock
reached our price target.
Jennison Associates:
On the basis of our stringent risk/reward criteria, we eliminated the Fund's
positions in Fisher Scientific International, PeopleSoft, Weatherford
International, and Amerada Hess. In each of these cases, the sales had a
positive effect on the Fund's performance. Fisher Scientific International, a
dominant player in the distribution of products to the scientific research and
clinical testing markets, reported several strong quarters of financial results.
We expect continued growth in the company's base business as pharmaceutical
spending increases. Nevertheless, we eliminated the position and captured
profits when the stock met our price target. PeopleSoft stock performed well
when Oracle received approval to acquire the company. We eliminated the Fund's
position when we felt that the stock had reached its fair market value.
DID THE FUND CHANGE ITS INDUSTRY GROUP WEIGHTINGS?
Markston International:
During the 12 months ended October 31, 2004, we significantly increased the
Fund's exposure to stocks in the financials and utilities sectors. In our
portion of the Fund's portfolio, we also modestly increased exposure to the
consumer discretionary sector. During the reporting period, we reduced our
allocations to the health care and information technology sectors.
Jennison Associates:
Any changes in the Fund's weightings are a consequence of our bottom-up
stock-selection process and do not reflect a "sector bet" on the part of our
management team. During the reporting period, the risk/reward discipline that
guides our portion of the Fund's portfolio led us to take profits in many strong
performers. Based on our bottom-up stock selection, we increased the Fund's
weighting in financials and basic materials, particularly in metals & mining and
in select chemical companies, and trimmed the Fund's weighting in consumer
discretionary and energy stocks. As oil prices rallied throughout the year, we
significantly reduced the Fund's exposure to the energy sector. More
specifically, we captured profits from certain energy holdings and reinvested
them in other energy stocks that we felt offered more attractive reward/risk
profiles.
WHAT DO YOU ANTICIPATE GOING FORWARD?
Markston International:
We continue to adhere to a strict bottom-up stock-selection approach, focusing
on securities that we believe offer reward potential that outweighs inherent
risk. In general, we are always looking for stocks that appear inexpensive. In
this context, we look for a catalyst that could cause a stock to appreciate.
While we do not rule out the possibility of unexpected volatility in interest
rates, the dollar, or energy prices over the next six to 12 months, we will
continue to search for securities that we feel can outperform the overall
market.
Jennison Associates:
Many of our new ideas are driven by company-specific catalysts that we believe
have been generally overlooked by the market. We are also closely monitoring
whether or not the Chinese government will continue to be successful in
engineering a "soft landing" for the country's economy, since this may affect
global demand for many commodities. A shift in demand would affect the
fundamentals of several commodity companies held by the Fund. We have
www.mainstayfunds.com 9
been focused on the basic materials sector for some time now, which has had a
positive impact on performance. We continue to find good supply/ demand
fundamentals among many companies in this diverse sector, but we are mindful of
the inherent cyclicality of these businesses and are selectively taking profits.
We continue to believe this will be a stock-picker's market. We intend to remain
disciplined in our style and philosophy as we seek to uncover new opportunities.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
10 MainStay MAP Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (88.1%)+
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE (3.3%)
Aviall, Inc. (a) 5,550 $ 120,157
Boeing Co. (The) 34,300 1,711,570
GenCorp, Inc. 21,400 297,460
Honeywell International, Inc. 81,500 2,744,920
Lockheed Martin Corp. 82,295 4,533,632
VNorthrop Grumman Corp. 250,978 12,988,111
Orbital Sciences Corp. (a) 114,800 1,188,180
Raytheon Co. 173,600 6,332,928
Teledyne Technologies, Inc. (a) 108,550 2,775,624
------------
32,692,582
------------
AIR FREIGHT & LOGISTICS (0.1%)
Danielson Holding Corp. (a) 137,407 1,026,430
------------
AIRLINES (0.4%)
Southwest Airlines Co. 284,100 4,480,257
------------
AUTO COMPONENTS (0.1%)
Goodyear Tire & Rubber Co. (The) (a) 95,650 964,152
------------
BEVERAGES (0.3%)
Coca-Cola Co. (The) 27,100 1,101,886
PepsiCo, Inc. 29,341 1,454,727
------------
2,556,613
------------
BIOTECHNOLOGY (3.2%)
Amylin Pharmaceuticals, Inc. (a) 129,952 2,767,978
Cell Therapeutics, Inc. (a) 16,100 99,820
Chiron Corp. (a) 64,200 2,081,364
Enzo Biochem, Inc. (a) 17,430 308,337
Enzon Pharmaceuticals, Inc. (a) 50,925 823,457
Eyetech Pharmaceuticals, Inc. (a) 69,828 2,963,500
Gen-Probe, Inc. (a) 25,068 878,383
Genentech, Inc. (a) 258,700 11,778,611
MedImmune, Inc. (a) 335,227 9,527,151
XOMA Ltd.(a) 68,025 139,451
------------
31,368,052
------------
CAPITAL MARKETS (5.1%)
Ameritrade Holding Corp. (a) 5,100 66,402
Bank of New York Co., Inc. (The) 314,700 10,215,162
Eaton Vance Corp. 146,600 6,394,692
Jefferies Group, Inc. 108,700 4,362,131
Knight Trading Group, Inc. (a) 18,900 196,371
Mellon Financial Corp. 191,400 5,531,460
Merrill Lynch & Co., Inc. 97,000 5,232,180
Morgan Stanley 142,800 7,295,652
National Financial Partners Corp. 151,700 4,663,258
</Table>
<Table>
<Caption>
SHARES VALUE
CAPITAL MARKETS (CONTINUED)
Northern Trust Corp. 31,955 $ 1,359,366
State Street Corp. 84,700 3,815,735
Waddell & Reed Financial, Inc. Class A 90,300 1,897,203
------------
51,029,612
------------
CHEMICALS (5.5%)
VE.I. du Pont de Nemours & Co. 403,100 17,280,897
Eastman Chemical Co. 13,250 628,978
Great Lakes Chemical Corp. 273,503 7,007,147
Lyondell Chemical Co. 292,600 6,723,948
VMonsanto Co. 351,907 15,044,024
Olin Corp. 367,800 6,877,860
Westlake Chemical Corp. (a) 56,200 1,296,534
------------
54,859,388
------------
COMMERCIAL BANKS (1.4%)
Popular, Inc. 399,656 10,279,152
Wachovia Corp. 65,000 3,198,650
------------
13,477,802
------------
COMMERCIAL SERVICES & SUPPLIES (2.9%)
Brink's Co. (The) 20,800 667,680
Cendant Corp. 93,000 1,914,870
Coinstar, Inc. (a) 25,887 668,661
DiamondCluster International, Inc. (a) 7,194 87,659
Education Management Corp. (a) 96,400 2,585,448
Hewitt Associates, Inc. Class A (a) 201,600 5,650,848
ITT Educational Services, Inc. (a) 192,000 7,297,920
Korn/Ferry International (a) 24,600 428,040
Manpower, Inc. 184,500 8,348,625
MemberWorks, Inc. (a) 5,800 172,840
On Assignment, Inc. (a) 17,800 89,356
Waste Management, Inc. 28,800 820,224
------------
28,732,171
------------
COMMUNICATIONS EQUIPMENT (2.4%)
ADC Telecommunications, Inc. (a) 134,600 297,466
CommScope, Inc. (a) 41,059 739,473
Endwave Corp. (a) 32,288 473,988
Enterasys Networks, Inc. (a) 99,250 138,950
Finisar Corp. (a) 450,489 662,219
VHarris Corp. 241,750 14,874,877
McDATA Corp. Class A (a) 64,900 407,572
NETGEAR, Inc. (a) 15,068 205,377
NMS Communications Corp. (a) 167,936 733,041
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, excluding short-term investments. May
be subject to change daily.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (CONTINUED)
Nokia Corp. ADR (c) 268,700 $ 4,143,354
Nortel Networks Corp. (a) 5,472 18,550
Polycom, Inc. (a) 13,998 289,059
REMEC, Inc. (a) 6,550 36,090
Riverstone Networks, Inc. (a) 12,802 12,034
Stratex Networks, Inc. (a) 103,588 188,012
UTStarcom, Inc. (a) 67,500 1,155,600
------------
24,375,662
------------
COMPUTERS & PERIPHERALS (0.5%)
ActivCard Corp. (a) 52,567 420,010
Advanced Digital Information Corp. (a) 156,600 1,401,570
Innovex, Inc. (a) 31,000 148,800
Pinnacle Systems, Inc. (a) 47,892 223,177
Sigma Designs, Inc. (a) 21,600 169,992
Sun Microsystems, Inc. (a) 561,797 2,544,940
------------
4,908,489
------------
CONSTRUCTION MATERIALS (0.3%)
Martin Marietta Materials, Inc. 950 43,254
Vulcan Materials Co. 53,389 2,657,704
------------
2,700,958
------------
CONSUMER FINANCE (1.3%)
American Express Co. 207,200 10,996,104
MBNA Corp. 27,400 702,262
Providian Financial Corp. (a) 48,500 754,175
Rewards Network, Inc. (a) 15,000 82,950
------------
12,535,491
------------
CONTAINERS & PACKAGING (0.1%)
Smurfit-Stone Container Corp. (a) 8,050 139,748
Temple-Inland, Inc. 19,800 1,170,576
------------
1,310,324
------------
DISTRIBUTORS (0.0%) (B)
ADESA, Inc. (a) 15,300 308,295
------------
DIVERSIFIED FINANCIAL SERVICES (3.7%)
Assured Guaranty Ltd. 353,400 5,802,828
CIT Group, Inc. 27,300 1,102,920
Citigroup, Inc. 256,300 11,372,031
Instinet Group, Inc. (a) 126,423 606,830
JPMorgan Chase & Co. 191,480 7,391,128
Principal Financial Group, Inc. 283,100 10,689,856
------------
36,965,593
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (1.4%)
CenturyTel, Inc. 31,100 997,999
Cincinnati Bell, Inc. (a) 236,350 805,953
Global Crossing Ltd. (a) 86,701 1,208,612
</Table>
<Table>
<Caption>
SHARES VALUE
DIVERSIFIED TELECOMMUNICATION SERVICES (CONTINUED)
IDT Corp. Class B (a) 46,900 $ 648,158
SBC Communications, Inc. 318,400 8,042,784
Sprint Corp. 92,508 1,938,043
------------
13,641,549
------------
ELECTRIC UTILITIES (0.5%)
American Electric Power Co., Inc. 60,000 1,975,800
Black Hills Corp. 14,150 416,859
DTE Energy Co. 52,300 2,233,733
Duquesne Light Holdings, Inc. 33,700 578,292
------------
5,204,684
------------
ELECTRICAL EQUIPMENT (0.0%) (B)
Acuity Brands, Inc. 1,000 26,530
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (2.1%)
Agilent Technologies, Inc. (a) 197,200 4,941,832
Frequency Electronics, Inc. 4,000 49,160
Giga-tronics, Inc. (a) 30,959 51,392
Itron, Inc. (a) 8,346 174,765
Sanmina-SCI Corp. (a) 201,865 1,614,920
Solectron Corp. (a) 298,700 1,559,214
VSymbol Technologies, Inc. 879,600 12,921,324
------------
21,312,607
------------
ENERGY EQUIPMENT & SERVICES (4.2%)
Cooper Cameron Corp. (a) 185,400 8,964,090
GlobalSantaFe Corp. 9,900 292,050
Horizon Offshore, Inc. (a) 900 855
Key Energy Services, Inc. (a) 101,400 1,166,100
National-Oilwell, Inc. (a) 161,900 5,457,649
Newpark Resources, Inc. (a) 159,750 867,442
Rowan Cos., Inc. (a) 327,500 8,361,075
VSchlumberger Ltd. 189,925 11,953,880
Tidewater, Inc. 54,800 1,694,964
Todco Class A (a) 160,100 2,716,897
------------
41,475,002
------------
FOOD & STAPLES RETAILING (1.2%)
Costco Wholesale Corp. 16,250 779,025
CVS Corp. 59,838 2,600,559
Kroger Co. (The) (a) 506,700 7,656,237
Longs Drug Stores Corp. 21,900 540,930
Pathmark Stores, Inc. (a) 76,050 327,776
Rite Aid Corp. (a) 146,050 543,306
------------
12,447,833
------------
FOOD PRODUCTS (0.6%)
Archer-Daniels-Midland Co. 233,340 4,519,796
Bunge Ltd. 28,500 1,360,305
Hormel Foods Corp. 4,400 123,684
------------
6,003,785
------------
</Table>
12 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
GAS UTILITIES (0.7%)
Kinder Morgan, Inc. 59,150 $ 3,807,485
Peoples Energy Corp. 53,500 2,288,730
Sempra Energy 29,000 972,660
------------
7,068,875
------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.8%)
ArthroCare Corp. (a) 19,910 613,427
Baxter International, Inc. 30,000 922,800
VBoston Scientific Corp. (a) 422,450 14,912,485
Hospira, Inc. (a) 20,000 638,200
Regeneration Technologies, Inc. (a) 8,596 66,619
SurModics, Inc. (a) 13,792 370,315
------------
17,523,846
------------
HEALTH CARE PROVIDERS & SERVICES (3.5%)
Andrx Corp. (a) 30,400 657,856
Cerner Corp. (a) 126,442 5,708,856
CIGNA Corp. 82,200 5,216,412
Community Health
Systems, Inc. (a) 109,900 2,947,518
Humana, Inc. (a) 29,200 559,180
IMS Health, Inc. 11,215 237,534
Medco Health Solutions, Inc. (a) 308,900 10,474,799
Per-Se Technologies, Inc. (a) 26,581 387,817
SunLink Health Systems, Inc. (a) 35,000 183,750
Tenet Healthcare Corp. (a) 538,600 5,773,792
Universal Health Services, Inc. Class B 3,000 124,680
WebMD Corp. (a) 368,554 2,786,268
------------
35,058,462
------------
HOTELS, RESTAURANTS & LEISURE (0.7%)
Hilton Hotels Corp. 127,900 2,545,210
McDonald's Corp. 139,000 4,051,850
------------
6,597,060
------------
HOUSEHOLD DURABLES (0.0%) (B)
Newell Rubbermaid, Inc. 9,500 204,820
------------
HOUSEHOLD PRODUCTS (0.5%)
Kimberly-Clark Corp. 76,600 4,570,722
------------
INDUSTRIAL CONGLOMERATES (2.7%)
3M Co. 16,390 1,271,372
ALLETE, Inc. 5,100 173,298
VTyco International Ltd. 794,058 24,734,907
Walter Industries, Inc. 35,450 603,004
------------
26,782,581
------------
</Table>
<Table>
<Caption>
SHARES VALUE
INSURANCE (7.0%)
ACE, Ltd. 69,800 $ 2,656,588
Allstate Corp. (The) 100,800 4,847,472
American International Group, Inc. 88,800 5,391,048
Axis Capital Holdings, Ltd. 226,500 5,676,090
Conseco, Inc. (a) 269,000 4,508,440
Genworth Financial, Inc. Class A 21,800 520,148
VMetLife, Inc. 410,600 15,746,510
Ohio Casualty Corp. (a) 104,248 2,176,698
St. Paul Travelers Cos., Inc. (The) 105,110 3,569,536
UnumProvident Corp. 523,800 7,155,108
W. R. Berkley Corp. 82,000 3,504,680
Willis Group Holdings Ltd. 160,800 5,780,760
XL Capital Ltd. Class A 105,842 7,673,545
------------
69,206,623
------------
INTERNET & CATALOG RETAIL (0.9%)
IAC/InterActive Corp. (a) 261,600 5,655,792
Priceline.com, Inc. (a) 118,672 2,366,320
Stamps.com, Inc. (a) 41,474 575,659
------------
8,597,771
------------
INTERNET SOFTWARE & SERVICES (0.9%)
Blue Coat Systems, Inc. (a) 68,826 1,198,261
Internet Capital Group, Inc. (a) 3,225 22,123
Netegrity, Inc. (a) 17,800 189,570
S1 Corp. (a) 290,800 2,730,612
Vignette Corp. (a) 242,100 268,731
Yahoo!, Inc. (a) 131,554 4,760,939
------------
9,170,236
------------
IT SERVICES (0.7%)
BISYS Group, Inc. (The) (a) 20,600 300,760
CheckFree Corp. (a) 9,300 288,300
Computer Sciences Corp. (a) 7,100 352,657
eFunds Corp. (a) 213,044 4,194,836
Electronic Data Systems Corp. 38,000 808,260
First Data Corp. 5,226 215,729
Liberate Technologies, Inc. (a) 112,900 267,884
Titan Corp. (The) (a) 21,200 314,608
------------
6,743,034
------------
LEISURE EQUIPMENT & PRODUCTS (0.0%) (B)
Mattel, Inc. 28,100 492,031
------------
MACHINERY (0.5%)
Navistar International Corp. (a) 148,500 5,130,675
------------
MEDIA (4.3%)
Cablevision Systems New York Group Class A (a) 131,100 2,698,038
Comcast Corp. Class A (a) 51,000 1,504,500
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
MEDIA (CONTINUED)
DIRECTV Group, Inc. (The) (a) 538,300 $ 9,027,291
Dreamworks Animation SKG, Inc. Class A (a) 5,800 226,490
Gemstar-TV Guide
International, Inc. (a) 218,503 1,256,392
Interpublic Group of Cos., Inc. (The) (a) 305,100 3,740,526
Liberty Media Corp. Class A (a) 641,300 5,720,396
Liberty Media International, Inc. Class A (a) 38,478 1,387,132
Meredith Corp. 700 34,300
PRIMEDIA, Inc. (a) 122,378 312,064
Radio One, Inc. Class D (a) 677,800 9,956,882
Viacom, Inc. Class B 178,216 6,503,102
------------
42,367,113
------------
METALS & MINING (3.8%)
Alcoa, Inc. 272,600 8,859,500
Aluminum Corp. of
China Ltd. ADR (c) 90,900 5,261,292
Arch Coal, Inc. 73,800 2,399,976
Companhia Vale do
Rio Doce ADR (c) 217,300 4,598,068
CONSOL Energy, Inc. 154,600 5,472,840
GrafTech International Ltd. (a) 286,600 2,653,916
Harmony Gold
Mining Co., Ltd. ADR (c) 660,400 7,792,720
Massey Energy Co. 18,150 488,780
------------
37,527,092
------------
MULTILINE RETAIL (0.2%)
Big Lots, Inc. (a) 97,400 1,206,786
May Department Stores Co. (The) 26,950 702,317
------------
1,909,103
------------
MULTI-UTILITIES & UNREGULATED POWER (3.4%)
AES Corp. (The) (a) 174,357 1,900,491
Aquila, Inc. (a) 670,000 2,123,900
VDuke Energy Corp. 1,047,600 25,697,628
Dynegy, Inc. Class A (a) 58,500 288,405
Westar Energy, Inc. 129,000 2,702,550
Williams Cos., Inc. (The) 67,300 841,923
------------
33,554,897
------------
OFFICE ELECTRONICS (0.0%) (B)
Xerox Corp. (a) 34,200 505,134
------------
OIL & GAS (3.4%)
Amerada Hess Corp. 16,500 1,331,715
Anadarko Petroleum Corp. 76,700 5,173,415
</Table>
<Table>
<Caption>
SHARES VALUE
OIL & GAS (CONTINUED)
Chesapeake Energy Corp. 90,600 $ 1,456,848
ConocoPhillips 18,139 1,529,299
Devon Energy Corp. 134,871 9,976,408
Kerr-McGee Corp. 25,000 1,480,500
Marathon Oil Corp. 54,400 2,073,184
Murphy Oil Corp. 22,400 1,792,448
Noble Energy, Inc. 35,500 2,059,000
Pogo Producing Co. 5,400 247,590
Unocal Corp. 168,400 7,030,700
------------
34,151,107
------------
PAPER & FOREST PRODUCTS (1.4%)
International Paper Co. 105,800 4,074,358
MeadWestvaco Corp. 238,349 7,515,144
Weyerhaeuser Co. 38,600 2,417,904
------------
14,007,406
------------
PHARMACEUTICALS (2.6%)
Alpharma, Inc. Class A 135,700 2,300,115
GlaxoSmithKline PLC ADR (c) 103,200 4,375,680
IVAX Corp. (a) 355,375 6,432,288
Lilly (Eli) & Co. 84,100 4,617,931
Mylan Laboratories, Inc. 105,000 1,808,100
Pfizer, Inc. 231,678 6,707,078
------------
26,241,192
------------
REAL ESTATE (0.8%)
Boykin Lodging Co. (a) 103,200 866,880
Crescent Real Estate Equities Co. 4,200 67,242
Health Care Property
Investors, Inc. 74,446 2,071,832
St. Joe Co. (The) 60,200 3,064,180
United Dominion Realty Trust, Inc. 70,870 1,493,940
------------
7,564,074
------------
ROAD & RAIL (1.1%)
Celadon Group, Inc. (a) 71,326 1,387,291
CSX Corp. 146,700 5,354,550
Norfolk Southern Corp. 46,550 1,580,372
Swift Transportation Co., Inc. (a) 104,432 1,973,765
Werner Enterprises, Inc. 41,595 881,814
------------
11,177,792
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.7%)
Applied Micro Circuits Corp. (a) 317,050 1,154,062
NVIDIA Corp. (a) 238,400 3,449,648
ON Semiconductor Corp. (a) 49,489 178,160
PMC-Sierra, Inc. (a) 7,900 81,054
</Table>
14 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (CONTINUED)
Three-Five Systems, Inc. (a) 91,500 $ 205,875
Vitesse Semiconductor Corp. (a) 539,852 1,468,398
------------
6,537,197
------------
SOFTWARE (3.4%)
Ascential Software Corp. (a) 35,033 493,615
Compuware Corp. (a) 234,450 1,357,466
Manhattan Associates, Inc. (a) 198,200 4,076,974
McAfee, Inc. (a) 349,750 8,463,950
Microsoft Corp. 386,300 10,812,537
MSC.Software Corp. (a) 62,300 541,387
NetIQ Corp. (a) 181,499 2,301,407
Novell, Inc. (a) 183,046 1,316,101
TIBCO Software, Inc. (a) 388,200 3,773,304
Visual Networks, Inc. (a) 37,612 110,955
WatchGuard
Technologies, Inc. (a) 49,750 198,005
Wind River Systems, Inc. (a) 45,199 605,215
------------
34,050,916
------------
SPECIALTY RETAIL (2.1%)
Boise Cascade Corp. 222,104 6,556,510
Circuit City Stores, Inc. 17,400 282,750
Linens 'n Things, Inc. (a) 160,200 3,857,616
RadioShack Corp. 61,550 1,842,192
Restoration Hardware, Inc. (a) 56,974 293,416
Toys "R" Us, Inc. (a) 369,600 6,656,496
Weight Watchers International, Inc. (a) 48,400 1,738,528
------------
21,227,508
------------
TEXTILES, APPAREL & LUXURY GOODS (0.4%)
Polo Ralph Lauren Corp. 121,310 4,479,978
------------
THRIFTS & MORTGAGE FINANCE (0.0%) (B)
New York Community Bancorp, Inc. 6,900 126,684
------------
Total Common Stocks (Cost $764,422,075) 876,977,790
------------
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (1.4%)
CONVERTIBLE BONDS (0.6%)
- ------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%)
Natural Microsystems Corp.
5.00%, due 10/15/05 $ 916,000 $ 914,855
------------
INTERNET SOFTWARE SERVICES (0.5%)
Akamai Technologies, Inc.
5.50%, due 7/1/07 4,650,000 4,725,563
------------
Total Convertible Bonds (Cost $3,838,320) 5,640,418
------------
CORPORATE BONDS (0.8%)
- ------------------------------------------------------------------------------
FOOD & STAPLES RETAILING (0.3%)
Rite Aid Corp.
7.625%, due 4/15/05 3,000,000 3,045,000
------------
MARINE (0.5%)
American Commercial Lines LLC
11.25%, due 1/1/08 (d) 5,511,870 4,960,683
------------
Total Corporate Bonds (Cost $5,777,121) 8,005,683
------------
Total Long-Term Bonds (Cost $9,615,441) 13,646,101
------------
SHORT-TERM INVESTMENTS (10.3%)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (4.2%)
Chevron USA, Inc.
1.75%, due 11/1/04 21,000,000 21,000,000
General Electric Capital Corp.
1.75%, due 11/1/04 21,135,000 21,135,000
------------
Total Commercial Paper
(Cost $42,135,000) 42,135,000
------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2004 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ------------------------------------------------------------------------------
TIME DEPOSIT (6.1%)
Bank of New York Cayman
1.125%, due 11/1/04 61,008,000 $ 61,008,000
------------
Total Time Deposit
(Cost $61,008,000) 61,008,000
------------
Total Short-Term Investments
(Cost $103,143,000) 103,143,000
------------
Total Investments
(Cost $877,180,516) (e) 99.8% 993,766,891(f)
Cash and Other Assets, Less Liabilities 0.2 1,568,347
----------- ------------
Net Assets 100.0% $995,335,238
=========== ============
</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) The cost for federal income tax purposes is
$881,037,027.
(f) At October 31, 2004 net unrealized appreciation was
$112,729,864, 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 $140,208,381 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $27,478,517.
</Table>
16 MainStay MAP Fund 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, 2004
<Table>
ASSETS:
Investment in securities, at value
(identified cost $877,180,516) $ 993,766,891
Cash 11,110
Receivables:
Fund shares sold 21,070,492
Investment securities sold 9,620,420
Dividends and interest 859,927
Other assets 45,316
--------------
Total assets 1,025,374,156
--------------
LIABILITIES:
Payables:
Investment securities purchased 27,106,893
Fund shares redeemed 1,549,376
NYLIFE Distributors 432,022
Transfer agent 418,281
Manager 361,925
Custodian 24,845
Trustees 12,375
Accrued expenses 133,201
--------------
Total liabilities 30,038,918
--------------
Net assets $ 995,335,238
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized:
Class A $ 83,700
Class B 101,362
Class C 44,595
Class I 84,934
Class R1 11
Class R2 1
Additional paid-in capital 840,257,331
Accumulated net realized gain on investments 38,176,929
Net unrealized appreciation on investments 116,586,375
--------------
Net assets $ 995,335,238
==============
CLASS A
Net assets applicable to outstanding shares $ 268,512,628
==============
Shares of beneficial interest outstanding 8,370,007
==============
Net asset value per share outstanding $ 32.08
Maximum sales charge (5.50% of offering
price) 1.87
--------------
Maximum offering price per share outstanding $ 33.95
==============
CLASS B
Net assets applicable to outstanding shares $ 313,765,242
==============
Shares of beneficial interest outstanding 10,136,166
==============
Net asset value and offering price per share
outstanding $ 30.96
==============
CLASS C
Net assets applicable to outstanding shares $ 138,043,996
==============
Shares of beneficial interest outstanding 4,459,503
==============
Net asset value and offering price per share
outstanding $ 30.96
==============
CLASS I
Net assets applicable to outstanding shares $ 274,975,340
==============
Shares of beneficial interest outstanding 8,493,467
==============
Net asset value and offering price per share
outstanding $ 32.37
==============
CLASS R1
Net assets applicable to outstanding shares $ 34,195
==============
Shares of beneficial interest outstanding 1,064
==============
Net asset value and offering price per share
outstanding $ 32.13
==============
CLASS R2
Net assets applicable to outstanding shares $ 3,837
==============
Shares of beneficial interest outstanding 120
==============
Net asset value and offering price per share
outstanding $ 32.07
==============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
17
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 9,238,869
Interest 2,011,440
------------
Total income 11,250,309
------------
EXPENSES:
Manager 6,468,735
Distribution -- Class B 2,073,820
Distribution -- Class C 902,159
Transfer agent -- Classes A, B and C 1,857,791
Transfer agent -- Classes I, R1 and R2 456,086
Service -- Class A 579,454
Service -- Class B 691,274
Service -- Class C 300,720
Service -- Class R2 3
Shareholder communication 214,956
Professional 115,828
Recordkeeping 112,916
Custodian 85,527
Registration 75,802
Trustees 60,358
Shareholder Service -- Class R1 8
Shareholder Service -- Class R2 1
Miscellaneous 49,973
------------
Total expenses before reimbursement 14,045,411
Expense reimbursement from Manager (258,449)
------------
Net Expenses 13,786,962
------------
Net investment loss (2,536,653)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions 83,456,247
Foreign currency transactions (9,722)
------------
Net realized gain on investments and foreign
currency transactions 83,446,525
------------
Net change in unrealized appreciation on
investments 21,503,347
------------
Net realized and unrealized gain on
investments and foreign currency
transactions 104,949,872
------------
Net increase in net assets resulting from
operations $102,413,219
============
</Table>
(a) Dividends recorded net of foreign withholding taxes of $2,872.
18 MainStay MAP Fund 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 YEAR ENDED OCTOBER 31, 2004, THE PERIOD JANUARY 1, 2003 THROUGH OCTOBER
31, 2003* AND THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
2004 2003* 2002
INCREASE IN NET ASSETS:
Operations:
Net investment income
(loss) $ (2,536,653) $ (2,034,493) $ 1,483,530
Net realized gain (loss)
on investments and
foreign currency
transactions 83,446,525 9,601,817 (55,362,524)
Net change in unrealized
appreciation
(depreciation) on
investments 21,503,347 124,644,560 (58,286,807)
--------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 102,413,219 132,211,884 (112,165,801)
--------------------------------------------
Dividends and distributions to
shareholders:
From net investment income:
Class A -- -- (591,975)
Class B -- -- --
Class C -- -- --
Class I -- -- (815,618)
From net realized gain on investments:
Class A -- -- (358,110)
Class B -- -- (455,285)
Class C -- -- (207,585)
Class I -- -- (330,392)
--------------------------------------------
Total dividends and
distributions to
shareholders -- -- (2,758,965)
--------------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 117,277,801 61,829,430 100,821,231
Class B 92,818,123 46,690,947 90,029,523
Class C 44,672,357 19,304,395 53,506,262
Class I 128,176,243 61,267,902 58,574,236
Class R1 62,122 -- --
Class R2 3,733 -- --
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A -- -- 801,111
Class B -- -- 403,046
Class C -- -- 154,233
Class I -- -- 1,102,772
--------------------------------------------
383,010,379 189,092,674 305,392,414
</Table>
<Table>
<Caption>
2004 2003* 2002
Cost of shares redeemed:
Class A $ (53,650,958) $ (43,414,587) $(49,191,426)
Class B (31,920,068) (21,993,148) (32,596,210)
Class C (15,543,242) (11,575,079) (17,554,911)
Class I (65,096,353) (29,475,751) (16,064,833)
Class R1 (29,064) -- --
--------------------------------------------
(166,239,685) (106,458,565) (115,407,380)
Increase in net
assets derived from
capital share
transactions 216,770,694 82,634,109 189,985,034
--------------------------------------------
Net increase in net
assets 319,183,913 214,845,993 75,060,268
NET ASSETS:
Beginning of period 676,151,325 461,305,332 386,245,064
--------------------------------------------
End of period $ 995,335,238 $ 676,151,325 $461,305,332
============================================
Accumulated 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. www.mainstayfunds.com
19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003 CLASS A JUNE 9**
YEAR ENDED THROUGH ------------------------------ THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31, DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning
of period $ 28.04 $ 21.95 $ 27.66 $ 27.25 $ 26.22 $25.38
-------- -------- -------- -------- ------- ------
Net investment income (loss) (0.01)(a) (0.04) 0.15 0.03 0.02 0.05
Net realized and unrealized
gain (loss) on investments 4.05 6.13 (5.69) 0.55 4.17 1.81
-------- -------- -------- -------- ------- ------
Total from investment
operations 4.04 6.09 (5.54) 0.58 4.19 1.86
-------- -------- -------- -------- ------- ------
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 $ 32.08 $ 28.04 $ 21.95 $ 27.66 $ 27.25 $26.22
======== ======== ======== ======== ======= ======
Total investment return (b) 14.41% 27.74%(c) (20.04%) 2.11% 16.67% 7.53%
Ratios (to average net
assets)/Supplemental Data:
Net investment income
(loss) (0.05%) (0.17%)+ 0.63% 0.37% 0.12% 0.46%+
Net expenses 1.35% 1.35%+ 1.33% 1.25% 1.25% 1.25%+
Expenses (before
reimbursement) 1.38% 1.45%+ 1.44% 1.43% 1.44% 1.41%+
Portfolio turnover rate 64% 61% 77% 19% 40% 32%
Net assets at end of period
(in 000's) $268,513 $176,932 $123,461 $103,402 $22,048 $8,651
</Table>
<Table>
<Caption>
JANUARY 1,
2003 CLASS C JUNE 9**
YEAR ENDED THROUGH ------------------------------ THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31, DECEMBER 31,
2004 2003* 2002 2001 2000 1999
Net asset value at beginning
of period $ 27.26 $ 21.47 $ 27.13 $ 26.92 $26.15 $25.38
-------- ------- ------- ------- ------ ------
Net investment income (loss) (0.24)(a) (0.16) (0.03) (0.06) (0.11) 0.02
Net realized and unrealized
gain (loss) on investments 3.94 5.95 (5.57) 0.41 4.04 1.76
-------- ------- ------- ------- ------ ------
Total from investment
operations 3.70 5.79 (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 $ 30.96 $ 27.26 $ 21.47 $ 27.13 $26.92 $26.15
======== ======= ======= ======= ====== ======
Total investment return (b) 13.57% 26.97%(c) (20.63%) 1.29% 15.72% 7.23%
Ratios (to average net
assets)/Supplemental Data:
Net investment income
(loss) (0.80%) (0.92%)+ (0.12%) (0.38%) (0.63%) (0.29%)+
Expenses 2.10% 2.10%+ 2.08% 2.00% 2.00% 2.00%+
Expenses (before
reimbursement) 2.13% 2.20%+ 2.19% 2.18% 2.19% 2.16%+
Portfolio turnover rate 64% 61% 77% 19% 40% 32%
Net assets at end of period
(in 000's) $138,044 $95,004 $69,077 $51,234 $6,546 $2,478
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Class A, B and C shares were first offered on June 9, 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).
**** Class R1 and Class R2 shares were first offered on January
2, 2004.
+ Annualized.
(a) Per share data based on average shares outstanding during
the period.
(b) Total return is calculated exclusive of sales charges.
Classes I, R1 and R2 are not subject to sales charges.
(c) Total return is not annualized.
(d) Less than one cent per share.
</Table>
20 MainStay MAP Fund 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>
JANUARY 1,
2003 CLASS B JUNE 9**
YEAR ENDED THROUGH ------------------------------ THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31, DECEMBER 31,
2004 2003* 2002 2001 2000 1999
$ 27.26 $ 21.47 $ 27.13 $ 26.92 $ 26.15 $ 25.38
-------- -------- -------- -------- ------- -------
(0.24)(a) (0.16) (0.03) (0.06) (0.11) 0.02
3.94 5.95 (5.57) 0.41 4.04 1.76
-------- -------- -------- -------- ------- -------
3.70 5.79 (5.60) 0.35 3.93 1.78
-------- -------- -------- -------- ------- -------
-- -- -- -- -- (0.07)
-- -- (0.06) (0.14) (3.16) (0.94)
-------- -------- -------- -------- ------- -------
-- -- (0.06) (0.14) (3.16) (1.01)
-------- -------- -------- -------- ------- -------
$ 30.96 $ 27.26 $ 21.47 $ 27.13 $ 26.92 $ 26.15
======== ======== ======== ======== ======= =======
13.57% 26.97%(c) (20.63%) 1.29% 15.72% 7.23%
(0.80%) (0.92%)+ (0.12%) (0.38%) (0.63%) (0.29%)+
2.10% 2.10%+ 2.08% 2.00% 2.00% 2.00%+
2.13% 2.20%+ 2.19% 2.18% 2.19% 2.16%+
64% 61% 77% 19% 40% 32%
$313,765 $220,932 $153,581 $134,883 $40,078 $11,511
</Table>
<Table>
<Caption>
CLASS R1 CLASS R2
JANUARY 1, ------------- -------------
2003 CLASS I*** JANUARY 2**** JANUARY 2****
YEAR ENDED THROUGH ----------------------------------------- THROUGH THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31, OCTOBER 31, OCTOBER 31,
2004 2003* 2002 2001 2000 1999 2004 2004
$ 28.19 $ 22.03 $ 27.75 $ 27.31 $ 26.25 $ 24.58 $30.38 $30.38
-------- -------- -------- ------- ------- ------- ------ ------
0.09(a) 0.00(a)(d) 0.19 0.07 0.12 0.11 0.05(a) (0.01)(a)
4.09 6.16 (5.69) 0.58 4.13 2.81 1.70 1.70
-------- -------- -------- ------- ------- ------- ------ ------
4.18 6.16 (5.50) 0.65 4.25 2.92 1.75 1.69
-------- -------- -------- ------- ------- ------- ------ ------
-- -- (0.16) (0.07) (0.03) (0.11) -- --
-- -- (0.06) (0.14) (3.16) (1.14) -- --
-------- -------- -------- ------- ------- ------- ------ ------
-- -- (0.22) (0.21) (3.19) (1.25) -- --
-------- -------- -------- ------- ------- ------- ------ ------
$ 32.37 $ 28.19 $ 22.03 $ 27.75 $ 27.31 $ 26.25 $32.13 $32.07
======== ======== ======== ======= ======= ======= ====== ======
14.83% 27.96%(c) (19.81%) 2.36% 16.88% 12.18% 5.76%(c) 5.56%(c)
0.31% 0.08%+ 0.88% 0.62% 0.37% 0.39% 0.21%+ (0.04%)
0.99% 1.10%+ 1.08% 1.00% 1.00% 0.88% 1.09%+ 1.34%+
1.02% 1.20%+ 1.19% 1.18% 1.19% 0.96% 1.12%+ 1.37%+
64% 61% 77% 19% 40% 32% 64% 64%
$274,975 $183,283 $115,186 $96,726 $69,434 $63,460 $ 34 $ 4
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. www.mainstayfunds.com
21
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company and comprises twenty-two 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 six classes of shares, Class A shares, Class B shares,
Class C shares, Class I shares, Class R1 shares and Class R2 shares.
Distribution of Class A shares, Class B shares, Class C shares and Class I
shares commenced on June 9, 1999. Distribution of Class R1 shares and Class R2
shares commenced on January 2, 2004. 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, Class R1 shares and Class R2 shares are not
subject to sales charge. The six 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 and Class R2 shares under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares and
Class R1 shares are not subject to a distribution or service fee. Class R1 and
Class R2 shares are authorized to pay to New York Life Investment Management
LLC, it affiliates, or independent third-party service providers, as
compensation for services rendered to shareholders of Class R1 or Class R2
shares, a shareholder service fee.
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.
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 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 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. Reasons for which securities may be valued in this manner
include, but are not limited to, trading for a security has been halted or
suspended, a security has been de-listed from a national exchange, or trading on
a security's primary market is temporarily closed at a time when under normal
conditions it would be open. The Fund did not hold securities at October 31,
2004, that were valued in such manner.
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) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue
22 MainStay MAP Fund
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, accumulated net realized gain on investments
and additional paid-in capital arising from permanent differences; net assets at
October 31, 2004, are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
NET NET REALIZED ADDITIONAL
INVESTMENT GAIN ON PAID-IN
LOSS INVESTMENTS CAPITAL
$2,524,420 $111,806 $(2,636,226)
</Table>
The reclassification for the Fund is primarily due to the fact that net
operating losses cannot be carried forward for federal income tax purposes,
foreign currency gain (loss), real estate investment trusts investments and
distributions paid in connection with the redemption of Fund shares.
(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) 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.
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.
(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
www.mainstayfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 Fund's
average daily net assets up to $1.0 billion and 0.70% on assets over $1.0
billion. The Manager has voluntarily agreed to reimburse the expenses of the
Fund to the extent that operating expenses would exceed on an annualized basis
1.35%, 2.10% and 2.10% of the average daily net assets of the Class A, Class B
and Class C shares, respectively and an equivalent amount for Class I, Class R1
and Class R2 shares. For the year ended October 31, 2004 earned from the Fund
$6,468,735 and reimbursed the Fund $258,449.
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, SERVICE AND SHAREHOLDER 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, Class C and Class R2 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 and Class R2 Plans, 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 and Class R2 shares, which is an expense
of the Class A and Class R2 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 and Class R1
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.
The Fund has adopted a shareholder services plan with respect to Class R1 and R2
shares. Under the terms of this plan, Class R1 and Class R2 shares are
authorized to pay to NYLIM, its affiliates, or independent third-party
providers, as compensation for services rendered, a shareholder service fee at
the rate of 0.10% of the average daily net assets of the Fund's Class R1 and R2
shares.
(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 $198,745 for the year
ended October 31, 2004. 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 $16,327, $392,114 and $27,307, respectively, for the year ended
October 31, 2004.
(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 for the year ended October 31, 2004
amounted to $2,313,877.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer 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 retainer fee of $20,000. The Audit
Committee Chairman receives an additional $2,000 for each meeting of the Audit
Committee attended and the Chairpersons of the Brokerage Committee, Operations
Committee and Performance Committee each receive an additional $1,000 for each
meeting of the Brokerage Committee, Operations Committee and Performance
Committee attended, respectively. In addition, each Non-Interested Trustee is
paid $1,000 for attending meetings of the Non-Interested Trustees held in
advance of or in connection with Board/Committee meetings. 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 $27,419 for the year ended October 31,
2004.
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%
24 MainStay MAP Fund
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 $112,916
for the year ended October 31, 2004.
NOTE 4 -- CUSTODIAN:
The Bank of New York is custodian of cash and securities of the Fund. Custodial
fees are charged to the Fund based on the market value of securities in the Fund
and the number of certain cash transactions incurred by the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2004, the components of accumulated gain on a tax basis were
as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
CAPITAL UNREALIZED ACCUMULATED
AND OTHER GAIN APPRECIATION GAIN
$42,033,440 $112,729,864 $154,763,304
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals and real estate investment trust
distributions.
The Fund utilized $42,290,239 of capital loss carryforward during the year ended
October 31, 2004.
The tax character of distributions paid during the year ended October 31, 2004,
the ten months ended October 31, 2003 and the year ended December 31, 2002,
shown in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2004 2003 2002
Distributions paid from:
Ordinary income $-- $-- $2,233,683
Long-term capital gains -- -- 525,282
- -----------------------------------------------------------
$-- $-- $2,758,965
- -----------------------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2004, purchases and sales of securities, other
than short-term securities, were $684,549 and $510,569, respectively.
NOTE 7 -- 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 year ended October 31, 2004.
NOTE 8 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 3,788 3,094 1,493
- ---------------------------------------------------------------
Shares issued in reinvestment of
dividends and distributions -- -- --
- ---------------------------------------------------------------
3,788 3,094 1,493
- ---------------------------------------------------------------
Shares redeemed (1,729) (1,064) (519)
- ---------------------------------------------------------------
Net increase 2,059 2,030 974
- ---------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS I CLASS R1* CLASS R2*
Shares sold 4,078 2 --(a)
- ---------------------------------------------------------------
Shares issued in
reinvestment of dividends
and distributions -- -- --
- ---------------------------------------------------------------
4,078 2 --(a)
- ---------------------------------------------------------------
Shares redeemed (2,086) (1) --
- ---------------------------------------------------------------
Net increase 1,992 1 --(a)
- ---------------------------------------------------------------
</Table>
<Table>
<Caption>
JANUARY 1 THROUGH
OCTOBER 31, 2003**
CLASS A CLASS B CLASS C CLASS I
Shares sold 2,489 1,920 778 2,448
- ------------------------------------------------------------------
Shares issued in
reinvestment of dividends
and distributions -- -- -- --
- ------------------------------------------------------------------
2,489 1,920 778 2,448
- ------------------------------------------------------------------
Shares redeemed (1,802) (966) (509) (1,176)
- ------------------------------------------------------------------
Net increase 687 954 269 1,272
- ------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2002
CLASS A CLASS B CLASS C CLASS I
Shares sold 3,907 3,567 2,098 2,358
- ------------------------------------------------------------------
Shares issued in
reinvestment of dividends
and distributions 36 19 7 49
- ------------------------------------------------------------------
3,943 3,586 2,105 2,407
- ------------------------------------------------------------------
Shares redeemed (2,058) (1,405) (776) (664)
- ------------------------------------------------------------------
Net increase 1,885 2,181 1,329 1,743
- ------------------------------------------------------------------
</Table>
<Table>
* First offered on January 2, 2004.
** The Fund changed its fiscal year end from December 31
to October 31.
(a) Less than one thousand.
</Table>
www.mainstayfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- OTHER MATTERS:
NYLIM and mutual funds that NYLIM advises have received requests for information
from various government authorities and regulatory bodies regarding market
timing, late trading, operations, fees, expenses, and other matters. NYLIM and
the funds it advises are cooperating fully in responding to these requests. As
reported in response to those requests for information, NYLIM was previously
party to agreements with certain registered representatives of broker-dealers
relating to the level of trading by clients or customers of those registered
representatives in shares of certain funds of the Trust. NYLIM is continuing to
review what effect, if any, transactions under these agreements may have had on
the funds, and will continue to apprise the Board of Trustees of such
information. NYLIM does not believe at this time that such trading had any
material effect on the funds' financial statements or their shareholders. To
date, substantially all of the costs associated with these and other regulatory
matters have been borne by NYLIM. Except as described below, neither NYLIM nor
the funds advised by it have any reason to believe that they have been targeted
as the subject of any governmental or regulatory enforcement action.
The SEC Staff has raised concerns relating to a guarantee provided to
shareholders of the MainStay Equity Index Fund and the fees and expenses of that
Fund, as well as the related guarantee disclosure to Fund shareholders.
Discussions have been held with the SEC concerning a possible resolution of this
matter. These discussions are continuing, but there can be no assurance at this
time as to the outcome of these efforts.
NOTE 10 -- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (UNAUDITED):
On March 8, 2004, KPMG LLP ("KPMG") was selected as the Trust's independent
auditor for the 2004 fiscal year. The selection of KPMG was recommended by the
Trust's Audit Committee, comprised of all Non-Interested Trustees, and was
approved by the Trust's Board of Trustees.
The predecessor independent auditor's reports on the Trust's financial
statements for the period ended October 31, 2003 and year ended December 31,
2002 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such fiscal periods, and through the date of engagement of KPMG, there
were no disagreements between the Trust and the predecessor independent auditor
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which such disagreements, if not
resolved to the satisfaction of the predecessor independent auditor, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on the financial statements for such periods.
26 MainStay MAP Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay MAP Fund (the "Fund"), one of the
funds constituting The MainStay Funds, as of October 31, 2004, and the related
statement of operations, statement of changes in net assets and the financial
highlights for the year or period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the period ended October 31, 2003 and the year ended December 31, 2002, and
the financial highlights for the periods presented through October 31, 2003,
were audited by other auditors, whose report dated December 18, 2003 expressed
an unqualified opinion thereon.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2004 by correspondence with the custodian and
brokers. As to securities purchased or sold but not yet received or delivered,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay MAP Fund of The MainStay Funds as of October 31, 2004, the results of
its operations, the changes in its net assets and its financial highlights for
the year or period then ended, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 28, 2004
www.mainstayfunds.com 27
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>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
GARY E. Chairman since Chief Executive Officer, Chairman, and 53 None
WENDLANDT 2002, President and Manager, New York Life Investment
10/8/50 Chief Executive Management LLC (including predecessor
Officer since June advisory organizations) and New York Life
15, 2004, and Trustee Investment Management Holdings LLC;
since 2000 Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
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);
President, Eclipse Funds Inc. (9
Portfolios) and Eclipse Funds (3
Portfolios); Executive Vice President and
Chief Investment Officer, MassMutual Life
Insurance Company (1993 to 1999).
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
CHARLYNN GOINS Trustee since 2001 Retired. Consultant to U.S. Commerce 22 None
9/15/42 Department, Washington, DC (1998 to
2000).
-------------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 22 None
8/17/32 Independent Management Consultant (1997
to 2002).
-------------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Partner, Health Ventures LLC; Vice Chair, 22 None
1/4/48 Employee Health Programs (1990 to 2002);
Partner, TheraCom (1994 to 2001);
President, Capitol Associates, Inc. (1984
to 2001).
-------------------------------------------------------------------------------------------------------------------------
JOHN B. Trustee since 1997 Chairman, Ulster Television Plc; Pro 22 Non-Executive
MCGUCKIAN Chancellor, Queen's University (1985 to Director,
11/13/39 2001). Allied Irish
Banks Plc;
Chairman and
Non-Executive
Director, Irish
Continental
Group, Plc;
Chairman, AIB
Group (UK) Plc;
Non-Executive
Director,
Unidare Plc.
-------------------------------------------------------------------------------------------------------------------------
DONALD E. Trustee since 1994 Retired. Vice Chairman, Harbour Group 22 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout firm). Adolor
12/9/32 Interested Trustee Corporation;
since 2000 Director, First
Advantage
Corporation.
-------------------------------------------------------------------------------------------------------------------------
</Table>
* 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."
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
28 MainStay MAP Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman and Chief Executive Officer, 22 None
TRUTANIC Somerset Group (financial advisory firm)
2/13/52 (1990 to present); Advisor and Managing
Director, The Carlyle Group (private
investment firm) (2002 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to 2001).
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF PORTFOLIOS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY OFFICER HELD BY OFFICER
-------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
JEFFERSON C. Senior Vice President Senior Managing Director, New York Life 34 None
BOYCE since 1995 Investment Management LLC (including
9/17/57 predecessor advisory organizations);
Senior Vice President, New York Life
Insurance Company; Manager, NYLIFE
Distributors LLC; Senior Vice President,
Eclipse Funds and Eclipse Funds Inc.
-------------------------------------------------------------------------------------------------------------------------
PATRICK J. Vice President, Managing Director, New York Life 59 None
FARRELL Treasurer, Chief Investment Management LLC (including
9/27/59 Financial and predecessor advisory organizations);
Accounting Officer Treasurer, Chief Financial and Accounting
since 2001 Officer, and Assistant Secretary, Eclipse
Funds Inc., Eclipse Funds, and MainStay
VP Series Fund, Inc.; Principal Financial
Officer and Assistant Treasurer, McMorgan
Funds.
-------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President- Managing Director and Chief Compliance 53 None
MICUCCI Compliance since Officer, New York Life Investment
12/16/65 September 21, 2004 Management LLC (June 2003 to present);
Vice President-Compliance, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series
Fund, Inc.; Senior Managing Director-
Compliance, NYLIFE Distributors LLC;
Deputy Chief Compliance Officer, New York
Life Investment Management LLC (September
2002 to June 2003); Vice President and
Compliance Officer, Goldman Sachs Asset
Management (November 1999 to August
2002).
-------------------------------------------------------------------------------------------------------------------------
MARGUERITE E. H. Secretary Managing Director and Associate General 53 None
MORRISON since Counsel, New York Life Investment
3/26/56 September 21, 2004 Management LLC (since June 2004);
Secretary, Eclipse Funds Inc., Eclipse
Funds and MainStay VP Series Fund, Inc.;
Managing Director and Secretary, NYLIFE
Distributors LLC; Chief Legal
Officer -- Mutual Funds and Vice
President and Corporate Counsel, The
Prudential Insurance Company of America
(2000 to June 2004).
-------------------------------------------------------------------------------------------------------------------------
RICHARD W. Tax Vice President Vice President, New York Life Insurance 53 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities, Inc.; Tax Vice
President, New York Life International,
LLC, Eclipse Funds, Eclipse Funds Inc.,
and MainStay VP Series Fund, Inc.
-------------------------------------------------------------------------------------------------------------------------
</Table>
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
www.mainstayfunds.com 29
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that
New York Life Investment Management LLC (NYLIM)
uses to vote proxies related to the Fund's securities is
available without charge, upon request, (i) by calling
1-800-MAINSTAY (1-800-624-6782); (ii) by visiting the Fund's website at
www.mainstayfunds.com; and (iii) on the Securities and Exchange Commission's
("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for each
Portfolio for the 12-month period ending June 30 on Form N-PX. The most recent
Form N-PX or relevant Portfolio proxy voting record is available free of charge
upon request by calling 1-800-MAINSTAY (1-800-624-6782), visiting the Fund's
website at www.mainstayfunds.com, or on the SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge, on the SEC's website at www.sec.gov and may be
available by calling NYLIM at 1-800-MAINSTAY (1-800-624-6782). You can obtain
copies of Form N-Q by (i) visiting the SEC's Public Reference Room in
Washington, DC (information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330); (ii) sending your request and a duplicating
fee to the SEC's Public Reference Room, Washington, DC 20549-0102; or (iii)
sending your request electronically to publicinfo@sec.gov.
INFORMATION ON THIS PAGE HAS NOT BEEN AUDITED.
30 MainStay MAP Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MainStay All Cap Growth Fund
MainStay All Cap Value Fund
MainStay Blue Chip Growth Fund
MainStay Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap Value Fund
MainStay Research Value Fund
MainStay S&P 500 Index Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Opportunity Fund
MainStay Small Cap Value Fund
MainStay Value Fund
INCOME FUNDS
MainStay Cash Reserves Fund
MainStay Diversified Income Fund
MainStay Floating Rate Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay Indexed Bond Fund
MainStay Intermediate Term Bond Fund
MainStay Money Market Fund
MainStay Short Term Bond Fund
MainStay Tax Free Bond Fund
BLENDED FUNDS
MainStay Asset Manager Fund
MainStay Balanced Fund
MainStay Convertible Fund
MainStay Strategic Value Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Bond Fund
MainStay International Equity Fund
1. Closed to new purchases as of January 1, 2002.
2. An affiliate of New York Life Investment Management LLC.
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(2)
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
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
www.mainstayfunds.com 31
(NEW YORK LIFE LOGO)
- ------------------------------------------------
/ Not FDIC insured. / No bank guarantee. / May lose value.
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may only be distributed when preceded or accompanied by a current
Fund prospectus.
www.mainstayfunds.com The MainStay Funds
(C)2004 NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A06431 (RECYCLE LOGO) MSMP11-12/04
30
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the Registrant has
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 its Audit Committee does not currently
have any member that qualifies as an "audit committee financial expert" as
defined under rules adopted by the Securities and Exchange Commission. In
accordance the authority granted under the Registrant's Audit Committee Charter,
the Audit Committee has retained a third party consultant to provide the
Committee and the Registrant with the financial expertise, knowledge and skills
similar to those of an audit committee financial expert.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees billed for the fiscal year ended October 31, 2004 for
professional services rendered by KPMG LLP ("KPMG") for the audit of the
Registrant's annual financial statements or services that are normally provided
by KPMG in connection with statutory and regulatory filings or engagements for
that fiscal year were $820,000. The aggregate fees billed for the fiscal period
ended October 31, 2003 for professional services rendered by
PricewaterhouseCoopers LLP ("PWC") for the audit of the Registrant's annual
financial statements or services that were normally provided by the PWC in
connection with statutory and regulatory filings or engagements for that fiscal
years were $782,662.
(b) Audit Related Fees
The aggregate fees billed for the fiscal year ended October 31, 2004 for
assurance and related services by KPMG that are reasonably related to the
performance of the audit of the Registrant's financial statements and are not
reported under paragraph (a) of this Item were $7,500. The aggregate fees billed
for the fiscal year ended October 31, 2004 for assurance and related services by
PWC that are reasonably related to the performance of the audit of the
Registrant's financial statements and are not reported under paragraph (a) of
this Item were $8,000. The aggregate fees billed for the fiscal period ended
October 31, 2003 for assurance and related services by PWC that are reasonably
related to the performance of the audit of the Registrant's financial statements
and are not reported under paragraph (a) of this Item were $6,000.
(c) Tax Fees
The aggregate fees billed: (i) during the fiscal year ended October 31, 2004 for
professional services rendered by KPMG for tax compliance, tax advice, and tax
planning were $116,000 and (ii) during the fiscal period ended October 31, 2003
for professional services rendered by PWC for tax compliance, tax advice, and
tax planning were $151,300. These services primarily included preparation of
federal, state and local income tax returns. Additionally, services included the
preparation of excise tax returns and excise tax distribution requirements.
(d) All Other Fees
The aggregate fees billed: (i) during the fiscal year ended October 31, 2004 for
products and services provided by KPMG, other than the services reported in
paragraphs (a) through (c) of this Item were $0 and (ii) during the fiscal
period ended October 31, 2003 for products and services provided by PWC, other
than the services reported in paragraphs (a) through (c) of this Item were $0.
(e) Pre-Approval Policies and Procedures
(1) The Registrant's Audit Committee has adopted pre-approval policies and
procedures (the "Procedures") to govern the Committee's pre-approval of (i) all
audit services and permissible non-audit services to be provided to the
Registrant by its independent accountant, and (ii) all permissible non-audit
services to be provided by such independent accountant to the Registrant's
investment adviser and to any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
Registrant (collectively, the "Service Affiliates") if the services directly
relate to the Registrant's operations and financial reporting. In accordance
with the Procedures, the Audit Committee is responsible for the engagement of
the independent accountant to certify the Registrant's financial statements for
each fiscal year. With respect to the pre-approval of non-audit services
provided to the Registrant and its Service Affiliates, the Procedures provide
that the Audit Committee may annually pre-approve a list of the types of
services that may be provided to the Registrant or its Service Affiliates, or
the Audit Committee may pre-approve such services on a project-by-project basis
as they arise. Unless a type of service has received general pre-approval, it
will require specific pre-approval by the Audit Committee if it is to be
provided by the independent accountant. The Procedures also permit the Audit
Committee to delegate authority to one or more of its members to pre-approve any
proposed non-audit services that have not been previously pre-approved by the
Audit Committee, subject to the ratification by the full Audit Committee no
later than its next scheduled meeting. To date, the Audit Committee has not
delegated such authority.
(2) With respect to the services described in paragraphs (b) through (d) of this
Item 4, no amount was approved by the Audit Committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) There were no hours expended on KPMG's engagement to audit the Registrant's
financial statements for the most recent fiscal year attributable to work
performed by persons other than KPMG's full-time, permanent employees.
(g) All non-audit fees billed by (i) KPMG for services rendered to the
Registrant for the fiscal year ended October 31, 2004 and (ii) PWC for services
rendered to the Registrant for the fiscal period ended October 31, 2003 are
disclosed in 4(b)-(d) above.
The aggregate non-audit fees billed by (i) KPMG for the year ended October 31,
2004 for services rendered to the Registrant's investment adviser (not including
any sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the adviser that
provides ongoing services to the Registrant were approximately $0 and
(ii) PWC for the fiscal period ended October 31,
2003 for services rendered to the Registrant's investment adviser (not including
any sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the adviser that
provides ongoing services to the Registrant were approximately $0.
(h) The Registrant's Audit Committee has determined that the non-audit services
rendered by (i) KPMG for the fiscal year ended October 31, 2004 and (ii) PWC for
the fiscal period ended October 31, 2003 to the Registrant's investment adviser
and any entity controlling, controlled by, or under common control with the
Registrant's investment adviser that provides ongoing services to the Registrant
that were not required to be pre-approved by the Audit Committee because they
did not relate directly to the operations and financial reporting of the
registrant were compatible with maintaining the respective independence of KPMG
and PWC during the relevant time periods.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
The Schedule of Investments is included as part of Item 1 of this report.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a meeting held on December 10-11, 2004, the Nominating Committee of the
Registrant adopted policies for considering Board Member candidates. The
Committee may consider nominations from shareholders of the Registrant. Each
eligible shareholder or shareholder group may submit no more than one candidate
each calendar year, and recommendations should be forwarded to the attention of
the Registrant's Secretary.
A shareholder's submission to the Secretary of the Registrant must
include: (a) contact information for the nominating shareholder or shareholder
group; (b) a certification from the nominating shareholder which provides the
number of shares which the person or group has: (i) sole power to vote or direct
the vote; (ii) shared power to vote or direct the vote; (iii) sole power to
dispose or direct the disposition of such shares; and (iv) shared power to
dispose or direct the disposition of such shares. In addition the certification
shall provide that the shares have been held continuously for at least two years
as of the date of the nomination; (c) the candidate's contact information and
the number of applicable Registrant shares owned by the candidate; (d) all
information regarding the candidate that would be required to be disclosed in
solicitations of proxies for elections of trustees required by Regulation 14A
under the Securities Exchange Act of 1934, as amended; and (e) a notarized
letter executed by the candidate, stating his or her intention to serve as a
candidate and be named in the Registrant's proxy statement, if so designated by
the Nominating Committee and the Registrant's Board.
It shall be in the Nominating Committee's sole discretion whether to seek
corrections of a deficient submission or to exclude a candidate from
consideration.
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the Disclosure Controls and Procedures (as
defined in Rule 30a-3(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 Registrant's principal
executive officer and principal financial officer have concluded that 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 changes in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940
that occurred during the second fiscal quarter of the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting.
ITEM 11. 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.
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
President and Chief Executive Officer
Date: January 7, 2005
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
President and Chief Executive Officer
Date: January 7, 2005
By: /s/ Patrick J. Farrell
--------------------------------------
PATRICK J. FARRELL
Treasurer and
Chief Financial and Accounting Officer
Date: January 7, 2005
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.