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: 11/1/04-10/31/05
FORM N-CSR
ITEM 1. REPORTS TO STOCKHOLDERS.
(MAINSTAY LOGO)
MAINSTAY
CAPITAL APPRECIATION FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay Capital Appreciation Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/S/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- --------------------------------------------------------------------------------
Investment and Performance Comparison 4
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 8
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 13
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public
Accounting Firm 22
- --------------------------------------------------------------------------------
Trustees and Officers 23
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 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 (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 4.81% -9.93% 4.42%
Excluding sales charges 10.91 -8.90 5.02
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
APPRECIATION FUND INDEX S&P 500 INDEX
----------------- ------------------- -------------
10/31/95 9450 10000 10000
11258 12205 12410
13933 15924 16394
16651 19848 20000
21856 26646 25134
24574 29132 26665
15124 17495 20024
12034 14063 16999
13961 17131 20535
13899 17710 22470
10/31/05 15416 19271 24429
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 5.11% -9.91% 4.27%
Excluding sales charges 10.11 -9.60 4.27
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
APPRECIATION FUND INDEX S&P 500 INDEX
----------------- ------------------- -------------
10/31/95 10000 10000 10000
11858 12205 12410
14605 15924 16394
17313 19848 20000
22546 26646 25134
25160 29132 26665
15363 17495 20024
12129 14063 16999
13958 17131 20535
13793 17710 22470
10/31/05 15187 19271 24429
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------
With sales charges 9.11% -9.60% 4.27%
Excluding sales charges 10.11 -9.60 4.27
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
APPRECIATION FUND INDEX S&P 500 INDEX
----------------- ------------------- -------------
10/31/95 10000 10000 10000
11858 12205 12410
14605 15924 16394
17313 19848 20000
22546 26646 25134
25160 29132 26665
15363 17495 20024
12129 14063 16999
13958 17131 20535
13793 17710 22470
10/31/05 15187 19271 24429
</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 max-
imum 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 THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Capital Appreciation Fund
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
11.27% -8.82% 5.21%
</Table>
(LINE GRAPH FOR CLASS I IN $)
<Table>
<Caption>
MAINSTAY CAPITAL RUSSELL 1000 GROWTH
APPRECIATION FUND INDEX S&P 500 INDEX
----------------- ------------------- -------------
10/31/95 10000 10000 10000
11982 12205 12410
14901 15924 16394
17836 19848 20000
23438 26646 25134
26360 29132 26665
16158 17495 20024
12880 14063 16999
14970 17131 20535
14932 17710 22470
10/31/05 16615 19271 24429
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ----------------------------------------------------------------
Russell 1000(R) Growth Index(1) 8.81% -7.93% 6.78%
S&P 500(R) Index(2) 8.72 -1.74 9.34
Average Lipper large-cap growth fund(3) 10.06 -7.15 6.48
</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 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 THE
TABLES AND 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
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT ENDING ACCOUNT
VALUE (BASED VALUE (BASED
BEGINNING ON ACTUAL EXPENSES ON HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000 $1,107.85 $ 6.75 $1,018.65 $ 6.46
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000 $1,104.50 $10.72 $1,014.90 $10.26
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000 $1,104.50 $10.72 $1,014.90 $10.26
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000 $1,107.80 $ 5.53 $1,019.80 $ 5.29
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.27% for Class A, 2.02% for Class B and Class C, and 1.04% for Class I)
multiplied by the average account value over the period, divided by 365,
multiplied by 184 (to reflect the one-half year period).
6 MainStay Capital Appreciation Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-TERM INVESTMENTS
(COLLATERAL FROM
SECURITIES LENDING LIABILITIES IN EXCESS OF CASH AND
COMMON STOCKS IS 9.1%) OTHER ASSETS
- ------------- ---------------------- ---------------------------------
99.3% 10.2 -9.5
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. UnitedHealth Group, Inc.
2. WellPoint, Inc.
3. Intel Corp.
4. Caremark Rx, Inc.
5. Corning, Inc.
6. BJ Services Co.
7. Amgen, Inc.
8. Apple Computer, Inc.
9. Praxair, Inc.
10. Coach, Inc.
</Table>
www.MAINSTAYfunds.com 7
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 normally invests in securities of U.S. companies with 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 MARKET DURING THE REPORTING PERIOD?
Arguably the biggest factor influencing the equity market during the reporting
period was the rise in the price of crude oil, which came on the heels of a 78%
increase in crude-oil prices in the previous year. The price of crude oil rose
as high as $69.81 per barrel on August 30, 2005, before falling off somewhat.
This energy inflation was among the factors that prompted the Federal Open
Market Committee to raise the federal funds target rate at a "measured pace"
throughout the reporting period. To keep inflation in check, the FOMC raised the
federal funds target rate eight times during the reporting period, with a
25-basis-point increase on each occasion. (A basis point is one-hundredth of a
percentage point.) Since high energy prices act as a silent tax on consumers and
can weigh on consumer spending, energy costs were a continuing concern for
equity investors. On the geopolitical front, negative headlines about progress
in Iraq also weighed heavily on investors' minds throughout the reporting
period.
WHAT DECISIONS HAD THE BIGGEST INFLUENCE ON THE FUND'S PERFORMANCE?
Excluding all sales charges, all of the Fund's share classes outperformed the
Fund's primary benchmark, the Russell 1000(R) Growth Index,(2) for the 12 months
ended October 31, 2005. Effective stock selection in the health care sector had
the most dramatic positive impact on the Fund's relative performance during the
reporting period. The Fund's relative results were also helped by overweighted
positions in energy
and consumer discretionary stocks. Energy stocks benefited from a dramatic rise
in the price of oil. Consumer discretionary stocks showed solid performance,
with historically low interest rates and a strong housing environment that
strengthened consumer spending. An underweighted position in consumer staples
and effective stock selection in the sector also helped relative returns as did
a modestly overweighted position in materials and strong stock selection in the
sector. The Fund's underweighted allocation to financials had a neutral impact
on relative results. An overweighted position and poor stock selection in
industrials had a negative impact on the Fund's performance. We reduced the
Fund's industrial holdings to a market-weighted position as the year progressed.
Although the Fund was prudently underweighted in information technology through
much of 12-month reporting period, stock selection in the sector hurt the Fund's
relative performance.
WHICH INDIVIDUAL SECURITIES HAD THE GREATEST POSITIVE IMPACT ON PERFORMANCE
DURING THE REPORTING PERIOD?
Peabody Energy mines and sells low-sulphur coal, mostly to utilities. With the
dramatic rise in the price of oil, investors surmised that demand for
alternative energy sources, such as coal, nuclear energy, and natural gas, would
also increase. Apple Computer, a leading manufacturer of personal computers and
consumer electronics, advanced primarily on the sales strength of its popular
iPod MP-3 players. Caremark Rx is a pharmacy benefit management company. During
the reporting period, the company integrated a major acquisition, signed several
new contracts, expanded operating margins, and rapidly increased earnings.
Health care provider UnitedHealth Group enjoyed strong earnings because of
robust demand and strong pricing power in the health care services sector.
Shares of Genentech, a biotechnology company, advanced on strong earnings
growth, promising new products, and positive results in clinical trials.
WHICH STOCKS DETRACTED FROM PERFORMANCE?
Maxim Integrated Products, a manufacturer of linear and mixed-signal integrated
circuits, saw its stock price decline primarily because of a cautious earnings
outlook, heightened competition, and a shift to relatively lower-margin consumer
products. The world's largest on-line auction site, eBay, felt the effects of
slowing economic growth in Western European markets and softening transaction
volume in the United States. Brunswick is a manufacturer of
1. See footnote on page 5 for more information on the S&P 500(R) Index.
2. See footnote on page 5 for more information on the Russell 1000(R) Growth
Index.
8 MainStay Capital Appreciation Fund
recreational products, including boats, marine engines, and equipment for
fitness, bowling, and billiards. During the reporting period, Brunswick lowered
its 2005 earnings guidance and cut production in the face of rising interest
rates, higher oil prices, devastating hurricanes, and declining consumer
confidence. Harman International Industries is a supplier of high-fidelity audio
products and electronics systems for the consumer and professional markets. The
company provided disappointing earnings guidance for fiscal 2006 and faced
heightened competition in the low-end navigation-systems market. Motorcycle
manufacturer Harley-Davidson lowered production guidance for the first time in
the company's history. Sales, earnings, and profit projections were also
adjusted, which took a toll on the company's shares.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
In the spring of 2005, we sold the Fund's entire positions in several technology
stocks because our research suggested that the companies' revenue and earnings
growth might slow. The companies were Applied Materials, the industry's largest
semiconductor equipment company; KLA Tencor, a manufacturer of semiconductor
test and processing equipment; Cisco Systems, the largest provider of data
networking products; Hewlett-Packard, a diversified provider of printers and
computer products and services; and Avaya, a leading provider of corporate
telephone systems. We redeployed the proceeds from these sales in other
information technology stocks, including Corning, EMC, Apple Computer, Intel,
Texas Instruments, and Motorola.
HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
It is important to note that the Fund's weightings are largely a residual of our
bottom-up stock-selection process and are affected by the Fund's careful sell
discipline. Because our process identified numerous attractive stocks in the
consumer discretionary sector, the Fund's exposure increased. We also increased
the Fund's exposure to the energy sector. The strong run-up in the price of oil
during the reporting period--along with the low probability that oil prices
would drop meaningfully below $50 a barrel anytime soon--led us to increase the
Fund's weighting in oil services stocks and stocks of companies that offer oil
alternatives, such as coal. We reduced the Fund's weightings in consumer
staples, industrials, and in information technology. In each case, the declines
resulted from company-specific sales rather than any overall impression about
the market or the economy. We also decreased the Fund's weighting in financials
because of rising interest rates.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2005, the Fund had overweighted positions relative to the
Russell 1000(R) Growth Index in consumer discretionary, energy, industrials, and
materials. As of the same date, the Fund was underweighted relative to the Index
in consumer staples, financials, health care, and information technology. At the
end of the reporting period, the Fund had no holdings in telecommunications
services or utilities.
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, 2005
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (99.3%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (3.9%)
L-3 Communications
Holdings, Inc. (a) 307,600 $ 23,937,432
United Technologies Corp. 469,500 24,075,960
--------------
48,013,392
--------------
AIR FREIGHT & LOGISTICS (1.8%)
FedEx Corp. 245,000 22,522,850
--------------
AUTOMOBILES (1.7%)
Harley-Davidson, Inc. (a) 419,600 20,782,788
--------------
BEVERAGES (1.0%)
PepsiCo, Inc. 199,800 11,804,184
--------------
BIOTECHNOLOGY (5.6%)
V Amgen, Inc. (a) (b) 367,800 27,864,528
Genentech, Inc. (b) 231,700 20,992,020
Gilead Sciences, Inc. (a) (b) 406,500 19,207,125
--------------
68,063,673
--------------
CAPITAL MARKETS (0.2%)
Ameriprise Financial, Inc. (b) 81,400 3,029,708
--------------
CHEMICALS (2.2%)
V Praxair, Inc. 547,300 27,042,093
--------------
COMMUNICATIONS EQUIPMENT (5.3%)
V Corning, Inc. (b) 1,447,000 29,070,230
Motorola, Inc. 1,019,500 22,592,120
QUALCOMM, Inc. 244,200 9,709,392
Research In Motion Ltd. (b) 58,600 3,603,314
--------------
64,975,056
--------------
COMPUTERS & PERIPHERALS (5.5%)
V Apple Computer, Inc. (b) 481,000 27,700,790
Dell, Inc. (b) 467,700 14,910,276
EMC Corp. (b) 1,087,400 15,180,104
International Business Machines Corp. 114,300 9,358,884
--------------
67,150,054
--------------
CONSUMER FINANCE (3.3%)
American Express Co. (a) 402,900 20,052,333
Capital One Financial Corp. (a) 264,500 20,194,575
--------------
40,246,908
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
ENERGY EQUIPMENT & SERVICES (9.2%)
Baker Hughes, Inc. 437,700 24,055,992
V BJ Services Co. (a) 824,800 $ 28,661,800
ENSCO International, Inc. 329,200 15,008,228
Transocean, Inc. (b) 338,400 19,454,616
Weatherford
International Ltd. (b) 396,800 24,839,680
--------------
112,020,316
--------------
FOOD & STAPLES RETAILING (1.8%)
Walgreen Co. (a) 474,900 21,574,707
--------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.7%)
Fisher Scientific
International, Inc. (b) 360,600 20,373,900
--------------
HEALTH CARE PROVIDERS & SERVICES (11.3%)
V Caremark Rx, Inc. (b) 566,600 29,689,840
Coventry Health Care, Inc. (b) 245,400 13,249,146
Quest Diagnostics, Inc. 448,900 20,968,119
V UnitedHealth Group, Inc. (a) 707,800 40,974,542
V WellPoint, Inc. (b) 435,100 32,493,268
--------------
137,374,915
--------------
HOTELS, RESTAURANTS & LEISURE (1.1%)
Carnival Corp. 272,100 13,515,207
--------------
HOUSEHOLD DURABLES (7.1%)
Centex Corp. (a) 356,400 22,934,340
D.R. Horton, Inc. 736,533 22,604,198
Harman International
Industries, Inc. 176,100 17,585,346
Lennar Corp. Class A 424,700 23,604,826
--------------
86,728,710
--------------
INDUSTRIAL CONGLOMERATES (3.6%)
3M Co. 264,800 20,119,504
General Electric Co. 712,500 24,160,875
--------------
44,280,379
--------------
INTERNET & CATALOG RETAIL (0.8%)
eBay, Inc. (a) (b) 251,900 9,975,240
--------------
LEISURE EQUIPMENT & PRODUCTS (1.0%)
Brunswick Corp. 306,100 11,671,593
--------------
MACHINERY (3.6%)
Danaher Corp. (a) 427,800 22,288,380
Illinois Tool Works, Inc. (a) 253,900 21,520,564
--------------
43,808,944
--------------
MEDIA (1.5%)
Omnicom Group, Inc. 222,900 18,491,784
--------------
</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.
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>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
MULTILINE RETAIL (3.7%)
Kohl's Corp. (b) 450,000 $ 21,658,500
Target Corp. 413,100 23,005,539
--------------
44,664,039
--------------
OIL, GAS & CONSUMABLE FUELS (2.3%)
Apache Corp. 116,300 7,423,429
Peabody Energy Corp. (a) 257,700 20,141,832
--------------
27,565,261
--------------
PHARMACEUTICALS (2.1%)
Johnson & Johnson 401,500 25,141,930
--------------
ROAD & RAIL (0.8%)
Norfolk Southern Corp. 252,600 10,154,520
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (5.4%)
Analog Devices, Inc. 182,000 6,329,960
V Intel Corp. 1,270,100 29,847,350
Linear Technology Corp. (a) 402,400 13,363,704
Maxim Integrated
Products, Inc. 236,100 8,187,948
National Semiconductor Corp. 377,900 8,551,877
--------------
66,280,839
--------------
SOFTWARE (2.1%)
Microsoft Corp. 332,300 8,540,110
Oracle Corp. (a) (b) 1,315,600 16,681,808
--------------
25,221,918
--------------
SPECIALTY RETAIL (5.6%)
Bed Bath & Beyond, Inc. (a) (b) 561,800 22,764,136
Best Buy Co., Inc. 488,850 21,636,501
Lowe's Cos., Inc. 392,300 23,840,071
--------------
68,240,708
--------------
TEXTILES, APPAREL & LUXURY GOODS (4.1%)
V Coach, Inc. (b) 839,900 27,027,982
NIKE, Inc. Class B 274,900 23,105,345
--------------
50,133,327
--------------
Total Common Stocks
(Cost $949,882,460) 1,210,848,943
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (10.2%)
- --------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.4%)
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (c)(d) $ 4,113,021 $ 4,113,021
--------------
Total Certificate of Deposit
(Cost $4,113,021) 4,113,021
--------------
COMMERCIAL PAPER (1.5%)
Compass Securitization
3.993%, due 11/22/05 (c) 2,937,873 2,937,873
Falcon Asset
Securitization Corp.
4.026%, due 12/2/05 (c) 1,762,723 1,762,723
Rabobank USA Finance Corp.
3.92%, due 11/3/05 5,035,000 5,033,903
Silver Tower U.S. Funding
3.932%, due 11/15/05 (c) 1,744,169 1,744,169
UBS Finance Delaware LLC
4.00%, due 11/1/05 7,065,000 7,065,000
--------------
Total Commercial Paper
(Cost $18,543,668) 18,543,668
--------------
<Caption>
SHARES
INVESTMENT COMPANY (2.2%)
BGI Institutional Money
Market Fund (c) 26,794,345 26,794,345
--------------
Total Investment Company
(Cost $26,794,345) 26,794,345
--------------
<Caption>
PRINCIPAL
AMOUNT
TIME DEPOSITS (6.1%)
Bank of the West (The)
4.02%, due 12/8/05 (c) $11,163,914 11,163,914
Barclays
3.92%, due 12/5/05 (c) 4,700,593 4,700,593
3.94%, due 11/28/05 (c) 5,288,170 5,288,170
Credit Suisse First
Boston Corp.
3.74%, due 11/1/05 (c) 4,113,021 4,113,021
Deutsche Bank
3.95%, due 12/2/05 (c) 4,700,595 4,700,595
First Tennessee National Corp.
3.88%, due 11/14/05 (c) 4,700,595 4,700,595
Fortis Bank
4.00%, due 12/12/05 (c) 5,288,170 5,288,170
</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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
TIME DEPOSITS (CONTINUED)
Halifax Bank of Scotland
3.75%, due 11/1/05 (c) $ 4,700,595 $ 4,700,595
Keybank
4.00%, due 11/1/05 (c) 5,256,204 5,256,204
Marshall & Ilsley Bank
3.97%, due 12/29/05 (c) 4,700,595 4,700,595
Societe Generale
3.77%, due 11/1/05 (c) 9,988,765 9,988,765
UBS AG
4.01%, due 12/13/05 (c) 4,700,595 4,700,595
Wells Fargo & Co.
4.00%, due 11/25/05 (c) 4,700,595 4,700,595
--------------
Total Time Deposits
(Cost $74,002,407) 74,002,407
--------------
Total Short-Term Investments
(Cost $123,453,441) 123,453,441
--------------
Total Investments
(Cost $1,073,335,901) (e) 109.5% 1,334,302,384(f)
Liabilities in Excess of Cash
and Other Assets (9.5) (115,241,789)
----------- --------------
Net Assets 100.0% $1,219,060,595
=========== ==============
</Table>
<Table>
(a) Represents security, or a portion thereof, which is out
on loan.
(b) Non-income producing security.
(c) Represents security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(d) Floating rate. Rate shown is the rate in effect at
October 31, 2005.
(e) The cost for federal income tax purposes is
$1,074,234,709.
(f) At October 31, 2005 net unrealized appreciation was
$260,067,675, 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 $285,417,319 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $25,349,644.
</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.
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 ASSETS AND LIABILITIES
AS OF OCTOBER 31, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $1,073,335,901) including
$108,784,759 market value of securities
loaned $1,334,302,384
Receivables:
Fund shares sold 368,746
Dividends and interest 121,231
Other assets 46,207
--------------
Total assets 1,334,838,568
--------------
LIABILITIES:
Securities lending collateral 111,354,538
Payables:
Fund shares redeemed 1,400,246
Transfer agent 1,140,146
NYLIFE Distributors 892,758
Manager 592,511
Shareholder communication 265,152
Investment securities purchased 15,696
Custodian 10,034
Due to custodian 148
Accrued expenses 106,744
--------------
Total liabilities 115,777,973
--------------
Net assets $1,219,060,595
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.010 per share) unlimited
number of shares authorized:
Class A $ 73,350
Class B 359,741
Class C 2,584
Class I --(a)
Additional paid-in capital 1,196,843,521
Accumulated net realized loss on investments (239,185,084)
Net unrealized appreciation on investments 260,966,483
--------------
Net assets $1,219,060,595
==============
CLASS A
Net assets applicable to outstanding shares $ 220,611,203
==============
Shares of beneficial interest outstanding 7,334,983
==============
Net asset value per share outstanding $ 30.08
Maximum sales charge (5.50% of offering
price) 1.75
--------------
Maximum offering price per share outstanding $ 31.83
==============
CLASS B
Net assets applicable to outstanding shares $ 991,328,242
==============
Shares of beneficial interest outstanding 35,974,092
==============
Net asset value and offering price per share
outstanding $ 27.56
==============
CLASS C
Net assets applicable to outstanding shares $ 7,120,089
==============
Shares of beneficial interest outstanding 258,374
==============
Net asset value and offering price per share
outstanding $ 27.56
==============
CLASS I
Net assets applicable to outstanding shares $ 1,061
==============
Shares of beneficial interest outstanding 35
==============
Net asset value and offering price per share
outstanding $ 30.21
==============
</Table>
(a) Less than one dollar.
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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 11,018,038
Interest 102,413
Income from securities loaned -- net 183,415
-------------
Total income 11,303,866
-------------
EXPENSES:
Distribution -- Class B 8,042,477
Distribution -- Class C 59,296
Manager 7,512,626
Transfer agent -- Classes A, B and C 4,911,405
Transfer agent -- Class I 4
Distribution/Service -- Class A 610,719
Service -- Class B 2,680,826
Service -- Class C 19,765
Shareholder communication 365,301
Professional 273,960
Recordkeeping 159,119
Custodian 93,109
Trustees 92,853
Registration 65,237
Miscellaneous 44,500
-------------
Total expenses 24,931,197
-------------
Net investment loss (13,627,331)
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 87,362,858
Net change in unrealized appreciation on
investments 58,572,551
-------------
Net realized and unrealized gain on
investments 145,935,409
-------------
Net increase in net assets resulting from
operations $132,308,078
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$55,709.
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.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
DECREASE IN NET ASSETS:
Operations:
Net investment loss $ (13,627,331) $ (17,017,118)
Net realized gain (loss) on
investments 87,362,858 (60,332,360)
Net change in unrealized
appreciation on investments 58,572,551 66,663,970
-------------------------------
Net increase (decrease) in net
assets resulting from
operations 132,308,078 (10,685,508)
-------------------------------
Capital share transactions:
Net proceeds from sale of
shares:
Class A 35,814,597 61,275,640
Class B 48,606,802 76,298,217
Class C 838,918 1,316,452
Class I 14 1,000
-------------------------------
85,260,331 138,891,309
Cost of shares redeemed:
Class A (109,647,573) (129,066,636)
Class B (296,854,534) (231,715,272)
Class C (3,199,154) (3,024,132)
Class I (13) --
-------------------------------
(409,701,274) (363,806,040)
Decrease in net assets
derived from capital share
transactions (324,440,943) (224,914,731)
-------------------------------
Net decrease in net assets (192,132,865) (235,600,239)
NET ASSETS:
Beginning of year 1,411,193,460 1,646,793,699
-------------------------------
End of year $1,219,060,595 $1,411,193,460
===============================
</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>
CLASS A
---------------------------------------------------------------------------------
JANUARY 1,
2003
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003* 2002 2001 2000
Net asset value at beginning
of period $ 27.12 $ 27.24 $ 22.49 $ 32.86 $ 43.46 $ 57.12
-------- -------- ----------- -------- -------- --------
Net investment loss (a) (0.12)(d) (0.13) (0.09) (0.13) (0.15) (0.33)
Net realized and unrealized
gain (loss) on investments 3.08 0.01 4.84 (10.24) (10.22) (6.16)
-------- -------- ----------- -------- -------- --------
Total from investment
operations 2.96 (0.12) 4.75 (10.37) (10.37) (6.49)
-------- -------- ----------- -------- -------- --------
Less distributions:
From net realized gain on
investments -- -- -- -- (0.23) (7.17)
-------- -------- ----------- -------- -------- --------
Net asset value at end of
period $ 30.08 $ 27.12 $ 27.24 $ 22.49 $ 32.86 $ 43.46
======== ======== =========== ======== ======== ========
Total investment return (b) 10.91% (0.44%) 21.12%(c) (31.56%) (23.85%) (11.17%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (0.41%)(d) (0.48%) (0.45%)+ (0.48%) (0.41%) (0.59%)
Net expenses 1.27% 1.25% 1.30% + 1.28% 1.29% 1.19%
Expenses (before
reimbursement) 1.27% 1.25% 1.30% + 1.23% 1.10% 0.99%
Portfolio turnover rate 27% 28% 19% 69% 44% 38%
Net assets at end of period
(in 000's) $220,611 $268,199 $335,484 $277,526 $442,526 $590,366
</Table>
<Table>
<Caption>
CLASS C
-------------------------------------------------------------------------
JANUARY 1,
2003
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003* 2002 2001 2000
Net asset value at beginning
of period $25.03 $25.33 $ 21.05 $31.00 $ 41.35 $ 55.15
------ ------ ----------- ------ ------- -------
Net investment loss (a) (0.31)(d) (0.32) (0.23) (0.32) (0.39) (0.72)
Net realized and unrealized
gain (loss) on investments 2.84 0.02 4.51 (9.63) (9.73) (5.91)
------ ------ ----------- ------ ------- -------
Total from investment
operations 2.53 (0.30) 4.28 (9.95) (10.12) (6.63)
------ ------ ----------- ------ ------- -------
Less distributions:
From net realized gain on
investments -- -- -- -- (0.23) (7.17)
------ ------ ----------- ------ ------- -------
Net asset value at end of
period $27.56 $25.03 $ 25.33 $21.05 $ 31.00 $ 41.35
====== ====== =========== ====== ======= =======
Total investment return (b) 10.11% (1.18%) 20.33%(c) (32.10%) (24.46%) (11.82%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.16%)(d) (1.23%) (1.20%)+ (1.23%) (1.16%) (1.34%)
Net expenses 2.02% 2.00% 2.05% + 2.03% 2.04% 1.94%
Expenses (before
reimbursement) 2.02% 2.00% 2.05% + 1.98% 1.85% 1.74%
Portfolio turnover rate 27% 28% 19% 69% 44% 38%
Net assets at end of period
(in 000's) $7,120 $8,694 $10,475 $9,819 $18,162 $27,241
</Table>
<Table>
* The Fund has changed is fiscal year end from December 31 to October 31.
** Commencement of operations.
+ 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.
(d) Net investment loss and the ratio of net investment loss includes $0.05 per share and
0.18%, respectively as a result of a special one time dividend from Microsoft Corp.
</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.
<Table>
<Caption>
CLASS B
-----------------------------------------------------------------------------------------
JANUARY 1,
2003
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003* 2002 2001 2000
$ 25.03 $ 25.33 $ 21.05 $ 30.99 $ 41.34 $ 55.15
-------- ---------- ----------- ---------- ---------- ----------
(0.31)(d) (0.32) (0.23) (0.32) (0.39) (0.72)
2.84 0.02 4.51 (9.62) (9.73) (5.92)
-------- ---------- ----------- ---------- ---------- ----------
2.53 (0.30) 4.28 (9.94) (10.12) (6.64)
-------- ---------- ----------- ---------- ---------- ----------
-- -- -- -- (0.23) (7.17)
-------- ---------- ----------- ---------- ---------- ----------
$ 27.56 $ 25.03 $ 25.33 $ 21.05 $ 30.99 $ 41.34
======== ========== =========== ========== ========== ==========
10.11% (1.18%) 20.33%(c) (32.07%) (24.47%) (11.85%)
(1.16%)(d) (1.23%) (1.20%)+ (1.23%) (1.16%) (1.34%)
2.02% 2.00% 2.05% + 2.03% 2.04% 1.94%
2.02% 2.00% 2.05% + 1.98% 1.85% 1.74%
27% 28% 19% 69% 44% 38%
$991,328 $1,134,299 $1,300,835 $1,165,260 $2,004,638 $2,905,828
</Table>
<Table>
<Caption>
CLASS I
- -----------------------------------
JANUARY 1,
2004
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2005 2004**
$27.15 $28.48
----------- -----------
(0.06)(d) (0.11)
3.12 (1.22)
----------- -----------
3.06 (1.33)
----------- -----------
----------- -----------
$30.21 $27.15
=========== ===========
11.27% (4.67%)(c)
(0.18%)(d) (0.11%)+
1.04% 0.88% +
1.04% 0.88% +
27% 28%
$ 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 nineteen 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, Class C 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 accounting
principles generally accepted in the United States of America 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 normally are taken from the principal 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 in good faith by 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 principal
market is temporarily closed at a time when under normal conditions it would be
open. The Fund did not hold securities at October 31, 2005, 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 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 accounting principles generally accepted in
the United States of America. 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.
18 MainStay Capital Appreciation Fund
The following table discloses the current year reclassifications between net
investment loss and additional paid-in-capital arising from permanent
differences; net assets at October 31, 2005, are not affected.
<Table>
<Caption>
NET
INVESTMENT ADDITIONAL
LOSS PAID-IN CAPITAL
$13,627,331 $(13,627,331)
</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. 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 transfer agent expenses and 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.
(H) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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 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 percentage of the Fund's
average daily net assets as follows: 0.72% on assets up to $200 million, 0.65%
on assets from $200 million to $500 million and 0.50% on assets in excess of
$500 million. For the year ended October 31, 2005, the Manager earned fees from
the Fund in the amount of $7,512,626.
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 $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 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.
www.MAINSTAYfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $96,156 for the year ended
October 31, 2005. 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 $11,319, $912,707 and $971, respectively, for the year ended October
31, 2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $4,911,409.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(F) CAPITAL. At October 31, 2005, New York Life and its affiliates held shares
of Class I with a net asset value of $1,061. This represents 100.0% of the Class
I shares net assets and less than one tenth of one percent of the Fund's total
net assets at October 31, 2005.
(G) OTHER. Pursuant to the Management Agreement, 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
$34,116 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $159,119 for the year ended
October 31, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, State Street Bank and Trust Company acted as custodian for
the Fund.
NOTE 5--FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
TOTAL
ACCUMULATED CAPITAL UNREALIZED ACCUMULATED
AND OTHER LOSSES APPRECIATION GAIN
$(238,286,276) $260,067,675 $21,781,399
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals.
At October 31, 2005, for federal income tax purposes, capital loss carryforwards
of $238,286,276 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 $ 23,983
2010 104,708
2011 49,074
2012 60,521
-------------------------------------------
$238,286
-------------------------------------------
</Table>
The Fund utilized $85,839,919 of capital loss carryforwards during the year
ended October 31, 2005.
NOTE 6--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $353,378 and $668,029, respectively.
NOTE 7--PORTFOLIO SECURITIES LOANED:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $108,784,759. The Fund
20 MainStay Capital Appreciation Fund
received $111,354,538 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, 2005.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED OCTOBER 31, 2005
CLASS A CLASS B CLASS C CLASS I
Shares sold 1,235 1,826 32 --(a)
- ---------------------------------------------------------------------------------
Shares redeemed (3,789) (11,161) (121) --(a)
- ---------------------------------------------------------------------------------
Net decrease (2,554) (9,335) (89) --(a)
- ---------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED OCTOBER 31, 2004
CLASS A CLASS B CLASS C CLASS I*
Shares sold 2,191 2,931 50 --(a)
- --------------------------------------------------------------------------------
2,191 2,931 50 --(a)
- --------------------------------------------------------------------------------
Shares redeemed (4,620) (8,975) (117) --
- --------------------------------------------------------------------------------
Net decrease (2,429) (6,044) (67) --(a)
- --------------------------------------------------------------------------------
</Table>
(a) Less than one-thousand.
* Commenced operations on January 2, 2004.
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.9 million to nine MainStay funds. The amount paid to the MainStay
Capital Appreciation Fund was $3,205,000. NYLIM has also agreed to reimburse or
pay all expenses relating to the Board of Trustees' review of this matter and
has paid substantially all of the costs associated with the other regulatory
matters described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
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,
2005, and the related statement of operations for the year then ended, and the
statements of changes in net assets and financial highlights for each of the
years in the two-year 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 audits. 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 audits 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
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, 2005, by correspondence with custodians 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 audits provide 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, 2005,
the results of its operations for the year then ended, and the changes in its
net assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
www.MAINSTAYfunds.com 23
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
24 MainStay Capital Appreciation Fund
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 25
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's underperformance over several
time periods, recent change of personnel on the portfolio management team
serving the Fund, and the Subadvisor's implementation of plan intended to
improve the Fund's performance.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees considered certain benefits
expected for, and risks borne by, the Manager and its affiliates, including
benefits from soft dollar arrangements. The Trustees considered the services
provided to the Fund by affiliates of the Manager, NYLIFE Distributors and NYLIM
Service, under other agreements, and the benefits to the Manager and its
affiliates from those relationships. The information provided to the Trustees
indicated that the profitability to the Manager and its affiliates arising
directly from those other agreements was not excessive. The Trustees
acknowledged certain benefits to the reputation of the Manager and its
affiliates, as well to that of the Trust, from their association with each
other.
The Trustees, in considering economies of scale, reviewed information showing
that the Fund, though one of the largest series of the MainStay Funds, had not
significantly increased in size during the past five years. The Trustees
discussed the extent to which, in the event the Fund were to increase in size,
economies of scale were projected by the Manager to be realized. They noted that
the Fund's contractual management fee had been reduced by the breakpoint
schedule applicable to the Fund that was intended to provide that the Fund's
shareholders would
26 MainStay Capital Appreciation Fund
share in benefits from economies of scale arising from the growth of Fund
assets. Acknowledging the difficulty of forecasting economies of scale, the
Trustees generally expressed an intention to monitor the Manager's profitability
and consider the application of fee breakpoints or other appropriate measures as
the Board may determine from time to time. The Trustees reviewed historical
information about changes in the Fund's expense and asset levels over time, as
well as information about certain Fund expenses that would remain fixed even as
Fund assets increase and, therefore, provide the Fund with benefits from
economies of scale as the Fund grows. The Trustees considered various
information about transfer agency expenses, including information showing that
transfer agency fees of a significant number of series of the Trust (although
not every such series or with respect to every share class of each series)
tended to be high, when aggregated and expressed as a percentage of the assets
of certain series, compared to the mutual fund industry average according to
certain studies reviewed by the Board and, therefore, adversely affected gross
expense ratios. The Board received information about potential effects on the
Manager were it to subsidize certain portions of the Trust's transfer agency
fees. The Trustees noted that a significant number of shareholders of the
Trust's series had small amounts invested in the series, and have considered
measures intended to increase average shareholder account size and/or otherwise
reduce the Trust's transfer agency fees and expenses, including steps that the
Manager has taken to encourage shareholders to consolidate or close small
accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated expense ratio, and various components of that expense ratio, in
comparison to other funds in comparison groupings prepared by outside data
providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
28 MainStay Capital Appreciation 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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
www.MAINSTAYfunds.com 29
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[True Blank Page]
(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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A07973 (RECYCLE LOGO) MS475-05 MSCA11-12/05
04
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
DIVERSIFIED INCOME FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay Diversified Income Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/S/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- --------------------------------------------------------------------------------
Investment and Performance Comparison 4
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 8
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 25
- --------------------------------------------------------------------------------
Notes to Financial Statements 30
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 39
Trustees and Officers 40
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 43
- --------------------------------------------------------------------------------
Federal Income Tax Information 45
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures 45
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 45
- --------------------------------------------------------------------------------
MainStay Funds 46
</Table>
www.MAINSTAYfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -2.49% 6.45% 5.18%
Excluding sales charges 2.11 7.43 5.74
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND THREE-INDEX COMPOSITE AGGREGATE BOND INDEX
-------------------- --------------------- --------------------
2/28/97 9550 10000 10000
9539 9916 10037
10549 10961 11132
10958 11568 11831
10777 11330 11980
11082 11709 13463
11809 12407 14519
13064 14372 16038
14468 15694 16330
10/31/05 15503 16806 17214
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -3.65% 6.32% 4.95%
Excluding sales charges 1.23 6.63 4.95
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND THREE-INDEX COMPOSITE AGGREGATE BOND INDEX
-------------------- --------------------- --------------------
2/28/97 10000 10000 10000
9972 9916 10037
10956 10961 11132
11291 11568 11831
11020 11330 11980
11248 11709 13463
11912 12407 14519
13064 14372 16038
14369 15694 16330
10/31/05 15210 16806 17214
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 0.26% 6.63% 4.95%
Excluding sales charges 1.23 6.63 4.95
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND THREE-INDEX COMPOSITE AGGREGATE BOND INDEX
-------------------- --------------------- --------------------
2/28/97 10000 10000 10000
9972 9916 10037
10956 10961 11132
11291 11568 11831
11020 11330 11980
11248 11709 13463
11912 12407 14519
13064 14372 16038
14369 15694 16330
10/31/05 15210 16806 17214
</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. 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 contractual and
may be modified or terminated only with the approval of the Board of Trustees.
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 THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Diversified Income Fund
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
2.32% 7.71% 6.02%
</Table>
<Table>
<Caption>
MAINSTAY DIVERSIFIED LEHMAN BROTHERS
INCOME FUND THREE-INDEX COMPOSITE AGGREGATE BOND INDEX
-------------------- --------------------- --------------------
2/28/97 10000 10000 10000
9992 9916 10037
11078 10961 11132
11536 11568 11831
11376 11330 11980
11728 11709 13463
12529 12407 14519
13896 14372 16038
15442 15694 16330
10/31/05 16602 16806 17124
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- ------------------------------------------------------------------
Three-Index Composite(1) 0.79% 8.15% 6.17%
Lehman Brothers(R) Aggregate Bond
Index(2) 1.13 6.31 6.47
Average Lipper multi-sector income
fund(3) 3.49 7.69 5.73
</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, Corporate Index, Mortgage-Backed Securities Index and
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 THE
TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.MAINSTAYfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY DIVERSIFIED INCOME FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
VALUE
ENDING ACCOUNT (BASED ON
VALUE (BASED HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% RETURN EXPENSES
ACCOUNT RETURNS AND PAID AND ACTUAL PAID
VALUE EXPENSES) DURING EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,007.15 $ 6.83 $1,018.25 $ 6.87
- --------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,002.30 $10.60 $1,014.50 $10.66
- --------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,002.30 $10.60 $1,014.50 $10.66
- --------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,008.45 $ 5.01 $1,020.05 $ 5.04
- --------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.35% for Class A, 2.10% for Class B and Class C, and 0.99% for Class I)
multiplied by the average account value over the period, divided by 365,
multiplied by 184 (to reflect the one-half year period).
6 MainStay Diversified Income Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-
TERM
INVESTMENTS
U.S. (COLLATERAL
GOVERNMENT FROM LOAN
FOREIGN & SECURITIES CORPORATE MORTAGE- ASSET- ASSIGNMENTS
GOVERNMENT CORPORATE FEDERAL LENDING BONDS- BACKED BACKED AND CONVERTIBLE
BONDS BONDS AGENCIES 3.7%) FOREIGN SECURITIES SECURITIES PARTICIPATIONS BONDS
- ---------- --------- ---------- ----------- --------- ---------- ---------- -------------- -----------
27.6% 25.2 25.0 17.9 9.4 2.3 1.6 1.0 1.0%
<Caption>
LIABILITIES
IN
EXCESS
OF
CASH
CONVERTIBLE AND
PREFERRED YANKEE COMMON PREFERRED MUNICIPAL OTHER
STOCKS BONDS STOCKS STOCKS BOND WARRANTS ASSETS
- --------- ------ ------ ----------- --------- -------- -----------
0.6 0.6 0.3 0.2 0.1 0.1 -12.9
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Federal Home Loan Mortgage Corporation 5.50%,
due 12/1/35 TBA
2. Federal National Mortgage Association 5.00%, due
12/1/35 TBA
3. Republic of Germany 3.75%, due 1/4/09
4. Federal National Mortgage Association 5.50%, due
12/1/20 TBA
5. Republic of Germany 5.00%, due 7/4/11
6. Federal National Mortgage Association 6.00%, due
12/1/35 TBA
7. Hellenic Republic 4.50%, due 5/20/14
8. United States Treasury Bond 6.25%, due 8/15/23
9. United States Treasury Note 3.00%, due 2/15/08
10. Federal National Mortgage Association 5.50%, due
12/1/35 TBA
</Table>
www.MAINSTAYfunds.com 7
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 including
U.S. government securities (which may include mortgage-related and asset backed
securities), foreign government securities and U.S. corporate and foreign
corporate debt securities. The Fund may invest in high-yield securities, if
available, in any of these 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.
WHAT SIGNIFICANT FACTORS AFFECTED THE BOND MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2005?
The Federal Open Market Committee raised the targeted federal funds rate eight
times during the reporting period, with a 25-basis-point increase on each
occasion. This caused a sharp increase in the yields of short-term domestic
issues. Strong inflows from Asian central banks helped support prices among
longer-dated U.S. Treasurys and resulted in a substantial flattening of the
yield curve during the reporting period.
In the domestic bond market, yield spreads(1) between investment-grade corporate
bonds and U.S. Treasurys continued to contract throughout the reporting period.
The automotive sector was a notable exception, largely because of difficulties
at Ford and General Motors that led Moody's and Standard & Poor's to downgrade
their debt to high-yield (or "fallen angel") status. In the non-U.S. dollar
market, currency exposure had a negative impact because the dollar rallied
relative to most major currencies. Emerging markets remained resilient. With
credit upgrades and increased institutional-investor participation,
emerging-market spreads reached record lows relative to U.S. Treasurys. For most
of the reporting period, U.S. high-yield issues saw tight spreads but little in
the way of increased default risk. The inclusion of General Motors in the
high-yield universe added volatility.
HOW DID THE FUND PERFORM RELATIVE TO ITS PEERS DURING THE REPORTING PERIOD?
In our estimation, the Fund's relative performance was adversely affected by its
currency exposure and by a smaller weighting than peer funds in emerging-market
debt. The Fund's airline holdings took a toll on the Fund's performance in the
high-yield sector. Fortunately, the Fund had little exposure to the automotive
industry in the investment-grade portion of the Fund's portfolio.
WHAT WERE SOME OF THE MAJOR DECISIONS THAT AFFECTED THE FUND'S PERFORMANCE?
We significantly altered the Fund's overall asset allocation during the 12-month
reporting period. We substantially reduced the Fund's high-yield allocation.
Over the same period, we increased the Fund's allocation to international bonds
and its allocation to investment-grade debt. In the international-bond portion
of the Fund, we put the new money to work in emerging-market dollar debt, which
had a positive impact on the Fund's performance. Since high-yield securities
outperformed investment-grade debt during the reporting period, the allocation
shift detracted from the Fund's overall performance. Our decision to increase
currency exposure also hurt the Fund's performance because the dollar continued
to rise for most of the reporting period.
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.
The Fund may experience a portfolio turnover rate of over 100% and may generate
short-term capital gains which are taxable.
1. The terms "spread" and "yield spread" may refer to the difference in yield
between a specific security or type of security and comparable U.S. Treasury
issues. The terms may also refer to the difference in yield between two
specific securities or types of securities at a given time.
8 MainStay Diversified Income Fund
WHAT SPECIFIC FACTORS LED YOU TO MAKE THE CHANGES IN THE FUND'S ALLOCATION?
Each allocation change had its own logic. Early in the reporting period, our
high-yield group became concerned about the tight yield spread between
high-yield bonds and U.S. Treasurys. We were also concerned about the reduced
quality of new issues in the high-yield market, which limited our source of new
high-yield investments. As a result, we began to slowly rotate out of high-yield
securities and into emerging-market and investment-grade debt. We did this by
allocating new money to emerging-market and investment-grade securities and by
making redemptions among high-yield holdings. We also increased cash in the
high-yield portion of the Fund's portfolio.
On the currency front, we concluded that the U.S. current account and budget
deficits would come under increasing stress leading to a U.S. dollar sell-off.
Early in the reporting period, we started adding exposure to the yen, the euro,
and to a lesser degree the Canadian dollar. Having seen the U.S. dollar continue
to rise against most foreign currencies, however, we recently elected to hedge
part of the Fund's yen exposure to help protect against further downside risk.
From the start of the reporting period our investment-grade group had been
underweighted in the troubled auto sector. In May we sold the Fund's position in
GMAC leaving only a small position in Ford Motor paper. As spreads continued to
widen in the auto sector, high-yield investors began to take notice. Toward the
end of the first calendar quarter of 2005, the high-yield group started to buy
General Motors, adding GMAC and GM paper starting in March.
HOW DID SPECIFIC PORTIONS OF THE FUND'S PORTFOLIO PERFORM DURING THE REPORTING
PERIOD?
Emerging-market debt was by far the Fund's best-performing asset class during
the reporting period. Non-U.S. dollar debt with unhedged currency exposure was
the worst-performing asset class. Exclusive of all fees and sales charges, the
high-yield portion of the Fund's portfolio provided a total return of 6.32%, the
international-bond portion returned 3.4%, and the domestic high-grade portion
returned 1.7%.
WERE THERE ANY SIGNIFICANT PURCHASES AND SALES DURING THE REPORTING PERIOD?
In the international portion of the Fund's portfolio, we bought Brazilian and
Mexican bonds in February and March. We took profits in Russian 30-year debt in
September. Significant purchases in the high-yield portion of the Fund's
portfolio included several GMAC issues during the second and third calendar
quarters of 2005 and securities issued by Qwest in August 2005.
HOW DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK?
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.(2) The Fund's performance relative to this benchmark was
positive because the Fund's overall currency exposure was considerably less than
the 33% implied by the non-currency-hedged Citigroup Non-U.S. Dollar World
Government Bond Index. At the end of the reporting period, less than 15% of the
Fund's assets carried currency exposure. Emerging-market debt, which contributed
to the Fund's positive performance, is not significantly reflected in any of the
three indices in the benchmark.
Exclusive of all fees and sales charges, the high-yield portion of the Fund's
portfolio had strong nominal performance and outperformed the Credit Suisse
First Boston(TM) High Yield Index. Although on the same basis the
investment-grade portion of the Fund's portfolio outperformed the Lehman
Brothers(R) Aggregate Index, the nominal return was lower than that in the
high-yield and international portions of the Fund's portfolio.
2. See page 5 for performance information and disclosure about the Fund's
Three-Index Composite.
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 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (93.8%)+
ASSET-BACKED SECURITIES (1.6%)
- -------------------------------------------------------------------------------
CONSUMER FINANCE (0.5%)
BMW Vehicle Owner Trust Series 2003-A, Class A3
1.94%, due 2/25/07 $ 5,535 $ 5,525
Harley-Davidson Motorcycle Trust Series 2004-1,
Class A2 2.53%, due 11/15/11 430,000 415,836
Volkswagen Auto Loan Enhanced Trust Series 2003-2,
Class A3
2.27%, due 10/22/07 194,595 192,991
------------
614,352
------------
CONSUMER LOANS (0.0%)++
Atlantic City Electric Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 75,000 77,093
------------
DIVERSIFIED FINANCIAL SERVICES (0.6%)
Capital One Master Trust Series 2001-5, Class A
5.30%, due 6/15/09 70,000 70,311
Chemical Master Credit Card Trust I Series 1996-2,
Class A
5.98%, due 9/15/08 635,000 636,865
------------
707,176
------------
ELECTRIC (0.4%)
AES Eastern Energy, L.P. Series 1999-A
9.00%, due 1/2/17 344,933 398,398
Public Service New Hampshire Funding LLC
Pass-Through Certificates Series 2002-1, Class A
4.58%, due 2/1/10 128,936 128,673
------------
527,071
------------
ENTERTAINMENT (0.1%)
United Artists Theatre Circuit, Inc.
Series 1995-A
9.30%, due 7/1/15 118,443 117,259
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
THRIFTS & MORTGAGE FINANCE (0.0%)++
Vanderbilt Mortgage Finance
Series 1999-B, Class 1A4
6.545%, due 4/7/18 $ 7,976 $ 8,011
------------
Total Asset-Backed Securities
(Cost $1,990,546) 2,050,962
------------
CONVERTIBLE BONDS (1.0%)
- -------------------------------------------------------------------------------
ADVERTISING (0.0%)++
Lamar Advertising Co.
2.875%, due 12/31/10 25,000 26,750
------------
BIOTECHNOLOGY (0.1%)
Amgen, Inc.
(zero coupon), due 3/1/32 150,000 116,812
------------
HEALTH CARE--SERVICES (0.4%)
Laboratory Corp. of America Holdings
(zero coupon), due 9/11/21 (a) 455,000 335,562
Lincare Holdings, Inc.
3.00%, due 6/15/33 (b) 55,000 55,206
3.00%, due 6/15/33 125,000 125,469
------------
516,237
------------
INSURANCE (0.0%)++
Conseco, Inc.
3.50%, due 9/30/35
(zero coupon) beginning 10/1/10 (b)(c)(q) 70,000 69,737
------------
INTERNET (0.1%)
At Home Corp.
4.75%, due 12/15/06 (d)(e)(f)(g) 504,238 50
Riverstone Networks, Inc.
3.75%, due 12/1/06 (b)(e) 95,000 89,300
------------
89,350
------------
MEDIA (0.1%)
Adelphia Communications Corp.
6.00%, due 2/15/06 (e) 80,000 2,400
UnitedGlobalCom, Inc.
1.75%, due 4/15/24 E 90,000 109,748
------------
112,148
------------
TELECOMMUNICATIONS (0.3%)
Lucent Technologies, Inc.
8.00%, due 8/1/31 (c) $ 95,000 98,206
</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.
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
CONVERTIBLE BONDS (CONTINUED)
- -------------------------------------------------------------------------------
TELECOMMUNICATIONS (CONTINUED)
Nortel Networks Corp.
4.25%, due 9/1/08 (c) $ 240,000 $ 224,100
------------
322,306
------------
Total Convertible Bonds
(Cost $1,262,719) 1,253,340
------------
CORPORATE BONDS (25.2%)
- -------------------------------------------------------------------------------
ADVERTISING (0.1%)
Bear Creek Corp.
9.00%, due 3/1/13 (b) 40,000 41,000
Vertis, Inc.
9.75%, due 4/1/09 130,000 131,950
------------
172,950
------------
AEROSPACE & DEFENSE (0.2%)
BE Aerospace, Inc.
8.00%, due 3/1/08 40,000 39,900
Sequa Corp.
8.875%, due 4/1/08 207,000 212,175
------------
252,075
------------
AGRICULTURE (0.1%)
Cargill, Inc.
4.375%, due 6/1/13 (b) 100,000 94,623
------------
AIRLINES (0.4%)
Delta Air Lines, Inc.
8.30%, due 12/15/29 (e) 671,000 119,103
9.75%, due 5/15/21 (e) 5,000 875
10.00%, due 8/15/08 (e) 35,000 6,038
10.375%, due 12/15/22 (e) 10,000 1,750
Northwest Airlines, Inc.
7.875%, due 3/15/08 (e) 15,000 4,350
8.70%, due 3/15/07 (e) 5,000 1,450
8.97%, due 1/2/15 (e) 19,029 2,759
9.875%, due 3/15/07 (e) 175,000 51,625
10.00%, due 2/1/09 (e) 279,000 79,515
Southwest Airlines Co.
5.125%, due 3/1/17 235,000 216,074
------------
483,539
------------
AUTO MANUFACTURERS (0.2%)
DaimlerChrysler NA Holding Corp.
6.50%, due 11/15/13 285,000 295,439
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
AUTO PARTS & EQUIPMENT (0.4%)
Collins & Aikman Products Co.
10.75%, due 12/31/11 (e) $ 50,000 $ 24,250
12.875%, due 8/15/12 (b)(e) 350,000 42,000
Dana Corp.
7.00%, due 3/1/29 10,000 7,400
Goodyear Tire & Rubber Co. (The)
12.75%, due 3/1/11 (b) 360,000 397,800
------------
471,450
------------
BANKS (0.3%)
FleetBoston Financial Corp.
3.85%, due 2/15/08 60,000 58,901
Fremont General Corp.
Series B
7.875%, due 3/17/09 255,000 247,350
Wachovia Corp.
5.50%, due 8/1/35 110,000 103,707
------------
409,958
------------
BUILDING MATERIALS (0.4%)
Compression Polymers Corp.
10.50%, due 7/1/13 (b) 100,000 91,000
Dayton Superior Corp.
10.75%, due 9/15/08 145,000 140,650
Goodman Global Holding Co., Inc.
6.41%, due 6/15/12 (b)(h) 40,000 39,200
Interline Brands, Inc.
11.50%, due 5/15/11 121,000 134,310
MMI Products, Inc.
Series B
11.25%, due 4/15/07 70,000 64,750
Panolam Industries International, Inc.
10.75%, due 10/1/13 (b)(c) 75,000 72,750
------------
542,660
------------
CHEMICALS (1.0%)
Cargill, Inc.
5.00%, due 11/15/13 (b) 135,000 132,721
Equistar Chemicals, L.P.
10.625%, due 5/1/11 275,000 299,750
Lyondell Chemical Co.
10.50%, due 6/1/13 215,000 243,756
Millennium America, Inc.
7.625%, due 11/15/26 149,000 140,433
Terra Capital, Inc.
12.875%, due 10/15/08 372,000 438,960
------------
1,255,620
------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -------------------------------------------------------------------------------
COMMERCIAL SERVICES (0.6%)
Cardtronics, Inc.
9.25%, due 8/15/13 (b) $ 20,000 $ 20,200
Great Lakes Dredge & Dock Corp.
7.75%, due 12/15/13 (c) 100,000 92,500
Language Line, Inc.
11.125%, due 6/15/12 125,000 106,250
Phoenix Color Corp.
10.375%, due 2/1/09 113,000 103,960
Protection One Alarm Monitoring, Inc.
Series B
8.125%, due 1/15/09 65,000 63,375
Quintiles Transnational Corp.
10.00%, due 10/1/13 220,000 242,825
Williams Scotsman, Inc.
8.50%, due 10/1/15 (b) 90,000 91,350
------------
720,460
------------
COMPUTERS (0.4%)
SunGard Data Systems, Inc.
3.75%, due 1/15/09 140,000 128,100
4.875%, due 1/15/14 25,000 21,750
8.525%, due 8/15/13 (b)(c)(h) 50,000 51,250
9.125%, due 8/15/13 (b) 125,000 126,875
10.25%, due 8/15/15 (b) 210,000 208,163
------------
536,138
------------
DISTRIBUTION & WHOLESALE (0.1%)
Intcomex, Inc.
11.75%, due 1/15/11 (b) 60,000 59,700
------------
DIVERSIFIED FINANCIAL SERVICES (4.8%)
ACCO Brands Corp.
7.625%, due 8/15/15 (b) 55,000 52,250
American Real Estate Partners, L.P.
8.125%, due 6/1/12 270,000 277,425
Bear Stearns Cos., Inc. (The)
4.00%, due 1/31/08 230,000 225,904
Citigroup, Inc.
0.80%, due 10/30/08 Y 30,000,000 259,087
Dollar Financial Group, Inc.
9.75%, due 11/15/11 $ 80,000 81,600
FGIC Corp.
6.00%, due 1/15/34 (b) 160,000 160,326
General Motors Acceptance Corp.
5.625%, due 5/15/09 90,000 85,099
6.15%, due 4/5/07 175,000 172,663
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
6.75%, due 12/1/14 (c) $ 280,000 $ 267,746
8.00%, due 11/1/31 (c) 430,000 443,907
Goldman Sachs Group, Inc. (The)
5.125%, due 4/24/13 E 170,000 223,130
6.345%, due 2/15/34 $ 95,000 95,263
HSBC Finance Corp.
4.75%, due 4/15/10 200,000 197,445
5.00%, due 6/30/15 305,000 293,820
6.375%, due 11/27/12 90,000 95,241
7.25%, due 5/15/06 400,000 405,444
J Paul Getty Trust
Series 2003
5.875%, due 10/1/33 90,000 91,308
JP Morgan Chase Capital XVII
5.85%, due 8/1/35 100,000 94,422
LaBranche & Co., Inc.
9.50%, due 5/15/09 (c) 100,000 105,250
11.00%, due 5/15/12 160,000 176,800
Morgan Stanley
3.625%, due 4/1/08 265,000 257,470
Morgan Stanley & Co.
5.375%, due 11/14/13 L 390,000 703,508
OMX Timber Finance Investments LLC
Series 1
5.42%, due 1/29/20 (b) $ 100,000 99,037
Pharma Services Intermediate Holding Corp.
(zero coupon), due 4/1/14 11.50%, beginning
4/1/09 (q) 225,000 161,438
Rainbow National Services LLC
8.75%, due 9/1/12 (b) 90,000 94,500
10.375%, due 9/1/14 (b) 260,000 286,000
Residential Capital Corp.
6.375%, due 6/30/10 (b) 170,000 172,676
Ucar Finance, Inc.
10.25%, due 2/15/12 205,000 216,275
Vanguard Health Holding Co. II LLC
9.00%, due 10/1/14 175,000 182,438
Venoco, Inc.
8.75%, due 12/15/11 80,000 80,800
------------
6,058,272
------------
ELECTRIC (1.3%)
AES Corp. (The)
9.00%, due 5/15/15 (b) 400,000 434,000
Calpine Corp.
8.50%, due 7/15/10 (b)(c) 361,000 252,700
9.875%, due 12/1/11 (b) 29,000 20,735
</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)
- -------------------------------------------------------------------------------
ELECTRIC (CONTINUED)
Calpine Gilroy, L.P.
10.00%, due 9/30/14 (i) $ 236,627 $ 236,627
Kiowa Power Partners LLC
Series B
5.737%, due 3/30/21 (b) 115,000 113,828
NiSource Finance Corp.
5.45%, due 9/15/20 105,000 100,420
PSE&G Energy Holdings LLC
8.625%, due 2/15/08 350,000 363,125
Tenaska Virginia Partners, LP
6.119%, due 3/30/24 (b) 107,067 110,290
------------
1,631,725
------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.3%)
Emerson Electric Co.
6.00%, due 8/15/32 50,000 52,753
Southern Peru Copper Corp.
7.50%, due 7/27/35 (b) 300,000 287,230
Spectrum Brands, Inc.
8.50%, due 10/1/13 50,000 45,250
------------
385,233
------------
ENTERTAINMENT (0.2%)
Chukchansi Economic Development Authority
8.00%, due 11/15/13 (b) 20,000 20,000
Loews Cineplex Entertainment Corp.
9.00%, due 8/1/14 95,000 91,438
President Casinos, Inc.
12.00%, due 9/15/06 (b)(e)(g) 21,387 17,110
13.00%, due 9/15/06 (e)(g) 47,658 37,173
Warner Music Group
7.375%, due 4/15/14 95,000 92,625
------------
258,346
------------
ENVIRONMENTAL CONTROL (0.2%)
Geo Sub Corp.
11.00%, due 5/15/12 235,000 229,713
------------
FOOD (0.5%)
Chiquita Brands International, Inc.
7.50%, due 11/1/14 35,000 32,988
Pinnacle Foods Holding Corp.
8.25%, due 12/1/13 200,000 185,000
Safeway, Inc.
6.15%, due 3/1/06 160,000 160,394
6.50%, due 3/1/11 70,000 71,910
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOOD (CONTINUED)
Swift & Co.
10.125%, due 10/1/09 $ 45,000 $ 47,475
12.50%, due 1/1/10 165,000 175,313
------------
673,080
------------
GAS UTILITIES (0.1%)
Star Gas Partners, LP/Star Gas Finance Co.
10.25%, due 2/15/13 140,000 115,500
------------
HAND & MACHINE TOOLS (0.1%)
Thermadyne Holdings Corp.
9.25%, due 2/1/14 100,000 89,500
------------
HEALTH CARE PROVIDERS & SERVICES (0.4%)
Ameripath, Inc.
10.50%, due 4/1/13 190,000 197,600
HCA, Inc., Note
6.375%, due 1/15/15 266,000 261,010
------------
458,610
------------
HEALTH CARE--SERVICES (0.5%)
Highmark, Inc.
6.80%, due 8/15/13 (b) 245,000 262,913
National Nephrology Associates, Inc.
9.00%, due 11/1/11 (b) 75,000 82,875
Quest Diagnostics, Inc.
5.45%, due 11/1/15 (b) 75,000 74,771
6.75%, due 7/12/06 220,000 222,768
------------
643,327
------------
HOME BUILDERS (0.1%)
Beazer Homes USA, Inc.
6.875%, due 7/15/15 (c) 170,000 155,975
------------
HOME FURNISHINGS (0.1%)
Fedders North America, Inc.
9.875%, due 3/1/14 95,000 70,063
------------
HOTELS, RESTAURANTS & LEISURE (0.2%)
Caesars Entertainment, Inc.
8.875%, due 9/15/08 35,000 37,625
9.375%, due 2/15/07 45,000 46,913
Starwood Hotel & Resorts
7.375%, due 11/15/15 172,000 182,320
------------
266,858
------------
HOUSEHOLD DURABLES (0.2%)
KB Home
6.25%, due 6/15/15 250,000 235,198
------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS & WARES (0.1%)
Spectrum Brands, Inc.
7.375%, due 2/1/15 (c) $ 190,000 $ 164,113
------------
INSURANCE (0.4%)
Crum & Forster Holdings Corp.
10.375%, due 6/15/13 220,000 235,400
First Mercury Financial Corp.
11.797%, due 8/15/12 (b)(h) 80,000 80,800
Fund American Cos., Inc.
5.875%, due 5/15/13 190,000 188,635
Lumbermens Mutual Casualty
8.45%, due 12/1/97 (b)(e) 35,000 1,225
9.15%, due 7/1/26 (b)(e) 535,000 18,725
------------
524,785
------------
INTERNET (0.0%)++
Globix Corp.
11.00%, due 5/1/08 (b)(j) 48,788 46,471
------------
IRON & STEEL (0.3%)
Allegheny Ludlum Corp.
6.95%, due 12/15/25 20,000 19,500
Allegheny Technologies, Inc.
8.375%, due 12/15/11 185,000 197,950
United States Steel LLC
10.75%, due 8/1/08 150,000 166,500
------------
383,950
------------
MEDIA (1.7%)
Clear Channel Communications, Inc.
5.50%, due 9/15/14 145,000 136,177
Houghton Mifflin Co.
7.20%, due 3/15/11 470,000 486,450
Medianews Group, Inc.
6.875%, due 10/1/13 65,000 64,188
Morris Publishing Group LLC
7.00%, due 8/1/13 220,000 216,150
Paxson Communications Corp.
(zero coupon), due 1/15/09 12.25%, beginning
1/15/06 (q) 290,000 283,475
Reed Elsevier Capital, Inc.
4.625%, due 6/15/12 120,000 115,112
Time Warner Entertainment Co., L.P.
10.15%, due 5/1/12 415,000 511,817
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MEDIA (CONTINUED)
Ziff Davis Media, Inc.
9.693%, due 5/1/12 (h) $ 135,000 $ 131,625
Series B
13.00%, due 8/12/09 (j) 187,004 192,147
------------
2,137,141
------------
METAL FABRICATE & HARDWARE (0.1%)
Mueller Group, Inc.
10.00%, due 5/1/12 140,000 147,000
------------
MISCELLANEOUS--MANUFACTURING (0.3%)
Mark IV Industries, Inc.
7.50%, due 9/1/07 414,000 393,300
------------
OIL & GAS (0.9%)
Enterprise Products Operating, L.P.
Series B
6.65%, due 10/15/34 255,000 255,314
Forest Oil Corp.
8.00%, due 6/15/08 210,000 219,975
Hilcorp Energy I, L.P./Hilcorp Finance Co.
10.50%, due 9/1/10 (b) 7,000 7,840
Mission Resources Corp.
9.875%, due 4/1/11 150,000 156,750
Newfield Exploration Co.
7.625%, due 3/1/11 15,000 15,975
8.375%, due 8/15/12 15,000 16,088
Parker Drilling Co.
9.625%, due 10/1/13 (b) 80,000 90,400
Plains Exploration & Production Co.
8.75%, due 7/1/12 100,000 106,750
Vintage Petroleum, Inc.
8.25%, due 5/1/12 220,000 237,050
------------
1,106,142
------------
OIL & GAS SERVICES (0.1%)
Lone Star Technologies, Inc.
9.00%, due 6/1/11 125,000 131,875
------------
PACKAGING & CONTAINERS (0.6%)
Owens-Brockway Glass Container, Inc.
8.875%, due 2/15/09 145,000 151,525
Owens-Illinois, Inc.
7.80%, due 5/15/18 383,000 367,680
8.10%, due 5/15/07 (c) 270,000 274,050
------------
793,255
------------
</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)
- -------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS (0.6%)
Georgia-Pacific Corp.
8.875%, due 2/1/10 $ 395,000 $ 432,525
8.875%, due 5/15/31 70,000 79,625
9.375%, due 2/1/13 45,000 49,613
Pope & Talbot, Inc.
8.375%, due 6/1/13 167,000 130,260
8.375%, due 6/1/13 45,000 35,100
------------
727,123
------------
PHARMACEUTICALS (0.3%)
Medco Health Solutions, Inc.
7.25%, due 8/15/13 240,000 259,934
Warner Chilcott Corp.
8.75%, due 2/1/15 (b) 85,000 78,200
------------
338,134
------------
PIPELINES (1.4%)
ANR Pipeline Co.
9.625%, due 11/1/21 155,000 187,769
Dynegy Holdings, Inc.
9.875%, due 7/15/10 (b) 225,000 241,875
El Paso Natural Gas Co.
7.50%, due 11/15/26 25,000 25,384
7.625%, due 8/1/10 205,000 215,132
El Paso Production Holding Co.
7.75%, due 6/1/13 485,000 499,550
Energy Transfer Partners, LP
5.95%, due 2/1/15 260,000 253,489
Kern River Funding Corp.
4.893%, due 4/30/18 246,125 239,918
Pacific Energy Partners, L.P.
7.125%, due 6/15/14 60,000 62,400
------------
1,725,517
------------
REAL ESTATE (1.0%)
CB Richard Ellis Services, Inc.
9.75%, due 5/15/10 73,000 79,935
11.25%, due 6/15/11 244,000 263,520
Crescent Real Estate
Equities, LP
7.50%, due 9/15/07 310,000 314,650
iStar Financial, Inc.
6.50%, due 12/15/13 130,000 131,685
Omega Healthcare Investors, Inc.
7.00%, due 4/1/14 255,000 256,275
Trustreet Properties, Inc.
7.50%, due 4/1/15 250,000 253,125
------------
1,299,190
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
RETAIL (1.3%)
CVS Corp.
5.298%, due 1/11/27 (b) $ 126,235 $ 121,895
5.789%, due 1/10/26 (b) 105,551 106,014
Dayton Hudson Co.
8.60%, due 1/15/12 125,000 147,509
Doane Pet Care Co.
10.625%, due 11/25/15 (b) 35,000 35,438
Duane Reade, Inc.
8.37%, due 12/15/10 (c)(h) 45,000 42,750
Kohl's Corp.
6.00%, due 1/15/33 285,000 271,774
Toys "R" Us, Inc.
7.625%, due 8/1/11 395,000 325,875
8.75%, due 9/1/21 165,000 156,750
Wal-Mart Stores, Inc.
5.25%, due 9/1/35 380,000 356,613
------------
1,564,618
------------
SEMICONDUCTORS (0.2%)
Amkor Technology, Inc.
7.125%, due 3/15/11 85,000 73,525
MagnaChip Semiconductor S.A.
7.12%, due 12/15/11 (h) 95,000 93,338
8.00%, due 12/15/14 125,000 114,375
------------
281,238
------------
SOFTWARE (0.1%)
Computer Associates International, Inc.
4.75%, due 12/1/09 (b) 120,000 116,534
------------
TELECOMMUNICATIONS (2.6%)
AT&T Corp., Reg S
7.75%, due 11/21/06 E 120,000 149,835
Citizens Communications Co.
9.25%, due 5/15/11 $ 295,000 319,338
Dobson Cellular Systems
8.375%, due 11/1/11 40,000 41,700
8.443%, due 11/1/11 (h) 70,000 72,625
9.875%, due 11/1/12 75,000 81,000
Loral Cyberstar, Inc.
10.00%, due 7/15/06 (e) 233,000 194,555
Lucent Technologies, Inc.
7.25%, due 7/15/06 (c) 172,000 172,860
MCI, Inc.
6.908%, due 5/1/07 21,000 21,210
New Cingular Wireless Services, Inc.
8.75%, due 3/1/31 150,000 195,608
PanAmSat Corp.
9.00%, due 8/15/14 92,000 96,830
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- -------------------------------------------------------------------------------
TELECOMMUNICATIONS (CONTINUED)
Qwest Communications International, Inc.
7.25%, due 2/15/11 (c) $ 250,000 $ 243,125
7.50%, due 2/15/14 65,000 62,238
7.50%, due 2/15/14 (b) 200,000 191,500
Qwest Corp.
5.625%, due 11/15/08 15,000 14,850
7.50%, due 6/15/23 195,000 183,300
8.875%, due 3/15/12 100,000 109,750
8.875%, due 6/1/31 180,000 186,300
Qwest Services Corp.
13.50%, due 12/15/10 284,000 324,470
14.00%, due 12/15/14 110,000 133,238
SBC Communications, Inc.
4.125%, due 9/15/09 115,000 110,726
Telcordia Technologies, Inc.
10.00%, due 3/15/13 (b) 200,000 176,000
Triton PCS, Inc.
8.50%, due 6/1/13 (c) 235,000 219,725
------------
3,300,783
------------
Total Corporate Bonds (Cost $32,277,017) 31,747,181
------------
CORPORATE BONDS--FOREIGN (9.4%)
- -------------------------------------------------------------------------------
ARGENTINA (0.2%)
Argentine Beverages Financial Trust
7.375%, due 3/22/12 (b) 250,000 250,000
YPF Sociedad Anonima
9.125%, due 2/24/09 60,000 65,700
------------
315,700
------------
BAHAMAS (0.1%)
Ultrapetrol Ltd.
9.00%, due 11/24/14 100,000 93,000
------------
BERMUDA (0.4%)
AES China Generating Co. Ltd.
8.25%, due 6/26/10 230,000 233,745
Intelsat Bermuda Ltd.
8.25%, due 1/15/13 (b) 135,000 134,663
8.695%, due 1/15/12 (b)(h) 160,000 162,000
------------
530,408
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
BRAZIL (0.5%)
Caue Finance Ltd.
8.875%, due 8/1/15 (b) $ 200,000 $ 206,500
CIA Brasileira de Bebidas
10.50%, due 12/15/11 365,000 449,863
------------
656,363
------------
CANADA (1.4%)
Abitibi-Consolidated, Inc.
8.85%, due 8/1/30 60,000 50,100
Ainsworth Lumber Co. Ltd.
7.25%, due 10/1/12 40,000 36,100
Alcan, Inc.,
5.75%, due 6/1/35 145,000 136,383
CanWest Media, Inc.
8.00%, due 9/15/12 202,611 212,235
Hollinger, Inc.
11.875%, due 3/1/11 (b) 40,000 40,000
12.875%, due 3/1/11 (b) 133,000 140,481
Nova Chemicals Corp.
7.561%, due 11/15/13 (b) 65,000 65,650
Quebecor Media, Inc.
11.125%, due 7/15/11 72,000 77,940
Quebecor Media, Inc.
(zero coupon), due 7/15/11
13.75%, beginning 7/15/06 (q) 301,000 306,268
Rogers Cable, Inc.
7.875%, due 5/1/12 245,000 259,700
Shaw Communications, Inc.
7.50%, due 11/20/13 C$ 225,000 203,454
Sun Media Corp.
7.625%, due 2/15/13 $ 210,000 217,350
------------
1,745,661
------------
CAYMAN ISLANDS (0.3%)
CSN Islands VIII Corp.
9.75%, due 12/16/13 (b) 200,000 218,000
Votorantim Overseas III
7.875%, due 1/23/14 (b) 100,000 103,750
------------
321,750
------------
CHILE (0.4%)
AES Gener S.A.
7.50%, due 3/25/14 (c) 250,000 249,833
Corporacion Nacional del Cobre-Codelco, Inc.
5.50%, due 10/15/13 (b) 55,000 55,142
Empresa Nacional de Petroleo
6.75%, due 11/15/12 (b) 200,000 213,107
------------
518,082
------------
</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)
- -------------------------------------------------------------------------------
COLOMBIA (0.2%)
Bavaria S.A.
8.875%, due 11/1/10 (b) $ 215,000 $ 234,081
------------
DENMARK (0.1%)
Realkredit Danmark A/S
6.00%, due 10/1/29 DK 867,936 145,723
------------
FRANCE (0.3%)
Crown European Holdings S.A.
9.50%, due 3/1/11 $ 300,000 330,000
10.875%, due 3/1/13 60,000 70,650
------------
400,650
------------
GERMANY (1.7%)
Aries Vermoegensverwaltungs
Series Reg S
9.60%, due 10/25/14 E 250,000 320,325
Citibank Global Markets (Severstal) Deutschland
9.25%, due 4/19/14 (b) 190,000 204,250
Kreditanstalt fuer Wiederaufbau
4.75%, due 8/18/06 724,000 883,312
Kyivstar GSM
10.375%, due 8/17/09 (b) 275,000 302,156
Landwirtschaftliche Rentenbank
Series E
0.65%, due 9/30/08 Y 50,000,000 432,441
------------
2,142,484
------------
JAPAN (0.2%)
Nippon Life Insurance Co.
4.875%, due 8/9/10 (b) $ 250,000 245,072
------------
LIBERIA (0.1%)
Royal Caribbean Cruises Ltd.
6.875%, due 12/1/13 135,000 139,725
------------
LUXEMBOURG (0.7%)
Gazprom International S.A.
7.201%, due 2/1/20 (b) 200,000 212,750
Millicom International Cellular S.A.
10.00%, due 12/1/13 300,000 309,000
Mobile Telesystems Finance
9.75%, due 1/30/08 (b) 150,000 159,750
Tengizchevroil Finance Co.
6.124%, due 11/15/14 (b) 100,000 100,250
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LUXEMBOURG (CONTINUED)
Wimm-Bill-Dann Foods OJSC
8.50%, due 5/21/08 (b) $ 100,000 $ 101,000
------------
882,750
------------
MEXICO (0.5%)
Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
12.50%, due 6/15/12 50,000 57,750
Innova S de RL
9.375%, due 9/19/13 100,000 110,750
Telefonos de Mexico
S.A. de C.V.
4.50%, due 11/19/08 180,000 176,104
5.50%, due 1/27/15 110,000 105,990
8.25%, due 1/26/06 200,000 201,800
------------
652,394
------------
NETHERLANDS (0.4%)
Coca-Cola HBC Finance BV
5.125%, due 9/17/13 50,000 49,741
Kazkommerts International BV
8.50%, due 4/16/13 (b) 400,000 417,000
------------
466,741
------------
RUSSIA (0.5%)
OAO Gazprom
9.625%, due 3/1/13 (b) 160,000 192,200
Siberian Oil Co.
Series Reg S
10.75%, due 1/15/09 100,000 112,370
Tyumen Oil Co.
11.00%, due 11/6/07 (b) 250,000 273,250
------------
577,820
------------
SINGAPORE (0.1%)
SP PowerAssets Ltd.
5.00%, due 10/22/13 (b) 175,000 173,761
------------
SOUTH KOREA (0.1%)
LG Electronics, Inc.
5.00%, due 6/17/10 (b) 100,000 97,473
------------
SUPRANATIONAL (0.3%)
Invista
9.25%, due 5/1/12 (b) 205,000 220,119
Jafra Cosmetics International, Inc./Distribuidora
Comerical Jafra S.A. de C.V.
10.75%, due 5/15/11 118,000 129,505
------------
349,624
------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS--FOREIGN (CONTINUED)
- -------------------------------------------------------------------------------
SWEDEN (0.2%)
Stena AB
9.625%, due 12/1/12 $ 200,000 $ 216,000
------------
UNITED KINGDOM (0.7%)
BSKYB Finance UK PLC
5.625%, due 10/15/15 (b) 190,000 187,098
6.50%, due 10/15/35 (b) 95,000 93,336
Inmarsat Finance PLC
(zero coupon), due 11/15/12
10.375%, beginning 11/15/08 (q) 250,000 204,375
Navigator Gas Transport PLC
10.50%, due 6/30/07 (b)(e)(l) 362,000 394,580
------------
879,389
------------
Total Corporate Bonds--Foreign
(Cost $10,972,615) 11,784,651
------------
FOREIGN GOVERNMENT BONDS (27.6%)
- -------------------------------------------------------------------------------
AUSTRALIA (0.4%)
Commonwealth of Australia
7.50%, due 9/15/09 A$ 570,000 457,094
------------
AUSTRIA (0.7%)
Republic of Austria
4.65%, due 1/15/18 E 643,000 857,424
------------
BELGIUM (1.2%)
Kingdom of Belgium
3.00%, due 9/28/08 825,000 995,686
5.00%, due 9/28/11 400,000 528,653
------------
1,524,339
------------
BRAZIL (2.1%)
Republic of Brazil
4.75%, due 4/10/07 Y 25,000,000 221,845
11.00%, due 8/17/40 $ 1,000,000 1,201,500
14.50%, due 10/15/09 1,000,000 1,273,500
------------
2,696,845
------------
CANADA (1.7%)
Canada Government
3.55%, due 9/15/10 C$ 510,000 423,739
5.25%, due 6/1/12 344,000 312,189
5.50%, due 6/1/10 525,000 474,887
5.75%, due 6/1/33 (m) 400,000 415,037
Canada Housing Trust No 1
3.70%, due 9/15/08 (b) 575,000 485,622
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CANADA (CONTINUED)
Province of Quebec
5.00%, due 7/17/09 $ 80,000 $ 80,540
------------
2,192,014
------------
COLOMBIA (0.3%)
Republic of Colombia
8.125%, due 5/21/24 300,000 310,800
------------
DENMARK (0.4%)
Kingdom of Denmark
5.00%, due 11/15/13 DK 2,985,000 539,148
------------
ECUADOR (0.4%)
Republic of Ecuador
Series Reg S
8.00%, due 8/15/30 (q)
10.00%, beginning 8/1/06 $ 495,000 439,313
------------
EL SALVADOR (0.2%)
Republic of El Salvador
7.75%, due 1/24/23 (b) 250,000 270,625
------------
FRANCE (0.4%)
French Republic
4.75%, due 7/12/07 E 400,000 495,865
------------
GERMANY (5.9%)
Republic of Germany
V 3.75%, due 1/4/09 (m) 2,610,000 3,216,538
4.50%, due 8/18/06 145,000 176,530
4.75%, due 7/4/08 125,000 157,500
V 5.00%, due 7/4/11 1,405,000 1,852,912
5.25%, due 1/4/08 704,000 888,362
5.375%, due 1/4/10 450,000 590,571
6.25%, due 1/4/30 350,000 584,020
------------
7,466,433
------------
GREECE (1.7%)
Hellenic Republic
V 4.50%, due 5/20/14 1,200,000 1,544,840
5.90%, due 10/22/22 406,000 608,517
------------
2,153,357
------------
INDONESIA (0.1%)
Republic of Indonesia
7.25%, due 4/20/15 (b) 180,000 177,300
------------
ITALY (1.7%)
Italian Republic
3.80%, due 3/27/08 Y 30,000,000 278,682
5.25%, due 12/15/05 E 321,000 386,025
</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)
- -------------------------------------------------------------------------------
ITALY (CONTINUED)
ex5.50%, due 11/1/10 E 600,000 $ 800,103
6.50%, due 11/1/27 372,000 611,877
------------
2,076,687
------------
JAPAN (2.2%)
Development Bank of Japan
1.60%, due 6/20/14 Y140,000,000 1,222,943
Japan Finance Corp. for Municipal Enterprises
1.55%, due 2/21/12 120,000,000 1,058,213
Japan Government
1.05%, due 6/20/23 57,000,000 420,451
------------
2,701,607
------------
MEXICO (1.2%)
United Mexican States
Series A
6.75%, due 9/27/34 (c) $ 1,300,000 1,355,250
8.125%, due 12/30/19 90,000 107,640
------------
1,462,890
------------
NETHERLANDS (0.6%)
Kingdom of the Netherlands
3.75%, due 7/15/09 E 634,000 784,167
------------
NORWAY (0.6%)
Kingdom of Norway
6.75%, due 1/15/07 NK 4,865,000 781,738
------------
PANAMA (0.3%)
Republic of Panama
8.875%, due 9/30/27 $ 325,000 377,813
------------
PHILIPPINES (0.4%)
Republic of Philippines
9.50%, due 2/2/30 250,000 263,750
9.875%, due 1/15/19 200,000 222,500
------------
486,250
------------
POLAND (0.6%)
Republic of Poland
6.00%, due 5/24/09 PZ 2,500,000 776,958
------------
PORTUGAL (0.3%)
Republic of Portugal
3.00%, due 7/17/06 E 335,000 403,150
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
RUSSIA (0.8%)
Russian Federation
Series Reg S
5.00%, due 3/31/30 (q)
7.50%, beginning 3/31/07 $ 892,000 $ 991,547
------------
SOUTH AFRICA (0.1%)
Republic of South Africa
7.00%, due 4/10/08 E 100,000 130,319
------------
TURKEY (0.4%)
Republic of Turkey
7.375%, due 2/5/25 $ 470,000 465,300
------------
UKRAINE (0.1%)
Ukraine Government
6.875%, due 3/4/11 (b) 175,000 180,469
------------
UNITED KINGDOM (2.4%)
United Kingdom Treasury Bond
4.00%, due 3/7/09 (m) L 247,000 432,631
4.25%, due 6/7/32 300,000 530,894
5.00%, due 3/7/12 235,000 431,299
6.00%, due 12/7/28 175,000 388,393
6.25%, due 11/25/10 465,000 894,985
8.00%, due 6/7/21 140,000 349,654
------------
3,027,856
------------
UNITED STATES (0.2%)
Financement-Quebec
5.00%, due 10/25/12 $ 190,000 190,564
------------
VENEZUELA (0.2%)
Republic of Venezuela
13.625%, due 8/15/18 181,000 262,903
------------
Total Foreign Government Bonds
(Cost $32,623,578) 34,680,775
------------
LOAN ASSIGNMENTS & PARTICIPATIONS (1.0%)
- -------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT (0.2%)
Goodyear Tire & Rubber Co. (The)
7.06%, due 4/30/10 (h)(i) 250,000 251,927
------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED)
- -------------------------------------------------------------------------------
MEDIA (0.3%)
Fidelity National Information Solutions, Inc.
Series B
5.685%, due 3/9/13 (i) $ 441,250 $ 442,590
------------
RETAIL (0.2%)
Neiman Marcus Group, Inc. (The)
6.475%, due 4/6/13 150,000 150,656
Riverdeep Group Ltd.
(zero coupon), due 10/30/11 (i) 50,000 52,750
------------
203,406
------------
SOFTWARE (0.3%)
SunGard Data Systems, Inc.
Series B
6.28%, due 12/11/12 (i) 169,575 170,943
Telcordia Technologies, Inc.
6.36%, due 9/15/12 (i) 248,750 245,952
------------
416,895
------------
Total Loan Assignments & Participations (Cost
$1,308,995) 1,314,818
------------
MORTGAGE-BACKED SECURITIES (2.3%)
- -------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (2.3%)
Banc of America Commercial Mortgage, Inc.
Series 2001-PB1, Class A1
4.907%, due 5/11/35 56,791 56,782
Series 2005-5, Class A2
5.001%, due 9/10/10 295,000 292,779
Citigroup Commercial Mortgage Trust
Series 2004-C2, Class A5
4.733%, due 10/15/41 220,000 211,708
Citigroup/Deutsche Bank Commercial Mortgage Trust
Series 2005-C1, Class A4
5.225%, due 9/15/20 (h) 440,000 440,114
LB-UBS Commercial Mortgage Trust
Series 2004-C2, Class A2
3.246%, due 3/15/29 425,000 403,083
Series 2004-C7, Class A1
3.625%, due 10/15/29 252,654 246,156
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (CONTINUED)
Series 2005-C7, Class A4
5.197%, due 11/15/30 $ 235,000 $ 233,752
Merrill Lynch Mortgage Trust
Series 2004-MKB1, Class A1
3.563%, due 2/12/42 227,202 221,239
Series 2004-BPC1, Class A5
4.855%, due 10/12/41 555,000 537,859
Morgan Stanley Capital I
Series 2003-IQ5, Class A1
3.02%, due 4/15/38 (h) 162,692 157,725
Wachovia Bank Commercial Mortgage Trust
Series 2004-C14, Class A1
3.477%, due 8/15/41 87,268 84,981
------------
2,886,178
------------
Total Mortgage-Backed Securities
(Cost $2,949,260) 2,886,178
------------
MUNICIPAL BOND (0.1%)
- -------------------------------------------------------------------------------
TEXAS (0.1%)
Harris County Texas Industrial Development Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 (h) 120,000 119,993
------------
Total Municipal Bond (Cost $120,401) 119,993
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (25.0%)
- -------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (4.9%)
3.00%, due 8/1/10 100,750 95,344
4.338%, due 3/1/35 (h) 156,753 153,948
5.00%, due 6/1/33 394,598 381,096
5.00%, due 8/1/33 767,951 741,602
5.00%, due 11/1/35 TBA (n) 805,000 774,309
5.50%, due 2/1/33 226,806 224,367
V 5.50%, due 12/1/35 TBA (n) 3,790,000 3,735,519
------------
6,106,185
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (3.2%)
4.00%, due 9/2/08 870,000 852,227
4.625%, due 5/1/13 135,000 130,311
4.75%, due 1/2/07 580,000 580,658
5.125%, due 1/2/14 150,000 149,098
5.25%, due 8/1/12 615,000 619,550
5.50%, due 5/2/06 635,000 638,403
</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 (CONTINUED)
6.25%, due 2/1/11 $ 185,000 $ 194,912
6.625%, due 9/15/09 825,000 879,069
------------
4,044,228
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(COLLATERALIZED MORTGAGE OBLIGATION) (0.1%)
Series 1998-M6, Class A2
6.32%, due 8/15/08 135,171 139,024
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (10.5%)
4.50%, due 4/1/18 128,771 124,739
4.50%, due 7/1/18 449,660 435,581
4.50%, due 11/1/18 485,279 470,084
5.00%, due 9/1/17 452,536 446,896
V 5.00%, due 12/1/35 TBA (n) 3,365,000 3,234,606
V 5.50%, due 12/1/20 TBA (n) 2,725,000 2,739,475
5.50%, due 11/1/33 494,306 488,431
5.50%, due 11/1/33 1,019,462 1,007,344
5.50%, due 12/1/33 636,232 628,669
V 5.50%, due 12/1/35 TBA (n) 1,490,000 1,467,650
V 6.00%, due 12/1/35 TBA (n) 1,825,000 1,838,118
6.50%, due 6/1/31 39,264 40,380
6.50%, due 8/1/31 31,940 32,848
6.50%, due 10/1/31 19,797 20,360
6.50%, due 6/1/32 103,021 105,896
7.00%, due 2/1/32 48,665 50,910
7.00%, due 4/1/32 26,253 27,463
7.50%, due 8/1/31 47,532 50,195
7.50%, due 8/1/31 27,718 29,271
------------
13,238,916
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (0.2%)
6.00%, due 4/15/29 78,193 79,688
6.00%, due 8/15/32 137,560 140,017
7.50%, due 12/15/23 15,836 16,882
7.50%, due 11/15/28 30,753 32,626
7.50%, due 12/15/28 23,099 24,517
------------
293,730
------------
UNITED STATES TREASURY BONDS (2.4%)
6.00%, due 2/15/26 275,000 316,142
V 6.25%, due 8/15/23 1,315,000 1,534,697
6.25%, due 5/15/30 715,000 863,921
6.875%, due 8/15/25 305,000 383,490
------------
3,098,250
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
UNITED STATES TREASURY NOTES (3.7%)
2.625%, due 11/15/06 $ 1,170,000 $ 1,149,388
V 3.00%, due 2/15/08 1,575,000 1,527,320
3.375%, due 2/15/08 1,370,000 1,339,389
3.875%, due 9/15/10 330,000 321,363
3.875%, due 2/15/13 210,000 201,592
------------
4,539,052
------------
Total U.S. Government & Federal Agencies (Cost
$31,926,379) 31,459,385
------------
YANKEE BONDS (0.6%) (K)
- -------------------------------------------------------------------------------
INSURANCE (0.2%)
Fairfax Financial Holdings Ltd.
7.375%, due 4/15/18 (c) 15,000 12,221
7.75%, due 4/26/12 (c) 95,000 87,404
7.75%, due 7/15/37 35,000 26,724
8.25%, due 10/1/15 5,000 4,474
8.30%, due 4/15/26 (c) 15,000 12,432
Montpelier Re Holdings Ltd.
6.125%, due 8/15/13 65,000 63,709
------------
206,964
------------
OIL & GAS SERVICES (0.3%)
Petroleum Geo-Services ASA
8.00%, due 11/5/06 14,592 14,738
10.00%, due 11/5/10 350,123 386,886
------------
401,624
------------
PACKAGING & CONTAINERS (0.1%)
Smurfit Capital Funding PLC
7.50%, due 11/20/25 185,000 162,800
------------
Total Yankee Bonds
(Cost $743,154) 771,388
------------
Total Long-Term Bonds
(Cost $116,174,664) 118,068,671
------------
<Caption>
SHARES
COMMON STOCKS (0.3%)
- -------------------------------------------------------------------------------
FOOD & STAPLES RETAILING (0.1%)
Parmalat SpA, GDR (d)(b) 21,200 61,639
------------
HEALTH CARE PROVIDERS & SERVICES (0.0%)++
Quadramed Corp. (d) 27,817 44,229
------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------
HEALTH CARE--SERVICES (0.0%)++
Skilled Healthcare Group, Inc. (d)(g)(i)(l) 110 $ 1,760
------------
INTERNET (0.0%)++
Globix Corp. (d)(g)(i)(l) 43,415 59,261
------------
MACHINERY--DIVERSIFIED (0.0%)++
MMH Holdings, Inc. (d)(g)(i)(l) 886 4,696
------------
MEDIA (0.1%)
Viacom, Inc. Class B 3,300 102,201
------------
METAL FABRICATE & HARDWARE (0.1%)
ACP Holding Co. (d)(b)(l) 42,447 78,527
------------
TELECOMMUNICATIONS (0.0%)++
ICO Global Communications Holdings Ltd. (d)(l) 1,161 4,676
Loral Cyberstar, Inc. (g) 39 39,000
------------
43,676
------------
TOBACCO (0.0%)++
North Atlantic Trading Co., Inc. (d)(g)(i)(l) 522 5
------------
Total Common Stocks
(Cost $229,941) 395,994
------------
CONVERTIBLE PREFERRED STOCKS (0.2%)
- -------------------------------------------------------------------------------
AUTOMOBILES (0.0%)++
General Motors Corp.
6.25% 300 5,505
------------
HEALTH CARE PROVIDERS & SERVICES (0.2%)
QuadraMed Corp.
5.50% (b)(i) 9,500 185,250
------------
INTERNET (0.0%)++
Globix Corp.
6.00% (d)(g)(l) 5,076 7,424
------------
Total Convertible Preferred Stocks
(Cost $257,718) 198,179
------------
</Table>
<Table>
<Caption>
SHARES VALUE
PREFERRED STOCKS (0.6%)
- -------------------------------------------------------------------------------
MEDIA (0.2%)
Haights Cross Communications, Inc.
16.00% (i)(l) 3,700 $ 212,750
Paxson Communications Corp.
14.25% (d)(j) 6 40,950
Ziff Davis Holdings, Inc.
10.00% (d)(l) 48 28,800
------------
282,500
------------
REAL ESTATE (0.4%)
Sovereign Real Estate Investment Corp.
12.00% (b) 358 516,415
------------
TRANSPORTATION (0.0%)++
Pacific & Atlantic Holdings, Inc.
7.50% (g)(l) 166 2
------------
Total Preferred Stocks (Cost $540,682) 798,917
------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS (0.1%)
- -------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (0.0%)++
ASAT Finance LLC
Strike Price $18.60
Expire 11/1/06 (d)(b)(g) 175 2
------------
MEDIA (0.0%)++
Haights Cross Communications, Inc.
Strike Price $0.001
Expire 12/10/11 (d)(g)(l) 3,350 34
Strike Price $0.001
Expire 12/10/11 (d)(g)(l) 6 0
Ono Finance PLC
Strike Price $0.01
Expire 2/15/11 (b)(d)(g)(l) 405 4
Ziff Davis Holdings, Inc.
Strike Price $0.001
Expire 8/12/12 (d)(b) 8,954 895
------------
933
------------
METAL FABRICATE & HARDWARE (0.1%)
ACP Holding Co.
Strike Price $0.01
Expire 9/13/13 (d)(b)(l) 42,051 77,794
------------
</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>
NUMBER OF
WARRANTS VALUE
WARRANTS (CONTINUED)
- -------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES (0.0%)++
UbiquiTel, Inc.
Strike Price $22.74
Expire 4/15/10 (d)(b)(l) 225 $ 2
------------
Total Warrants
(Cost $60,945) 78,731
------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (17.9%)
- -------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.1%)
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (h)(p) $ 171,356 $ 171,356
------------
Total Certificate of Deposit (Cost $171,356) 171,356
------------
COMMERCIAL PAPER (11.1%)
American General Finance Corp.
3.84%, due 11/15/05 (o) 2,000,000 1,997,013
3.85%, due 11/9/05 (o) 400,000 399,660
Compass Securitization
3.993%, due 11/22/05 (p) 122,395 122,395
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (p) 73,438 73,438
General Electric Capital Corp.
3.86%, due 11/9/05 (o) 1,660,000 1,658,576
Goldman Sachs Group, Inc.
3.98%, due 11/21/05 (o) 1,100,000 1,097,566
International Business Machines Corp.
3.77%, due 11/9/05 (o) 1,285,000 1,283,923
Merck & Co., Inc.
3.74%, due 11/2/05 (o) 215,000 214,978
Merrill Lynch & Co., Inc.
3.84%, due 11/14/05 (o) 1,300,000 1,298,197
Morgan Stanley
3.85%, due 11/7/05 (o) 960,000 959,384
Silver Tower U.S. Funding
3.932%, due 11/15/05 (p) 72,665 72,665
Toyota Motor Credit Corp.
3.81%, due 11/8/05 (o) 2,200,000 2,198,370
UBS Finance Delaware LLC
4.00%, due 11/1/05 (o) 835,000 835,000
Wells Fargo & Co.
3.79%, due 11/7/05 (o) 1,800,000 1,798,863
------------
Total Commercial Paper
(Cost $14,010,028) 14,010,028
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FEDERAL AGENCIES (3.3%)
Federal Home Loan Bank
3.72%, due 11/2/05 (o) $ 1,000,000 $ 999,897
------------
Federal Home Loan Mortgage Corporation
3.68%, due 11/1/05 (o) 1,575,000 1,575,000
------------
Federal National Mortgage Association
3.73%, due 11/14/05 (o) 1,500,000 1,497,980
------------
Total Federal Agencies (Cost $4,072,877) 4,072,877
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.9%)
BGI Institutional Money Market Fund (p) 1,116,299 1,116,299
------------
Total Investment Company (Cost $1,116,299) 1,116,299
------------
<Caption>
PRINCIPAL
AMOUNT
TIME DEPOSITS (2.5%)
Bank of the West (The)
4.02%, due 12/8/05 (p) $ 465,108 465,108
Barclays
3.92%, due 12/5/05 (p) 195,835 195,835
3.94%, due 11/28/05 (p) 220,314 220,314
Credit Suisse First Boston Corp.
3.74%, due 11/1/05 (p) 171,356 171,356
Deutsche Bank
3.95%, due 12/2/05 (p) 195,835 195,835
First Tennessee National Corp.
3.88%, due 11/14/05 (p) 195,835 195,835
Fortis Bank
4.00%, due 12/12/05 (p) 220,314 220,314
Halifax Bank of Scotland
3.75%, due 11/1/05 (p) 195,835 195,835
Keybank
4.00%, due 11/1/05 (p) 218,983 218,983
Marshall & Ilsley Bank
3.97%, due 12/29/05 (p) 195,835 195,835
Societe Generale
3.77%, due 11/1/05 (p) 416,149 416,149
UBS AG
4.01%, due 12/13/05 (p) 195,835 195,835
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Wells Fargo & Co.
4.00%, due 11/25/05 (p) $ 195,835 $ 195,835
------------
Total Time Deposits
(Cost $3,083,069) 3,083,069
------------
Total Short-Term Investments
(Cost $22,453,629) 22,453,629
------------
Total Investments
(Cost $139,717,580) (r) 112.9% 141,994,121(s)
Liabilities in Excess of Cash
and Other Assets (12.9) (16,167,562)
------------ ------------
Net Assets 100.0% $125,826,559
============ ============
</Table>
<Table>
++ Less than one tenth of a percent.
(a) 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.
(b) May be sold to institutional investors only.
(c) Represents security, or a portion thereof, which is out on loan.
(d) Non-income producing security.
(e) Issue in default.
(f) Issuer in bankruptcy.
(g) Fair valued security. The total market value of these securities at October
31, 2005 is $166,521, which reflects 0.1% of the Fund's net assets.
(h) Floating rate. Rate shown is the rate in effect at October 31, 2005.
(i) Restricted security.
(j) PIK ("Payment in Kind")--interest or dividend payment is made with
additional securities.
(k) Yankee Bond--dollar-denominated bond issued in the United States by a
foreign bank or corporation.
(l) Illiquid security.
(m) Partially segregated for foreign currency forward contracts.
(n) 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 market value of these
securities at October 31, 2005 is $13,789,677.
(o) Segregated as collateral for TBA's.
(p) Represents security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(q) Step Bond--coupon rate changes in increments to maturity. Rate shown is
rate in effect at October 31, 2005.
(r) The cost for federal income tax purposes is $142,897,097.
(s) At October 31, 2005, net unrealized depreciation was $902,976 based on cost
for federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $1,927,772 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $2,830,748.
</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, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $139,717,580) including
$4,527,452 market value of securities loaned $141,994,121
Cash denominated in foreign currencies
(identified cost $914,399) 897,859
Cash 60,315
Receivables:
Dividends and interest 1,828,407
Investment securities sold 1,263,133
Fund shares sold 51,812
Other assets 18,575
Unrealized appreciation on foreign currency
forward contracts 31,824
-------------
Total assets 146,146,046
-------------
LIABILITIES:
Securities lending collateral 4,639,222
Payables:
Investment securities purchased 15,020,308
Fund shares redeemed 225,166
Transfer agent 92,826
NYLIFE Distributors 82,670
Shareholder communication 51,094
Professional 35,563
Manager 27,765
Custodian 11,788
Accrued expenses 26,750
Dividend payable 102,015
Unrealized depreciation on foreign currency
forward contracts 4,320
-------------
Total liabilities 20,319,487
-------------
Net assets $125,826,559
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest (par value of
$.01 per share)
unlimited shares authorized:
Class A $ 45,502
Class B 81,413
Class C 15,947
Class I 263
Additional paid-in capital 129,427,016
Accumulated distributions in excess of net
investment income (1,368,616)
Accumulated net realized loss on investments (4,686,315)
Net unrealized appreciation on investments 2,276,541
Net unrealized appreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts 34,808
-------------
Net assets $125,826,559
=============
CLASS A
Net assets applicable to outstanding shares $ 40,075,754
=============
Shares of beneficial interest outstanding 4,550,232
=============
Net asset value per share outstanding $ 8.81
Maximum sales charge (4.50% of offering price) 0.42
-------------
Maximum offering price per share outstanding $ 9.23
=============
CLASS B
Net assets applicable to outstanding shares $ 71,514,761
=============
Shares of beneficial interest outstanding 8,141,258
=============
Net asset value and offering price per share
outstanding $ 8.78
=============
CLASS C
Net assets applicable to outstanding shares $ 14,004,073
=============
Shares of beneficial interest outstanding 1,594,654
=============
Net asset value and offering price per share
outstanding $ 8.78
=============
CLASS I
Net assets applicable to outstanding shares $ 231,971
=============
Shares of beneficial interest outstanding 26,318
=============
Net asset value and offering price per share
outstanding $ 8.81
=============
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 7,388,547
Dividends(a) 58,049
Income from securities loaned--net 18,400
-----------
Total income 7,464,996
-----------
EXPENSES:
Manager 791,423
Distribution--Class B 571,034
Distribution--Class C 121,282
Transfer agent--Classes A, B and C 373,246
Transfer agent--Class I 282
Distribution/Service--Class A 98,566
Service--Class B 190,345
Service--Class C 40,427
Professional 69,345
Shareholder communication 64,060
Registration 52,248
Custodian 50,858
Recordkeeping 39,857
Directors 14,328
Miscellaneous 66,742
-----------
Total expenses before reimbursement 2,544,043
Expense reimbursement from Manager (87,293)
-----------
Net expenses 2,456,750
-----------
Net investment income 5,008,246
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on:
Security transactions 1,061,793
Foreign currency transaction 230,852
-----------
Net realized gain on investment and foreign
currency transactions 1,292,645
-----------
Net change in unrealized appreciation
(depreciation) on:
Security transactions (4,643,339)
Translation of other assets and liabilities
in foreign currencies and forwards
contracts 345,131
-----------
Net change in unrealized appreciation
(depreciation) on investments and foreign
currency contracts (4,298,208)
-----------
Net realized and unrealized loss on investments
and foreign currency transactions (3,005,563)
-----------
Net increase in net assets resulting from
operations $ 2,002,683
===========
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of $3,844.
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 YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment income $ 5,008,246 $ 5,022,102
Net realized gain on investment
and foreign currency transactions 1,292,645 1,463,519
Net change in unrealized
appreciation (depreciation) on
investments and foreign currency
contracts (4,298,208) 2,711,331
----------------------------
Net increase in net assets
resulting from operations 2,002,683 9,196,952
----------------------------
Dividends to shareholders:
From net investment income:
Class A (1,708,513) (1,919,553)
Class B (2,720,609) (3,675,328)
Class C (575,607) (641,929)
Class I (8,134) (1,934)
----------------------------
Total dividends to shareholders (5,012,863) (6,238,744)
----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 12,794,668 17,280,589
Class B 8,764,440 16,298,457
Class C 7,104,784 8,650,466
Class I 160,449 70,412
Net asset value of shares issued
to shareholders in reinvestment
of dividends:
Class A 1,245,678 1,328,042
Class B 2,045,194 2,718,981
Class C 265,298 322,308
Class I 7,148 1,737
----------------------------
32,387,659 46,670,992
Cost of shares redeemed:
Class A (10,184,745) (13,341,129)
Class B (15,560,074) (16,712,880)
Class C (7,437,723) (5,355,622)
Class I (2,207) --
----------------------------
(33,184,749) (35,409,631)
Increase (decrease) in net
assets derived from capital
share transactions (797,090) 11,261,361
------------- ------------
Net increase (decrease) in net
assets (3,807,270) 14,219,569
NET ASSETS:
Beginning of year 129,633,829 115,414,260
----------------------------
End of year $ 125,826,559 $129,633,829
============================
Accumulated distribution in excess
of net investment income at end of
year $ (1,368,616) $ (1,987,068)
============================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning of period $ 9.01 $ 8.77 $ 7.97 $ 8.22 $ 8.37 $ 9.20
-------- -------- ----------- -------- -------- --------
Net investment income 0.39(a) 0.40(a) 0.39(a) 0.55(a) 0.67 (a)(e) 0.73
Net realized and unrealized gain (loss) on
investments (0.24) 0.37 0.86 (0.03) (0.14)(e) (0.61)
Net realized and unrealized gain (loss) on
foreign currency transactions 0.04 (0.05) 0.01 (0.15) 0.01 (0.26)
-------- -------- ----------- -------- -------- --------
Total from investment operations 0.19 0.72 1.26 0.37 0.54 (0.14)
-------- -------- ----------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.39) (0.48) (0.38) (0.46) (0.62) (0.55)
Return of capital -- -- (0.08) (0.16) (0.07) (0.14)
-------- -------- ----------- -------- -------- --------
Total dividends and distributions (0.39) (0.48) (0.46) (0.62) (0.69) (0.69)
-------- -------- ----------- -------- -------- --------
Net asset value at end of period $ 8.81 $ 9.01 $ 8.77 $ 7.97 $ 8.22 $ 8.37
======== ======== =========== ======== ======== ========
Total investment return (b) 2.11% 8.44% 16.22%(c) 4.78% 6.62% (1.57%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 4.32% 4.48% 5.59%+ 6.95% 7.95%(e) 8.27%
Net expenses 1.34% 1.41% 1.46%+ 1.49% 1.44% 1.47%
Expenses (before reimbursement) 1.40% 1.41% 1.46%+ 1.49% 1.44% 1.47%
Portfolio turnover rate 105% 84% 80% 84% 141% 187%
Net assets at end of period (in 000's) $40,076 $37,179 $31,042 $18,297 $15,066 $18,909
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning of period $ 8.99 $ 8.75 $ 7.95 $ 8.20 $ 8.36 $ 9.19
-------- -------- ----------- -------- -------- --------
Net investment income 0.32(a) 0.33(a) 0.34(a) 0.49(a) 0.61 (a)(e) 0.67
Net realized and unrealized gain (loss) on
investments (0.25) 0.39 0.86 (0.03) (0.15)(e) (0.61)
Net realized and unrealized gain (loss) on
foreign currency transactions 0.04 (0.06) 0.01 (0.15) 0.01 (0.26)
-------- -------- ----------- -------- -------- --------
Total from investment operations 0.11 0.66 1.21 0.31 0.47 (0.20)
-------- -------- ----------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.32) (0.42) (0.34) (0.42) (0.56) (0.50)
Return of capital -- -- (0.07) (0.14) (0.07) (0.13)
-------- -------- ----------- -------- -------- --------
Total dividends and distributions (0.32) (0.42) (0.41) (0.56) (0.63) (0.63)
-------- -------- ----------- -------- -------- --------
Net asset value at end of period $ 8.78 $ 8.99 $ 8.75 $ 7.95 $ 8.20 $ 8.36
======== ======== =========== ======== ======== ========
Total investment return (b) 1.23% 7.68% 15.55%(c) 3.99% 5.78% (2.28%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.57% 3.73% 4.84%+ 6.20% 7.20%(e) 7.52%
Net expenses 2.09% 2.16% 2.21%+ 2.24% 2.19% 2.22%
Expenses (before reimbursement) 2.15% 2.16% 2.21%+ 2.24% 2.19% 2.22%
Portfolio turnover rate 105% 84% 80% 84% 141% 187%
Net assets at end of period (in 000's) $14,004 $14,449 $10,573 $5,967 $2,965 $2,895
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charge. 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 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>
Decrease net investment income $(0.00)(d) $(0.00)(d) $(0.00)(d)
Increase net realized and unrealized gains and losses 0.00(d) 0.00(d) 0.00(d)
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>
CLASS B
- -------------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 8.99 $ 8.75 $ 7.95 $ 8.20 $ 8.36 $ 9.19
----------- ----------- ----------- ------- ------- -------
0.32(a) 0.33(a) 0.34(a) 0.49(a) 0.61 (a)(e) 0.67
(0.25) 0.39 0.86 (0.03) (0.15)(e) (0.61)
0.04 (0.06) 0.01 (0.15) 0.01 (0.26)
----------- ----------- ----------- ------- ------- -------
0.11 0.66 1.21 0.31 0.47 (0.20)
----------- ----------- ----------- ------- ------- -------
(0.32) (0.42) (0.34) (0.42) (0.56) (0.50)
-- -- (0.07) (0.14) (0.07) (0.13)
----------- ----------- ----------- ------- ------- -------
(0.32) (0.42) (0.41) (0.56) (0.63) (0.63)
----------- ----------- ----------- ------- ------- -------
$ 8.78 $ 8.99 $ 8.75 $ 7.95 $ 8.20 $ 8.36
=========== =========== =========== ======= ======= =======
1.23% 7.68% 15.55%(c) 3.99% 5.78% (2.28%)
3.57% 3.73% 4.84%+ 6.20% 7.20%(e) 7.52%
2.09% 2.16% 2.21%+ 2.24% 2.19% 2.22%
2.15% 2.16% 2.21%+ 2.24% 2.19% 2.22%
105% 84% 80% 84% 141% 187%
$71,515 $77,933 $73,799 $55,842 $51,694 $47,607
</Table>
<Table>
<Caption>
CLASS I
----------------------------
JANUARY 2,
2004**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2005 2004
$ 9.02 $ 8.96
----------- -----------
0.42(a) 0.33(a)
(0.25) 0.16
0.04 (0.02)
----------- -----------
0.21 0.47
----------- -----------
(0.42) (0.41)
-- --
----------- -----------
-- --
----------- -----------
$ 8.81 $ 9.02
=========== ===========
2.32% 5.44%(c)
4.69% 4.77%+
0.97% 1.12%+
1.03% 1.12%+
105% 84%
$ 232 $ 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 nineteen 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, Class B, Class C 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 provide current income and competitive
overall return by investing primarily in domestic and foreign debt 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 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. 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 accounting
principles generally accepted in the United States of America 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 normally are taken
from the principal 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. 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 in good faith
by 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 principal market is temporarily closed at a
time when under normal conditions it would be open. At October 31, 2005, the
Fund held securities with a value of $166,521 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
30 MainStay Diversified Income Fund
impact on the price of such securities as a result of such events.
(B) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward contract is
an agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. During the period the forward contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" such contract on a daily basis to reflect the
market value of the contract at the end of each day's trading. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into foreign currency forward
contracts primarily to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates or to try to enhance the Fund's returns.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized 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. (See Note 7)
(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 and
unrealized appreciation or depreciation is recorded 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, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the market price of the underlying security or foreign
currency increase but, as long as the obligation as a writer continues, have
retained the risk of loss should the price of the underlying security decline.
By writing a covered put option, the Fund, in exchange for the premium, accepts
the risk of decline in the market value of the underlying security or foreign
currency below the exercise price. After writing a put option, the Fund may
incur a loss equal to the difference between the exercise price of the option
and the sum of the market value of the underlying security plus the premium
received from the sale of the option. 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) 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
www.MAINSTAYfunds.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
(F) MORTGAGE DOLLAR ROLLS. The Fund enters into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the portfolio of investments and liabilities for such purchase
commitments are included as payables for investments purchased. During the roll
period, a Fund forgoes principal and interest on the securities. A Fund is
compensated by the difference between the current sales price and the forward
price for the future purpose as well as by the earnings on the cash proceeds of
the initial sale. MDRs may be renewed without physical delivery of the
securities subject to the contract. 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) 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. (See Note 7)
(H) 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.
(I) 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 accounting principles generally accepted in
the United States of America. 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 and accumulated net
realized loss on investments arising from permanent differences; net assets at
October 31, 2005, are not affected.
<Table>
<Caption>
ACCUMULATED
DISTRIBUTIONS IN ACCUMULATED NET
EXCESS OF NET REALIZED LOSS ON
INVESTMENT INCOME INVESTMENTS
$623,069 $ (623,069)
------------------------------------
</Table>
The reclassifications for the Fund are primarily due to premium amortization
adjustments, straddles, paydown and foreign currency gain (loss).
(J) 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.
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.
32 MainStay Diversified Income Fund
(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 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, are reflected in
unrealized foreign exchange gains or losses at period end exchange rates.
(L) 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 transfer agent expenses and 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.
(M) 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.
(N) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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 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 percentage of the Fund's
average daily net assets as follows: 0.60% on assets up to $500 million and
0.55% on assets in excess of $500 million. Effective August 1, 2005, the Manager
has entered into a written expense limitation agreement, under which the Manager
has agreed to reimburse the expenses of the Fund so that the total operating
expenses (excluding taxes, interest, litigation, extraordinary expenses, and
brokerage and other transaction expenses relating to the purchase or sale of
portfolio investments) do not exceed, on an annualized basis, 1.30% of the
average daily net assets of the Class A shares. An equivalent reimbursement, in
an equal amount of basis points, will be applied to the other share classes. The
Manager, within three years of incurring such expenses, may recoup the amount of
any management fee waiver or expense reimbursement from the Fund pursuant to
this agreement if such recoupment does not cause the Fund to exceed the expense
limitations. At October 31, 2005, the Fund had $19,479 of recoupment available.
This amount is available until October 31, 2008. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. Prior to
August 1, 2005 and after December 1, 2004, NYLIM voluntarily agreed to reimburse
the expenses of the Fund so that total annual fund operating expenses do not
exceed on an annualized basis 1.35% of the average daily net assets of the Class
A shares, and such that there would be an equivalent reduction for the other
classes of shares. For the year ended October 31, 2005, the Manager earned fees
from the Fund in the amount of $791,423, and waived its fee and/or reimbursed
expenses in the amount of $87,293.
www.MAINSTAYfunds.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor a monthly fee of 0.30% of the Fund's
average daily net assets. To the extent that the Manager has agreed to reimburse
expenses of the Fund, the Subadvisor has voluntary 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 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 $31,598 for the year ended
October 31, 2005. 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 $284, $69,918 and $3,573, respectively, for the year ended October 31,
2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $373,528.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(F) CAPITAL. At October 31, 2005 NYLIFE Distributors held shares of Class B
with a value of $7,584,384 which represents 10.6% of Class B net assets and 6.0%
of the total Fund's net assets at October 31, 2005.
(G) OTHER. Pursuant to the Management Agreement, 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
$3,416 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $39,857 for the year ended
October 31, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, The Bank of New York acted as custodian for the Fund.
NOTE 5--FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED OTHER TOTAL
ORDINARY CAPITAL TEMPORARY UNREALIZED ACCUMULATED
INCOME LOSSES DIFFERENCES DEPRECIATION LOSS
$1,366,319 $(3,840,926) $(400,807) $(868,168) $(3,743,582)
----------------------------------------------------------------------
</Table>
34 MainStay Diversified Income Fund
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale loss deferrals, deferral of losses on foreign
currency forward contracts for tax purposes and interest on defaulted
securities.
At October 31, 2005, for federal income tax purposes, capital loss carryforwards
of $3,840,926 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 $1,293
2009 864
2010 1,161
2011 523
-------------------------------------------
$3,841
-------------------------------------------
</Table>
The Fund utilized $711,183 of capital loss carryforwards during the year ended
October 31, 2005.
The tax character of distributions paid during the years ended October 31, 2005
and 2004, shown in the Statement of Changes in Net Assets, were as follows:
<Table>
<Caption>
2005 2004
Distributions paid from:
Ordinary Income $5,012,863 $6,238,744
- -------------------------------------------------------------
</Table>
NOTE 6--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of U.S. Government
securities were $91,351 and $85,059, respectively. Purchase and sales of
securities, other than U.S. Government securities and short-term securities,
were $39,620 and $44,027, respectively.
NOTE 7--PORTFOLIO SECURITIES LOANED, FOREIGN CURRENCY FORWARD CONTRACTS AND
RESTRICTED SECURITIES:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $4,527,452. The Fund received $4,639,222 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.
www.MAINSTAYfunds.com 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Foreign currency forward contracts open at October 31, 2005:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
SOLD PURCHASED (DEPRECIATION)
Foreign Currency Sale Contracts
- -------------------------------------------------------------------------------------------------------------------
Pound Sterling vs. Euro, expiring 11/17/05 E 1,361,822 L2,408,000 $ 2,162
- -------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 11/21/05 $ 1,600,000 E1,332,057 (1,960)
- -------------------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 1/6/06 $ 89,981 E 75,000 221
- -------------------------------------------------------------------------------------------------------------------
U.S. Dollar vs. Pound Sterling, expiring 11/17/05 L 841,470 $1,488,560 (581)
- -------------------------------------------------------------------------------------------------------------------
U.S. Dollar vs. Canadian Dollar, expiring 11/17/05 C$ 567,765 $ 479,531 (1,404)
- -------------------------------------------------------------------------------------------------------------------
U.S. Dollar vs. Euro, expiring 11/17/05 E 4,000,000 $4,819,400 21,720
- -------------------------------------------------------------------------------------------------------------------
U.S. Dollar vs. Euro, expiring 11/21/05 E 1,332,057 $1,605,761 7,721
- -------------------------------------------------------------------------------------------------------------------
U.S. Dollar vs. Euro, expiring 1/6/06 E 150,430 $ 180,546 (375)
- -------------------------------------------------------------------------------------------------------------------
Unrealized appreciation on foreign currency forward
contracts $ 27,504
- -------------------------------------------------------------------------------------------------------------------
</Table>
Foreign currency held at October 31, 2005:
<Table>
<Caption>
CURRENCY COST MARKET VALUE
Austrailian Dollar A$ 19,246 $ 14,844 $ 14,390
- -------------------------------------------------------------------------------------------------------------------
Canadian Dollar C$ 19,406 16,371 16,431
- -------------------------------------------------------------------------------------------------------------------
Danish Krone DK 1,482,122 247,808 238,013
- -------------------------------------------------------------------------------------------------------------------
Euro E 347,834 418,139 416,862
- -------------------------------------------------------------------------------------------------------------------
Pound Sterling L 74,718 131,982 132,250
- -------------------------------------------------------------------------------------------------------------------
Japanese Yen Y 9,302,502 85,255 79,913
- -------------------------------------------------------------------------------------------------------------------
$ 914,399 $ 897,859
- -------------------------------------------------------------------------------------------------------------------
</Table>
36 MainStay Diversified Income Fund
Restricted securities held at October 31, 2005:
<Table>
<Caption>
PRINCIPAL
DATE(S) OF AMOUNT/ 10/31/05 PERCENT OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
Calpine Gilroy, L.P.
10.00%, due 9/30/14 11/26/2003 236,627 $ 236,627 $ 236,627 0.2%
- --------------------------------------------------------------------------------------------------------------------------------
Fidelity National Information Solutions,
Inc., Series B
5.69%, due 3/9/13 3/16/05-4/25/05 441,250 441,250 442,590 0.4
- --------------------------------------------------------------------------------------------------------------------------------
Globix Corp.
Common Stock 10/15/02 43,415 29,954 59,261 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
Goodyear Tire & Rubber Co. (The)
7.06%, due 4/30/10 4/15/05 250,000 250,000 251,927 0.2
- --------------------------------------------------------------------------------------------------------------------------------
MMH Holdings, Inc.
Common Stock 12/28/01-10/17/02 886 1,413 4,696 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
Haights Cross Communications, Inc.
Preferred Stock
16.00% 1/22/04 3,700 172,130 212,750 0.2
- --------------------------------------------------------------------------------------------------------------------------------
North Atlantic Trading Co., Inc.
Common Stock 4/21/04 522 5 5 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
QuadraMed Corp.
Convertible Preferred Stock
5.50% 6/16/04 9,500 237,500 185,250 0.1
- --------------------------------------------------------------------------------------------------------------------------------
Riverdeep Group Ltd.
(zero coupon), due 10/30/11 7/26/05 50,000 50,000 52,750 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
Skilled Healthcare Group, Inc.
Common Stock 9/4/03 110 1 1,760 0.0(a)
- --------------------------------------------------------------------------------------------------------------------------------
SunGard Data Systems, Inc.,
Series B
6.28%, due 12/11/12 7/28/05 169,575 169,363 170,943 0.1
- --------------------------------------------------------------------------------------------------------------------------------
Telcordia Technologies, Inc.
6.36%, due 9/15/12 4/5/05 248,750 248,405 245,952 0.2
- --------------------------------------------------------------------------------------------------------------------------------
$1,836,648 $1,864,511 1.4%
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Less than one tenth of a percent.
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, 2005.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C CLASS I
Shares sold 1,416 971 786 18
- -------------------------------------------------------------------------------
Shares issued in reinvestment of
dividend and distributions 138 227 29 --(a)
- -------------------------------------------------------------------------------
1,554 1,198 815 18
- -------------------------------------------------------------------------------
Shares redeemed (1,130) (1,728) (828) --(a)
- -------------------------------------------------------------------------------
Net increase (decrease) 424 (530) (13) 18
- -------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<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
dividend and distributions 150 307 36 --(a)
- --------------------------------------------------------------------------------
2,091 2,137 1,008 8
- --------------------------------------------------------------------------------
Shares redeemed (1,503) (1,896) (608) --
- --------------------------------------------------------------------------------
Net increase 588 241 400 8
- --------------------------------------------------------------------------------
</Table>
* Commenced operations on January 2, 2004.
(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 have cooperated fully and completely responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those agreements and certain other levels of trading by
fund shareholders over the period from 1999 to 2003 may have had on the Funds.
As a result of this review, in December 2005, NYLIM made payments totaling $5.9
million to nine MainStay funds. No payment was made with respect to the MainStay
Diversified Income Fund. NYLIM has also agreed to reimburse or pay all expenses
relating to the Board of Trustees' review of this matter and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
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,
2005, and the related statement of operations for the year then ended, and the
statements of changes in net assets and financial highlights for each of the
years in the two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005,
the results of its operations for the year then ended, and the changes in its
net assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
40 MainStay Diversified Income Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 41
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
42 MainStay Diversified Income Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in managements presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's mid-range performance when
compared over several time periods with funds concluded by Trustees to be peers
of the Fund.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund, with the expectation that the Manager intended, over time, to
implement measures designed to reduce the Trust's transfer agency fees. The
Trustees considered certain benefits expected for, and risks borne by, the
Manager and its affiliates, including benefits from soft dollar arrangements.
The Trustees considered the services provided to the Fund by affiliates of the
Manager, NYLIFE Distributors and NYLIM Service, under other agreements, and the
benefits to the Manager and its affiliates from those relationships. The
information provided to the Trustees indicated that the profitability to the
Manager and its affiliates arising directly from those other agreements was not
excessive. The Trustees acknowledged certain benefits to the reputation of the
Manager and its affiliates, as well to that of the Trust, from their association
with each other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distributing shares
of various series of the Trust. They noted the Manager's willingness to
implement contractual breakpoints, and that the contractual breakpoints in place
www.MAINSTAYfunds.com 43
for the management fee were intended to provide that the Fund's shareholders
would share in benefits from economies of scale arising from the growth of Fund
assets. The Trustees acknowledged that the Fund had not yet reached the asset
level at which breakpoints would reduce the contractual management fee to which
the Fund is subject. Acknowledging the difficulty of forecasting economies of
scale, the Trustees generally expressed an intention to monitor the Manager's
profitability and consider the application of fee breakpoints or other
appropriate measures as the Board may determine from time to time. The Trustees
reviewed historical information about changes in the Fund's expense and asset
levels over time, as well as information about certain Fund expenses that would
remain fixed even as Fund assets increase and, therefore, provide the Fund with
benefits from economies of scale as the Fund grows. The Trustees noted that, to
the extent the Fund's gross expenses currently are higher than its net expenses,
economies of scale achieved through an increase in the Fund's assets might not
directly benefit the Fund through lower net expenses. The Trustees considered
various information about transfer agency expenses, including information
showing that transfer agency fees of the Fund and a significant number of series
of the Trust (although not every such series or with respect to every share
class of each series) tended to be high, when aggregated and expressed as a
percentage of the assets of certain series, compared to the mutual fund industry
average according to certain studies reviewed by the Board and, therefore,
adversely affected gross expense ratios. The Board received information about
potential effects on the Manager were it to subsidize certain portions of the
Trust's transfer agency fees. The Trustees noted that a significant number of
shareholders of the Trust's series had small amounts invested in the series, and
have considered measures intended to increase average shareholder account size
and/or otherwise reduce the Trust's transfer agency fees and expenses, including
steps that the Manager has taken to encourage shareholders to consolidate or
close small accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated gross and net expense ratios, and various components of that expense
ratio, in comparison to other funds in comparison groupings prepared by outside
data providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
44 MainStay Diversified 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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
www.MAINSTAYfunds.com 45
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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
46 MainStay Diversified Income Fund
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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO8106 (RECYCLE SYMBOL) MS475-05 MSDI11-12/05
16
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP VALUE FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay Mid Cap Value Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/S/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- --------------------------------------------------------------------------------
Investment and Performance Comparison 4
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 8
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 13
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 23
- --------------------------------------------------------------------------------
Trustees and Officers 24
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 27
- --------------------------------------------------------------------------------
Federal Income Tax Information 29
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures 29
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 29
- --------------------------------------------------------------------------------
MainStay Funds 30
</Table>
www.MAINSTAYfunds.com 3
4 MainStay Mid Cap Value Fund
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 4.01% 5.69% 10.21%
Excluding sales charges 10.06 6.90 11.05
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<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
18697 16676
10/31/05 20578 18917
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 4.27% 5.81% 10.23%
Excluding sales charges 9.27 6.12 10.23
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<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
18857 16676
10/31/05 20606 18917
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 8.27% 6.12% 10.23%
Excluding sales charges 9.27 6.12 10.23
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<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
18857 16676
10/31/05 20606 18917
</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 contractual and may be modified or terminated only with the
approval of the Board of Trustees. 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 THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.MAINSTAYfunds.com 5
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
10.48% 7.22% 11.37%
</Table>
(PERFORMANCE GRAPH)
<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
20136 16676
10/31/05 22246 18917
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
10.35% 7.12% 11.26%
</Table>
(PERFORMANCE GRAPH)
<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
20016 16676
10/31/05 22087 18917
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
10.06% 6.83% 10.96%
</Table>
(PERFORMANCE GRAPH)
<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
19668 16676
10/31/05 21646 18917
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -------------------------------------------------------------
Russell Midcap(R) Value Index(1) 19.50% 12.82% 9.74%
Average Lipper mid cap value
fund(2) 14.51 10.66 9.30
</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 THE
TABLES AND 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
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2005. Simply divide your
account value by $1,000 (for example, an $8,600 account value divided by $1,000
= 8.6), then multiply the result by the number under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT ENDING ACCOUNT
VALUE (BASED VALUE (BASED
BEGINNING ON ACTUAL EXPENSES ON HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,057.55 $ 7.00 $1,018.25 $ 6.87
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,054.10 $10.87 $1,014.50 $10.66
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,054.10 $10.87 $1,014.50 $10.66
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,059.75 $ 5.14 $1,020.05 $ 5.04
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,059.25 $ 5.66 $1,019.55 $ 5.55
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,057.70 $ 6.95 $1,018.30 $ 6.82
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each Class
(1.35% for Class A, 2.10% for Class B and Class C, 0.99% for Class I, 1.09%
for Class R1, and 1.34% for Class R2) multiplied by the average account value
over the period, divided by 365, multiplied by 184 (to reflect the one-half
year period).
6 MainStay Mid Cap Value Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT TERM
INVESTMENTS
(COLLATERAL FROM LIABILITIES IN EXCESS
SECURITIES LENDING INVESTMENT PURCHASED PUT OF CASH AND OTHER
COMMON STOCKS IS 6.7%) COMPANY OPTIONS ASSETS
- ------------- ----------- ---------- ------------- ---------------------
88.4% 12.3 3.4 0.6 -4.7
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. GlobalSantaFe Corp.
2. PMI Group, Inc. (The)
3. Rowan Cos., Inc.
4. Transocean, Inc.
5. Pride International, Inc.
6. Abitibi-Consolidated, Inc.
7. ENSCO International, Inc.
8. iShares Russell Midcap Value Index Fund
9. Kroger Co. (The)
10. Cadbury Schweppes PLC ADR
</Table>
www.MAINSTAYfunds.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Richard A. Rosen and Mark T. Spellman
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) The
Fund normally invests at least 80% of its assets in securities that we believe
are undervalued when purchased, pay cash dividends, and are listed on a national
securities exchange or traded in the over-the-counter market. 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 equities that we deem to be undervalued based on a number of
factors, including relative valuation, prospects for future earnings growth,
ability to grow dividends, and corporate management.
WHAT MAJOR FACTORS INFLUENCED THE STOCK MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2005?
During the 12-month reporting period, stocks generally advanced, despite
political events and energy price fluctuations. Value stocks outperformed growth
stocks at all capitalization levels. Crude-oil prices rallied to $69.81 per
barrel and natural gas prices broke $14 per million Btu before backing off
somewhat. Major hurricanes affected supply-and-demand dynamics by damaging oil
rigs and petrochemical plants. The price of gasoline rose to more than $3 a
gallon, which threatened to slow consumer spending. Although hurricane-related
stocks--including retailers, insurers, and companies on the Gulf Coast--were
weakened, the long-term economic impact appeared to be manageable.
The Federal Open Market Committee raised the targeted federal funds rate eight
times during the 12-month reporting period, with a 25-basis-point increase on
each occasion. (A basis point is one-hundredth of a percentage point.) On
October 31, 2005, the federal funds target rate stood at 3.75%. During the
reporting period, the yield curve flattened to reflect concern over a potential
recession. Yet the most recent gross-domestic-product data suggests that the
overall economy has remained resilient.
WHAT WERE SOME OF THE FUND'S STRONG PERFORMERS DURING THE REPORTING PERIOD?
The top-five positive contributors to the Fund during the reporting period were
all from the contract drilling segment of the energy sector. Transocean Energy,
ENSCO International, GlobalSantaFe, Rowan, and Pride International each
benefited from higher oil and natural gas prices. These companies also benefited
from the perception that day rates may continue to rise if damage to the Gulf of
Mexico's drilling infrastructure tightens drilling-rig supply. Earnings results
at these companies came in better than expected throughout the reporting period,
which raised expectations and drove stock prices higher.
WHICH STOCKS DETRACTED FROM THE FUND'S RESULTS?
Three stocks in the paper industry hurt the Fund's performance during the
reporting period. We purchased shares of Canadian newsprint manufacturer
Abitibi-Consolidated in March 2005, and the company's shares slid through
October because of higher energy costs and weaker-than-expected demand. The Fund
continued to hold the company's shares, how-
ever, because we felt they were attractively valued. The company has begun to
concentrate on share-
holder value by monetizing some noncore operations and cutting excess capacity.
Paper company Bowater was plagued by higher feed-stock costs, sluggish demand,
product substitution, and excess capacity. We reduced the Fund's position in
this stock because we felt that conditions were not likely to get materially
better in the foreseeable future.
Linerboard manufacturer Smurfit-Stone Container faced trends similar to those at
Bowater and Abitibi-Consolidated. The company also had difficulty passing
through higher costs. We reduced the Fund's position in Smurfit-Stone Container
near the end of the reporting period.
We initiated a Fund position in Molson Coors Brewing in March 2005. After the
share price declined and recent merger synergies were slow to materialize, we
decided to eliminate the position from the portfolio in July 2005.
Mid-capitalization companies are generally less established and their stocks may
be more volatile and less liquid than the securities of large companies. The
Fund may experience a portfolio turnover rate of over 100% and may generate
short-term capital gains which are taxable.
1. See footnote on page 5 for more information about the Russell Midcap(R) Value
Index.
8 MainStay Mid Cap Value Fund
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2005, the Fund held overweighted positions relative to the
Russell Midcap(R) Value Index in energy, materials, and industrials. On the same
date, the Fund was underweighted relative to the Index in financials, consumer
discretionary, utilities, information technology, and health care.
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, 2005
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (88.4%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.4%)
Raytheon Co. 139,842 $ 5,167,162
------------
AUTO COMPONENTS (1.3%)
TRW Automotive
Holdings Corp. (a) 190,700 5,158,435
------------
BUILDING PRODUCTS (1.5%)
American Standard Cos., Inc. 153,900 5,854,356
------------
CHEMICALS (3.3%)
Arch Chemicals, Inc. 222,282 5,839,348
Chemtura Corp. 195,800 2,095,062
Olin Corp. (b) 266,525 4,765,467
------------
12,699,877
------------
COMMERCIAL BANKS (4.2%)
Compass Bancshares, Inc. 163,114 7,953,439
Hibernia Corp. Class A 83,757 2,485,070
Marshall & Ilsley Corp. 133,343 5,728,415
------------
16,166,924
------------
COMMERCIAL SERVICES & SUPPLIES (1.8%)
Pitney Bowes, Inc. 166,911 7,023,615
------------
COMMUNICATIONS EQUIPMENT (1.8%)
Lucent Technologies, Inc. (a) 2,386,700 6,802,095
------------
CONSUMER FINANCE (1.2%)
MBNA Corp. 182,000 4,653,740
------------
CONTAINERS & PACKAGING (2.6%)
Owens-Illinois, Inc. (a) 306,700 5,839,568
Temple-Inland, Inc. 110,900 4,084,447
------------
9,924,015
------------
ELECTRIC UTILITIES (4.6%)
Entergy Corp. 76,287 5,395,017
FirstEnergy Corp. 81,488 3,870,680
PPL Corp. 270,800 8,486,872
------------
17,752,569
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (2.9%)
Molex, Inc. Class A 468,300 11,187,687
------------
ENERGY EQUIPMENT & SERVICES (23.7%)
Diamond Offshore
Drilling, Inc. (b) 82,500 4,657,950
V ENSCO International, Inc. 303,622 13,842,127
</Table>
<Table>
<Caption>
SHARES VALUE
ENERGY EQUIPMENT & SERVICES (CONTINUED)
V GlobalSantaFe Corp. 424,656 $ 18,918,425
V Pride International, Inc. (a) 595,000 16,701,650
V Rowan Cos., Inc. 555,700 18,332,543
V Transocean, Inc. (a) 318,200 18,293,318
------------
90,746,013
------------
FOOD & STAPLES RETAILING (3.1%)
V Kroger Co. (The) (a) 602,200 11,983,780
------------
FOOD PRODUCTS (3.1%)
V Cadbury Schweppes PLC ADR (c) 296,300 11,760,147
------------
HEALTH CARE PROVIDERS & SERVICES (1.7%)
Apria Healthcare Group, Inc. (a) 111,400 2,569,998
Universal Health Services, Inc. Class B (b) 82,400 3,884,336
------------
6,454,334
------------
INSURANCE (3.7%)
Hartford Financial Services Group, Inc. (The) (b) 122,147 9,741,223
St. Paul Travelers
Cos., Inc. (The) 96,500 4,345,395
------------
14,086,618
------------
IT SERVICES (1.5%)
Computer Sciences Corp. (a) 109,052 5,588,915
------------
LEISURE EQUIPMENT & PRODUCTS (1.0%)
Mattel, Inc. 247,100 3,644,725
------------
MACHINERY (1.6%)
Navistar International Corp. (a) 66,902 1,841,143
Timken Co. (The) (b) 144,400 4,095,184
------------
5,936,327
------------
MEDIA (1.2%)
Gannett Co., Inc. 45,700 2,863,562
Regal Entertainment Group Class A (b) 97,400 1,795,082
------------
4,658,644
------------
METALS & MINING (1.2%)
Inco, Ltd. 117,000 4,705,740
------------
</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.
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.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
)x
MULTI-UTILITIES (2.5%)
PG&E Corp. 79,225 $ 2,882,206
Public Service Enterprise Group, Inc. 105,000 6,603,450
------------
9,485,656
------------
PAPER & FOREST PRODUCTS (4.0%)
V Abitibi-Consolidated, Inc. (b) 4,886,600 15,246,192
------------
PHARMACEUTICALS (0.5%)
Forest Laboratories, Inc. (a) 50,900 1,929,619
------------
REAL ESTATE (1.6%)
General Growth
Properties, Inc. (b) 60,448 2,567,831
Highwoods Properties, Inc. 130,763 3,688,824
------------
6,256,655
------------
ROAD & RAIL (2.3%)
Burlington Northern Santa Fe Corp. 79,095 4,908,636
CSX Corp. 83,661 3,832,510
------------
8,741,146
------------
SOFTWARE (0.4%)
BMC Software, Inc. (a) 72,900 1,428,111
------------
SPECIALTY RETAIL (0.5%)
Gap, Inc. (The) 112,800 1,949,184
------------
THRIFTS & MORTGAGE FINANCE (7.3%)
V PMI Group, Inc. (The) 462,100 18,428,548
Sovereign Bancorp, Inc. 439,621 9,482,625
------------
27,911,173
------------
WIRELESS TELECOMMUNICATION SERVICES (0.9%)
Alltel Corp. 57,413 3,551,568
------------
Total Common Stocks
(Cost $282,869,420) 338,455,022
------------
INVESTMENT COMPANY (3.4%)
- --------------------------------------------------------------------------------
V iShares Russell Midcap Value Index Fund (d) 110,000 13,189,000
------------
Total Investment Company
(Cost $13,208,327) 13,189,000
------------
NUMBER OF
CONTRACTS (g) VALUE
)x
PURCHASED PUT OPTIONS (0.6%)
- --------------------------------------------------------------------------------
CONTAINERS & PACKAGING (0.1%)
Owens-Illinois, Inc.
Strike price $25.00
Expire 2/18/06 (a) 872 $ 279,040
------------
ENERGY EQUIPMENT & SERVICES (0.5%)
Diamond Offshore Drilling, Inc.
Strike price $55.00 Expire 1/21/06 (a) 210 67,200
ENSCO International, Inc.
Strike price $35.00
Expire 12/17/05 (a) 2,980 59,600
GlobalSantaFe Corp.
Strike price $45.00
Expire 1/21/06 (a) 1,626 504,060
Pride International, Inc.
Strike price $25.00
Expire 1/21/06 (a) 1,050 136,500
Rowan Cos., Inc.
Strike price $32.50
Expire 1/21/06 (a) 1,830 402,600
Transocean, Inc.
Strike price $55.00
Expire 1/21/06 (a) 2,250 742,500
------------
1,912,460
------------
Total Purchased Put Options
(Premium $2,419,334) 2,191,500
------------
PRINCIPAL
AMOUNT
)x
SHORT-TERM INVESTMENTS (12.3%)
- --------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.2%)
Skandinaviska Enskilda Banken AB 4.082%, due
2/22/06 (e)(f) $ 953,157 953,157
------------
Total Certificate of Deposit
(Cost $953,157) 953,157
------------
COMMERCIAL PAPER (6.0%)
American General Finance Corp.
3.85%, due 11/9/05 3,915,000 3,911,650
Compass Securitization
3.993%, due 11/22/05 (e) 680,827 680,827
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (e) 408,496 408,496
General Electric Capital Corp.
3.86%, due 11/9/05 630,000 629,460
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (CONTINUED)
Goldman Sachs
Group, Inc. (The)
4.00%, due 11/23/05 $ 2,615,000 $ 2,608,608
Merck & Co., Inc.
3.74%, due 11/1/05 3,500,000 3,500,000
Merrill Lynch & Co., Inc.
3.84%, due 11/14/05 4,860,000 4,853,259
Silver Tower U.S. Funding
3.932%, due 11/15/05 (e) 404,196 404,196
UBS Finance Delaware LLC
4.00%, due 11/1/05 5,890,000 5,890,000
------------
Total Commercial Paper
(Cost $22,886,496) 22,886,496
------------
<Caption>
SHARES
INVESTMENT COMPANY (1.6%)
BGI Institutional Money
Market Fund (e) 6,209,359 6,209,359
------------
Total Investment Company
(Cost $6,209,359) 6,209,359
------------
<Caption>
PRINCIPAL
AMOUNT
TIME DEPOSITS (4.5%)
Bank of the West (The)
4.02%, due 12/8/05 (e) $ 2,587,141 2,587,141
Barclays
3.92%, due 12/5/05 (e) 1,089,322 1,089,322
3.94%, due 11/28/05 (e) 1,225,490 1,225,490
Credit Suisse First Boston Corp.
3.74%, due 11/1/05 (e) 953,157 953,157
Deutsche Bank
3.95%, due 12/2/05 (e) 1,089,322 1,089,322
First Tennessee National Corp.
3.88%, due 11/14/05 (e) 1,089,322 1,089,322
Fortis Bank
4.00%, due 12/12/05 (e) 1,225,488 1,225,488
Halifax Bank of Scotland
3.75%, due 11/1/05 (e) 1,089,322 1,089,322
Keybank
4.00%, due 11/1/05 (e) 1,218,080 1,218,080
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
Marshall & Ilsley Bank
3.97%, due 12/29/05 (e) $ 1,089,322 $ 1,089,322
Societe Generale
3.77%, due 11/1/05 (e) 2,314,810 2,314,810
UBS AG
4.01%, due 12/13/05 (e) 1,089,322 1,089,322
Wells Fargo & Co.
4.00%, due 11/25/05 (e) 1,089,322 1,089,322
------------
Total Time Deposits
(Cost $17,149,420) 17,149,420
------------
Total Short-Term Investments
(Cost $47,198,432) 47,198,432
------------
Total Investments
(Cost $345,695,513) (h) 104.7% 401,033,954(i)
Liabilities in Excess of
Cash and Other Assets (4.7) (18,033,369)
------------- ------------
Net Assets 100.0% $383,000,585
============= ============
</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) Exchange Traded Fund--represents a basket of securities that are traded on
an exchange.
(e) Represents security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(f) Floating rate. Rate shown is the rate in effect at October 31, 2005.
(g) One contract relates to 100 shares.
(h) The cost for federal income tax purposes is $345,548,138.
(i) At October 31, 2005 net unrealized appreciation was $55,485,816, 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 $69,369,015 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $13,883,199.
</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 ASSETS AND LIABILITIES AS OF OCTOBER 31, 2005
<Table>
ASSETS:
Investment in securities, at value (identified
cost $345,695,513) including $24,749,406
market value of securities loaned $401,033,954
Cash 8,232
Receivables:
Investment securities sold 44,084,995
Fund shares sold 366,242
Dividends and interest 50,544
Other assets 35,879
-------------
Total assets 445,579,846
-------------
LIABILITIES:
Securities lending collateral 25,805,455
Payables:
Investment securities purchased 35,371,389
Fund shares redeemed 493,001
Transfer agent 341,349
NYLIFE Distributors 240,446
Manager 175,947
Shareholder communication 86,130
Custodian 4,257
Accrued expenses 61,287
-------------
Total liabilities 62,579,261
-------------
Net assets $383,000,585
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 74,913
Class B 125,007
Class C 25,715
Class I 341
Class R1 683
Class R2 2,091
Additional paid-in capital 300,985,648
Accumulated net realized gain on investments 26,447,746
Net unrealized appreciation on investments 55,338,441
-------------
Net assets $383,000,585
=============
CLASS A
Net assets applicable to outstanding shares $127,680,223
=============
Shares of beneficial interest outstanding 7,491,269
=============
Net asset value per share outstanding $ 17.04
Maximum sales charge (5.50% of offering price) 0.99
-------------
Maximum offering price per share outstanding $ 18.03
=============
CLASS B
Net assets applicable to outstanding shares $207,348,186
=============
Shares of beneficial interest outstanding 12,500,711
=============
Net asset value and offering price per share
outstanding $ 16.59
=============
CLASS C
Net assets applicable to outstanding shares $ 42,653,791
=============
Shares of beneficial interest outstanding 2,571,452
=============
Net asset value and offering price per share
outstanding $ 16.59
=============
CLASS I
Net assets applicable to outstanding shares $ 584,354
=============
Shares of beneficial interest outstanding 34,051
=============
Net asset value and offering price per share
outstanding $ 17.16
=============
CLASS R1
Net assets applicable to outstanding shares $ 1,170,116
=============
Shares of beneficial interest outstanding 68,274
=============
Net asset value and offering price per share
outstanding $ 17.14
=============
CLASS R2
Net assets applicable to outstanding shares $ 3,563,915
=============
Shares of beneficial interest outstanding 209,095
=============
Net asset value and offering price per share
outstanding $ 17.04
=============
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 4,810,218
Interest 1,158,677
Income from securities loaned--net 7,873
------------
Total income 5,976,768
------------
EXPENSES:
Manager 2,760,089
Distribution--Class B 1,594,352
Distribution--Class C 326,969
Transfer agent--Classes A, B and C 1,356,696
Transfer agent--Classes I, R1 and R2 8,530
Distribution/Service--Class A 336,496
Service--Class B 531,451
Service--Class C 108,990
Distribution/Service--Class R2 4,976
Shareholder communication 128,151
Professional 110,527
Registration 79,688
Recordkeeping 66,097
Custodian 35,900
Trustees 30,147
Shareholder service fee--Class R1 1,181
Shareholder service fee--Class R2 1,990
Miscellaneous 17,521
------------
Total expenses before waiver/reimbursement 7,499,751
Expense waiver/reimbursement by Manager (259,768)
------------
Net expenses 7,239,983
------------
Net investment loss (1,263,215)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY:
Net realized gain on:
Security transactions 26,395,220
Foreign currency transactions 1,284
------------
Net realized gain on investment and foreign
currency transactions 26,396,504
------------
Net change in unrealized appreciation on
investments 8,425,972
------------
Net realized and unrealized gain on investments
and foreign currency transactions 34,822,476
------------
Net increase in net assets resulting from
operations $33,559,261
============
</Table>
(a) Dividends recorded net of foreign withholding taxes of $23,175.
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.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
INCREASE IN NET ASSETS:
Operations:
Net investment loss $ (1,263,215) $ (760,694)
Net realized gain on investments
and foreign currency transactions 26,396,504 14,705,022
Net change in unrealized
appreciation on investments 8,425,972 31,407,947
----------------------------
Net increase in net assets
resulting from operations 33,559,261 45,352,275
----------------------------
Distributions to shareholders:
From net realized gain on investments:
Class A (1,832,457) --
Class B (2,997,487) --
Class C (612,883) --
Class I (4,372) --
Class R1 (16,133) --
Class R2 (13,805) --
----------------------------
Total distributions to
shareholders (5,477,137) --
----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 49,642,958 45,632,106
Class B 33,836,862 36,003,609
Class C 10,334,089 9,050,836
Class I 577,360 1,000
Class R1 211,547 1,108,901
Class R2 4,355,764 1,133,738
Net asset value of shares issued to shareholders
in reinvestment of distributions:
Class A 1,618,360 --
Class B 2,758,714 --
Class C 489,566 --
Class I 4,372 --
Class R1 16,133 --
Class R2 13,805 --
----------------------------
103,859,530 92,930,190
Cost of shares redeemed:
Class A (49,885,936) (34,827,078)
Class B (35,551,146) (25,489,485)
Class C (11,165,156) (7,963,268)
Class R1 (224,818) (65,929)
Class R2 (1,697,454) (319,582)
----------------------------
(98,524,510) (68,665,342)
Increase in net assets derived
from capital share
transactions 5,335,020 24,264,848
----------------------------
Net increase in net assets 33,417,144 69,617,123
</Table>
<Table>
<Caption>
2005 2004
NET ASSETS:
Beginning of year $ 349,583,441 $279,966,318
----------------------------
End of year $ 383,000,585 $349,583,441
============================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 15.71 $ 13.50 $ 11.51 $ 13.47 $ 13.14 $ 11.81
-------- -------- ----------- ------- ------- -------
Net investment income (loss) 0.03 0.03 0.04 0.06 0.12 0.21
Net realized and unrealized
gain (loss) on investments 1.54 2.18 1.97 (1.90) 0.52 2.44
-------- -------- ----------- ------- ------- -------
Total from investment
operations 1.57 2.21 2.01 (1.84) 0.64 2.65
-------- -------- ----------- ------- ------- -------
Less dividends and
distributions:
From net investment income -- -- (0.02) (0.06) (0.12) (0.21)
From net realized gain on
investments (0.24) -- -- (0.06) (0.19) (1.02)
In excess of net realized
gains -- -- -- -- -- (0.09)
-------- -------- ----------- ------- ------- -------
Total dividends and
distributions (0.24) -- (0.02) (0.12) (0.31) (1.32)
-------- -------- ----------- ------- ------- -------
Net asset value at end of
period $ 17.04 $ 15.71 $ 13.50 $ 11.51 $ 13.47 $ 13.14
======== ======== =========== ======= ======= =======
Total investment return (a) 10.06% 16.37% 17.53%(b) (13.67%) 4.88% 22.79%
Ratios (to average net
assets)/Supplemental Data:
Net investment income
(loss) 0.17% 0.27% 0.45%+ 0.71% 0.95% 1.66%
Net expenses 1.35% 1.43% 1.54%+ 1.50% 1.53% 1.59%
Expenses (before
waiver/reimbursement) 1.42% 1.43% 1.54%+ 1.50% 1.53% 1.59%
Portfolio turnover rate 49% 33% 30% 46% 100% 148%
Net assets at end of period
(in 000's) $127,680 $116,396 $90,349 $80,442 $40,692 $32,782
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 15.41 $ 13.34 $ 11.42 $ 13.41 $ 13.09 $11.78
------- ------- ----------- ------- ------- ------
Net investment income (loss) (0.10) (0.07) (0.03) (0.01) 0.03 0.12
Net realized and unrealized
gain (loss) on investments 1.52 2.14 1.95 (1.92) 0.51 2.42
------- ------- ----------- ------- ------- ------
Total from investment
operations 1.42 2.07 1.92 (1.93) 0.54 2.54
------- ------- ----------- ------- ------- ------
Less dividends and
distributions:
From net investment income -- -- -- -- (0.03) (0.12)
From net realized gain on
investments (0.24) -- -- (0.06) (0.19) (1.02)
In excess of net realized
gains -- -- -- -- -- (0.09)
------- ------- ----------- ------- ------- ------
Total dividends and
distributions (0.24) -- -- (0.06) (0.22) (1.23)
------- ------- ----------- ------- ------- ------
Net asset value at end of
period $ 16.59 $ 15.41 $ 13.34 $ 11.42 $ 13.41 $13.09
======= ======= =========== ======= ======= ======
Total investment return (a) 9.27% 15.52% 16.81%(b) (14.35%) 4.17% 21.83%
Ratios (to average net
assets)/Supplemental Data:
Net investment income
(loss) (0.58%) (0.48%) (0.30%)+ (0.04%) 0.20% 0.91%
Net expenses 2.10% 2.18% 2.29%+ 2.25% 2.28% 2.34%
Expenses (before
waiver/reimbursement) 2.17% 2.18% 2.29%+ 2.25% 2.28% 2.34%
Portfolio turnover rate 49% 33% 30% 46% 100% 148%
Net assets at end of period
(in 000's) $42,654 $39,884 $33,501 $28,183 $10,586 $2,803
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Total return is calculated exclusive of sales charges. Classes I, R1 and R2 are not
subject to sales charge.
(b) Total return is not annualized.
</Table>
16 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>
CLASS B
- ------------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 15.41 $ 13.34 $ 11.42 $ 13.41 $ 13.09 $ 11.78
-------- -------- ----------- -------- -------- -------
(0.10) (0.07) (0.03) (0.01) 0.03 0.12
1.52 2.14 1.95 (1.92) 0.51 2.42
-------- -------- ----------- -------- -------- -------
1.42 2.07 1.92 (1.93) 0.54 2.54
-------- -------- ----------- -------- -------- -------
-- -- -- -- (0.03) (0.12)
(0.24) -- -- (0.06) (0.19) (1.02)
-- -- -- -- -- (0.09)
-------- -------- ----------- -------- -------- -------
(0.24) -- -- (0.06) (0.22) (1.23)
-------- -------- ----------- -------- -------- -------
$ 16.59 $ 15.41 $ 13.34 $ 11.42 $ 13.41 $ 13.09
======== ======== =========== ======== ======== =======
9.27% 15.52% 16.81%(b) (14.35%) 4.17% 21.83%
(0.58%) (0.48%) (0.30%)+ (0.04%) 0.20% 0.91%
2.10% 2.18% 2.29%+ 2.25% 2.28% 2.34%
2.17% 2.18% 2.29%+ 2.25% 2.28% 2.34%
49% 33% 30% 46% 100% 148%
$207,348 $191,390 $156,116 $130,024 $105,146 $50,172
</Table>
<Table>
<Caption>
CLASS I CLASS R1 CLASS R2
---------------------------- ---------------------------- ----------------------------
JANUARY 2, JANUARY 2, JANUARY 2,
2004** 2004** 2004**
YEAR ENDED THROUGH YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2005 2004 2005 2004
$15.76 $14.81 $15.76 $14.81 $15.71 $14.81
----------- ----------- ----------- ----------- ----------- -----------
0.04 0.07 0.07 (0.01) 0.01 (0.02)
1.60 0.88 1.55 0.96 1.56 0.92
----------- ----------- ----------- ----------- ----------- -----------
1.64 0.95 1.62 0.95 1.57 0.90
----------- ----------- ----------- ----------- ----------- -----------
-- -- -- -- -- --
(0.24) -- (0.24) -- (0.24) --
-- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
(0.24) -- (0.24) -- (0.24) --
----------- ----------- ----------- ----------- ----------- -----------
$17.16 $15.76 $17.14 $15.76 $17.04 $15.71
=========== =========== =========== =========== =========== ===========
10.48% 6.41%(b) 10.35% 6.41%(b) 10.06% 6.08%(b)
0.37% 0.70%+ 0.43% 0.56%+ 0.09% 0.26%+
0.99% 1.00%+ 1.09% 1.14%+ 1.34% 1.44%+
1.06% 1.00%+ 1.16% 1.14%+ 1.41% 1.44%+
49% 33% 49% 33% 49% 33%
$ 584 $ 1 $1,170 $1,075 $3,564 $ 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 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 nineteen 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, Class R1 and Class
R2 shares are not subject to a 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, its affiliates, or 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.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America 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 normally are taken from the principal 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 in good faith by 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 principal
market is temporarily closed at a time when under normal conditions it would be
open. The Fund did not hold securities at October 31, 2005, 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) 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 and
unrealized appreciation or depreciation is recorded 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,
18 MainStay Mid Cap Value Fund
in exchange for the premium, the Fund foregoes the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security or foreign currency increase but, as long as the obligation as a writer
continues, have retained the risk of loss should the price of the underlying
security decline. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of decline in the market value of the underlying
security or foreign currency below the exercise price. After writing a put
option, the Fund may incur a loss equal to the difference between the exercise
price of the option and the sum of the market value of the underlying security
plus the premium received from the sale of the option. 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.
(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 accounting principles generally accepted in
the United States of America. 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, accumulated net realized gain on investments and additional
paid-in-capital arising from permanent differences; net assets at October 31,
2005, are not affected.
<Table>
<Caption>
ACCUMULATED
NET NET REALIZED ADDITIONAL
INVESTMENT GAIN ON PAID-IN-
LOSS INVESTMENTS CAPITAL
$1,263,215 $158,191 $(1,421,406)
---------------------------------------
</Table>
The reclassifications for the Fund are primarily due to the fact that net
operating losses cannot be carried forward for federal income tax purposes, real
estate investment trusts investments and 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 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.
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 transfer agent expenses and 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
www.MAINSTAYfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 currency
denominated assets and liabilities, other than investments, are reflected in
unrealized foreign exchange gains or losses at year 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.
(J) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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 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 percentage of the Fund's
average daily net assets as follows: 0.70% on assets up to $500 million and
0.65% on assets in excess of $500 million. Effective August 1, 2005, the Manager
has entered into a written expense limitation agreement, under which the Manager
has agreed to reimburse the expenses of the Fund so that the total operating
expenses (excluding taxes, interest, litigation, extraordinary expenses, and
brokerage and other transaction expenses relating to the purchase or sale of
portfolio investments) do not exceed, on an annualized basis, 1.35% of the
average daily net assets of the Class A shares. An equivalent reimbursement, in
an equal amount of basis points, will be applied to the other share classes. The
Manager, within three years of incurring such expenses, may recoup the amount of
any management fee waiver or expense reimbursement from the Fund pursuant to
this agreement if such recoupment does not cause the Fund to exceed the expense
limitations. At October 31, 2005 the Fund had $130,177 of recoupment available.
This amount is available until October 31, 2008. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. Prior to
August 1, 2005 and after December 1, 2004, NYLIM agreed to voluntarily reimburse
the expenses of the Fund so that the total operating expenses would not exceed
on an annualized basis 1.35% of the average daily net assets of the Class A
shares, and such that there would be an equivalent reduction for the other
classes of shares. Prior to December 1, 2004, NYLIM agreed to voluntarily
reimburse the expenses of the Fund so that the total operating expenses would
not 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, and an
equivalent amount for Class I, Class R1 and Class R2 shares. For the year ended
October 31, 2005, the Manager earned fees from the Fund in the amount of
$2,760,089, and waived its fee and/or reimbursed expenses in the amount of
$259,768.
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
0.35% 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, 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 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
20 MainStay Mid Cap Value Fund
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 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 $96,303 for the year ended
October 31, 2005. 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 $11,626, $263,868 and $5,290, respectively, for the year ended October
31, 2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $1,365,226.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(F) OTHER. Pursuant to the Management Agreement, 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
$10,396 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $66,097 for the year ended
October 31, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, The Bank of New York acted as custodian for the Fund.
NOTE 5--FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED NET TOTAL
REALIZED GAIN ON UNREALIZED ACCUMULATED
INVESTMENTS APPRECIATION GAIN
$26,300,371 $55,485,816 $81,786,187
---------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals.
The tax character of distributions paid during the year ended October 31, 2005
and October 31, 2004 shown in the Statement of Changes in Net Assets, are as
follows:
<Table>
<Caption>
2005 2004
Distributions paid from:
Long-term Capital Gain $5,477,137 $--
- --------------------------------------------------------
</Table>
NOTE 6--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $177,754 and $172,916, respectively.
www.MAINSTAYfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PORTFOLIO SECURITIES LOANED:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $24,749,406. The Fund received $25,805,455 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, 2005.
NOTE 9--CAPITAL SHARE TRANSACTIONS
(IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C
Shares sold 2,913 2,037 623
- ---------------------------------------------------------------------
Shares issued in reinvestment of
distributions 99 172 31
- ---------------------------------------------------------------------
3,012 2,209 654
- ---------------------------------------------------------------------
Shares redeemed (2,930) (2,130) (671)
- ---------------------------------------------------------------------
Net increase (decrease) 82 79 (17)
- ---------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS I CLASS R1 CLASS R2
Shares sold 34 12 254
- -----------------------------------------------------------------------
Shares issued in reinvestment of
distributions --(a) 1 1
- -----------------------------------------------------------------------
34 13 255
- -----------------------------------------------------------------------
Shares redeemed -- (13) (99)
- -----------------------------------------------------------------------
Net increase 34 --(a) 156
- -----------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2004
CLASS A CLASS B CLASS C
Shares sold 3,034 2,434 614
- ---------------------------------------------------------------------
3,034 2,434 614
- ---------------------------------------------------------------------
Shares redeemed (2,319) (1,720) (537)
- ---------------------------------------------------------------------
Net increase 715 714 77
- ---------------------------------------------------------------------
</Table>
<Table>
<Caption>
PERIOD ENDED
OCTOBER 31, 2004*
CLASS I CLASS R1 CLASS R2
Shares sold --(a) 72 74
- -----------------------------------------------------------------------
--(a) 72 74
- -----------------------------------------------------------------------
Shares redeemed -- (4) (21)
- -----------------------------------------------------------------------
Net increase --(a) 68 53
- -----------------------------------------------------------------------
</Table>
(a) Less than one-thousand.
* Commenced operations on January 2, 2004.
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.9 million to nine MainStay funds. No payment was made with respect
to the MainStay Mid Cap Value Fund. NYLIM has also agreed to reimburse or pay
all expenses relating to the Board of Trustees' review of this matter and has
paid substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
22 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, 2005, and
the related statement of operations for the year then ended, and the statements
of changes in net assets and financial highlights for each of the years in the
two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the
results of its operations for the year then ended, and the changes in its net
assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
24 MainStay Mid Cap Value Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 25
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
26 MainStay Mid Cap Value Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's underperformance relative to
certain measures over several time periods and the Subadvisor's plan designed to
improve performance, in part, through the implementation of measures intended to
reduce the volatility of the Fund's investment portfolio.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund, with the expectation that the Manager intended, over time, to
implement measures designed to reduce the Trust's transfer agency fees. The
Trustees considered certain benefits expected for, and risks borne by, the
Manager and its affiliates, including benefits from soft dollar arrangements.
The Trustees considered the services provided to the Fund by affiliates of the
Manager, NYLIFE Distributors and NYLIM Service, under other agreements, and the
benefits to the Manager and its affiliates from those relationships. The
information provided to the Trustees indicated that the profitability to the
Manager and its affiliates arising directly from those other agreements was not
excessive. The Trustees acknowledged certain benefits to the reputation of the
Manager and its affiliates, as well to that of the Trust, from their association
with each other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distribut-
www.MAINSTAYfunds.com 27
ing shares of various series of the Trust. They noted the Manager's willingness
to implement contractual breakpoints, and that the contractual breakpoints in
place for the management fee were intended to provide that the Fund's
shareholders would share in benefits from economies of scale arising from the
growth of Fund assets. The Trustees acknowledged that the Fund had not yet
reached the asset level at which breakpoints would reduce the contractual
management fee to which the Fund is subject. Acknowledging the difficulty of
forecasting economies of scale, the Trustees generally expressed an intention to
monitor the Manager's profitability and consider the application of fee
breakpoints or other appropriate measures as the Board may determine from time
to time. The Trustees reviewed historical information about changes in the
Fund's expense and asset levels over time, as well as information about certain
Fund expenses that would remain fixed even as Fund assets increase and,
therefore, provide the Fund with benefits from economies of scale as the Fund
grows. The Trustees noted that, to the extent the Fund's gross expenses
currently are higher than its net expenses, economies of scale achieved through
an increase in the Fund's assets might not directly benefit the Fund through
lower net expenses. The Trustees considered various information about transfer
agency expenses, including information showing that transfer agency fees of the
Fund and a significant number of series of the Trust (although not every such
series or with respect to every share class of each series) tended to be high,
when aggregated and expressed as a percentage of the assets of certain series,
compared to the mutual fund industry average according to certain studies
reviewed by the Board and, therefore, adversely affected gross expense ratios.
The Board received information about potential effects on the Manager were it to
subsidize certain portions of the Trust's transfer agency fees. The Trustees
noted that a significant number of shareholders of the Trust's series had small
amounts invested in the series, and have considered measures intended to
increase average shareholder account size and/or otherwise reduce the Trust's
transfer agency fees and expenses, including steps that the Manager has taken to
encourage shareholders to consolidate or close small accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated gross and net expense ratios, and various components of that expense
ratio, in comparison to other funds in comparison groupings prepared by outside
data providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
28 MainStay Mid 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, 2005) 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 $5,477,137 on December 13,
2004.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
30 MainStay Mid Cap Value Fund
(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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A08019 (RECYCLE LOGO) MS475-05 MSMV11-12/05
19
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GLOBAL HIGH INCOME FUND
The MainStay Funds
Annual Report
October 31, 2005
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 2
- --------------------------------------------------------------------------------
Investment and Performance Comparison 3
- --------------------------------------------------------------------------------
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 27
Trustees and Officers 28
- --------------------------------------------------------------------------------
Board Consideration and Approval of Subadvisory Agreements 31
- --------------------------------------------------------------------------------
Federal Income Tax Information 33
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures 33
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 33
- --------------------------------------------------------------------------------
MainStay Funds 34
</Table>
2 MainStay Global High Income Fund
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 6.34% 14.58% 10.31%
Excluding sales charges 11.35 15.64 10.99
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY GLOBAL HIGH INCOME JPMORGAN EMBI GLOBAL
FUND DIVERSIFIED INDEX
--------------------------- --------------------
6/1/98 9550.00 10000.00
7473.00 9223.00
8831.00 9748.00
10016.00 10903.00
10825.00 10753.00
12269.00 10434.00
16283.00 13927.00
18605.00 16676.00
10/31/05 20718.00 21879.00
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 5.62% 14.58% 10.14%
Excluding sales charges 10.62 14.81 10.14
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY GLOBAL HIGH INCOME JPMORGAN EMBI GLOBAL
FUND DIVERSIFIED INDEX
--------------------------- --------------------
6/1/98 10000.00 10000.00
7789.00 9223.00
9120.00 9748.00
10271.00 10903.00
11018.00 10753.00
12406.00 10434.00
16336.00 13927.00
18519.00 16676.00
10/31/05 20486.00 21879.00
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 9.62% 14.81% 10.14%
Excluding sales charges 10.62 14.81 10.14
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY GLOBAL HIGH INCOME JPMORGAN EMBI GLOBAL
FUND DIVERSIFIED INDEX
--------------------------- --------------------
6/1/98 10000.00 10000.00
7789.00 9223.00
9120.00 9748.00
10271.00 10903.00
11018.00 10753.00
12406.00 10434.00
16336.00 13927.00
18519.00 16676.00
10/31/05 20486.00 21879.00
</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 max-imum 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 contractual and may be modified or terminated
only with the approval of the Board of Trustees. 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 THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.MAINSTAYfunds.com 3
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- ----------------------------------------------------------------------
JPMorgan EMBI Global Diversified Index(1) 10.18% 13.54% 11.13%
Average Lipper emerging markets debt
fund(2) 12.74 15.77 11.22
</Table>
1. The JPMorgan EMBI Global Diversified Index is an unmanaged,
market-capitalization weighted, total-return index tracking the traded market
for U.S. dollar denominated Brady bonds, Eurobonds, traded loans, and
local-market debt instruments issued by sovereign and quasi-sovereign
entities. Results assume reinvestment of all income and capital gains. The
JPMorgan 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.
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 PREVIOUS PAGE ARE AN INTEGRAL PART OF THE
TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Global High Income Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY GLOBAL HIGH INCOME FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% RETURN EXPENSES
ACCOUNT RETURNS AND PAID AND ACTUAL PAID
VALUE EXPENSES) DURING EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,078.15 $ 7.49 $1,017.85 $ 7.27
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,074.70 $11.40 $1,014.10 $11.07
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,074.70 $11.40 $1,014.10 $11.07
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.43% for Class A and 2.18% for Class B and Class C) multiplied by the
average account value over the period, divided by 365, multiplied by 184 (to
reflect the one-half year period).
www.MAINSTAYfunds.com 5
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-TERM
INVESTMENTS
(COLLATERAL
FROM
SECURITIES
GOVERNMENTS & FEDERAL CORPORATE LENDING IS
AGENCIES BONDS 0.7%) BRADY BONDS YANKEE BONDS
- --------------------- --------- ----------- ----------- ------------
69.7% 17.4 7.4 3.8% 0.6
<Caption>
CASH AND
LOAN OTHER ASSETS
PARTICIPATIONS LESS LIABILITIES
- -------------- ----------------
0.2 0.9
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Russian Federation Series Reg S 5.00%, due
3/31/30
2. United Mexican States 8.125%, due 12/30/19
3. Republic of Brazil 8.00%, due 1/15/18
4. Republic of Venezuela 9.25%, due 9/15/27
5. Russian Federation Series Reg S 11.00%, due
7/24/18
6. Republic of Philippines 9.50%, due 2/2/30
7. Republic of Peru 9.125%, due 2/21/12
8. Republic of Brazil 11.00%, due 8/17/40
9. PEMEX Project Funding Master Trust 7.375%, due
12/15/14
10. Republic of Brazil 11.00%, due 1/11/12
</Table>
6 MainStay Global High Income Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Gary Goodenough, Joseph Portera, and
Jeffrey H. Saxon of MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests primarily in high-yield securities, including debt
securities issued by governments, and their agencies and authorities, and
corporations that are located in at least three different countries. The Fund
focuses on debt securities that generally are rated in the lower rating
categories of Moody's or S&P(1). 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.
During the reporting period, all of the assets and liabilities of MainStay
International Bond Fund were transferred to MainStay Global High Income Fund in
exchange for shares of MainStay Global High Income Fund.
WHAT FACTORS INFLUENCED EMERGING-MARKET DEBT DURING THE 12-MONTH REPORTING
PERIOD?
By and large, emerging-market debt performed within our expectations during the
period, buoyed by higher relative yields and continued improvement in credit
fundamentals. While credit risk remained a concern, the additional yield offered
by emerging-market securities continued to compensate buyers, and during the
12-month period ended October 31, 2005, emerging-market debt outperformed most
other fixed-income asset classes. Several other factors also influenced the
market during the reporting period. Tighter monetary policy in the U.S. caused
the yield curve to flatten, as short-term yields rose while longer-term yields
remained virtually unchanged.
WHAT ISSUES AFFECTED THE MANAGEMENT OF THE FUND DURING THE 12-MONTH REPORTING
PERIOD?
For much of the reporting period, we concentrated the portfolio on securities
with longer-term maturities and maintained a slightly longer duration than that
of the Fund's benchmark, the JPMorgan EMBI Global Diversified Index.(2) The
prices of soft and hard commodities continued to rise across the board during
the reporting period. Several events strengthened the surge in prices. Major
hurricanes in the United States disrupted refinery production and pushed oil and
gas prices higher. Even selected agreements by the Organization of the Petroleum
Exporting Countries to increase production had little if any effect on lowering
energy prices. Higher prices benefited emerging-market oil exporters such as
Mexico, Russia, and Venezuela. Precious-metals prices rose as demand from China
and India continued to expand. Higher commodity prices benefited several
investments in the Fund, including metals & mining companies Companhia
Siderurgica Nacional in Brazil and Southern Peru Copper.
HOW DID POLITICAL FACTORS AFFECT THE FUND?
In emerging markets, political risk is always an issue. During the reporting
period, there was considerable discussion about the possibility of Turkey
becoming a member of the European Union. We saw a regime change in Ecuador. In
Brazil, there was the usual "scandal sheet" of who took money and who benefited
from what. In Russia, transparency and the rule of law came into question when
President Putin used his influence to effectively renationalize parts of the oil
and natural gas industry.
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. The Fund may experience a portfolio turnover rate of over
100% and may generate short-term capital gains which are taxable.
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 JPMorgan EMBI Global
Diversified Index.
www.MAINSTAYfunds.com 7
In the past, these kinds of events would have led to increased volatility. But
clearly the market has matured. Prices did drop for specific issuers, such as
those in Ecuador, but the securities quickly recovered. Over the past several
years, emerging market government and corporate issuers have strengthened their
balance sheets. With net debt reductions during the past 12 months, issuers
hoping to extend the average maturity of their external debt have taken
advantage of strong demand and historically low yields to do so. Over the years,
many issuers that lacked access to the capital markets (e.g., Mexico in 1994 and
Russia in 1998) have faced difficulties when they needed to roll over short-term
debt. With prudent debt management and rising international reserves, however,
this scenario is much less likely for most issuers.
HOW DID YOU POSITION THE FUND'S PORTFOLIO IN THIS ENVIRONMENT?
Regardless of the market environment, our philosophy is to emphasize undervalued
assets using a long-term perspective. Since emerging-market debt had already
enjoyed several years of above-average performance, we entered the reporting
period believing that volatility was likely to increase, at least over the short
term. As long as fundamentals continued to improve, however, we planned to
remain almost fully invested. As new money came into the Fund, we quickly sought
to invest it--at least until October 2005. As the U.S. Treasury sell-off gained
momentum, we became more defensive and increased the Fund's cash position.
For most of the 12 months ended October 31, 2005, we maintained our major
themes, focusing on commodity-based issuers and improving corporate credits. A
major shift for the Fund during the reporting period was our decision to add
local currency debt to the Fund's portfolio. As of October 31, 2005, local
currency emerging-market debt was approximately 3% of the Fund's net assets and
was split across the Mexican peso, the Brazilian real, the Argentine peso, the
Turkish lira, and the Colombian peso. In most cases, we have been attracted to
these currencies because of high real interest rates and strong current-account
data. Following the debt exchange in Argentina, we concluded that the local
currency offered better risk/reward characteristics than the external debt.
Since the Fund purchased the local currency debt, these bonds have contributed
positively to the Fund's overall return. The Fund's strategically overweighted
position in Russian assets also enhanced results. The yield premium investors
have demanded to own Russian debt has declined 145 basis points over the
reporting period. (A basis point is one-hundredth of a percentage point.)
The financial woes of the U.S. auto sector have received considerable publicity.
In August, we viewed this as an opportunity and elected to add a small position
in General Motors Acceptance Corp. debt to the Fund's portfolio. We felt that
under any conceivable scenario, a commitment to GMAC would be well invested. In
particular, the Fund purchased some long-term GMAC debt, and the holding has
risen since it was acquired. The increase came on news that General Motors was
looking for a strategic buyer for a majority of GMAC, a move that might help the
subsidiary regain an investment-grade rating.
As we stated earlier, we raised the Fund's cash position toward the end of the
reporting period. We also reduced the Fund's exposure to Russian debt. Given the
rally in the corporate sector, we felt that at current spread levels it would be
prudent to reduce this overweighted position. Part of the proceeds went into
cash and a portion was used to purchase Mexican dollar debt.
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, 2005
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (91.7%)+
BRADY BONDS (3.8%) (J)
- ---------------------------------------------------------------------------------
BRAZIL (1.4%)
Republic of Brazil
Series 11BR
4.313%, due 4/15/12 (a) $ 1,395,608 $ 1,361,555
Series 18 year
5.25%, due 4/15/12 (a) 1,024,720 999,717
------------
2,361,272
------------
NIGERIA (0.7%)
Central Bank of Nigeria
Series WW
6.25%, due 11/15/20 1,250,000 1,240,625
------------
PERU (1.5%)
Republic of Peru
Series 20 year
5.00%, due 3/7/17 (b) 2,832,200 2,662,268
------------
VIETNAM (0.2%)
Socialist Republic of Vietnam
Series 30 year
3.75%, due 3/12/28
4.00%, beginning 3/1/07 (k) 500,000 364,956
------------
Total Brady Bonds
(Cost $5,488,168) 6,629,121
------------
CORPORATE BONDS (17.4%)
- ---------------------------------------------------------------------------------
ARGENTINA (0.1%)
Argentine Beverages Financial Trust
7.375%, due 3/22/12 (c) 250,000 250,000
------------
BAHAMAS (0.2%)
Ultrapetrol Ltd.
9.00%, due 11/24/14 450,000 418,500
------------
BERMUDA (0.6%)
AES China Generating Co. Ltd. 8.25%, due 6/26/10 550,000 558,956
Asia Aluminum Holdings Ltd.
8.00%, due 12/23/11 (c) 500,000 488,750
------------
1,047,706
------------
BRAZIL (0.9%)
Braskem S.A.
9.375%, due 6/1/15 150,000 163,125
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
BRAZIL (CONTINUED)
Series Reg S
9.375%, due 6/1/15 $ 500,000 $ 541,250
Caue Finance Ltd.
8.875%, due 8/1/15 (c) 750,000 774,375
CIA Brasileira de Bebidas
10.50%, due 12/15/11 125,000 154,062
------------
1,632,812
------------
CAYMAN ISLANDS (0.8%)
Banco Mercantil del Norte S.A.
Series Reg S
5.875%, due 2/17/14 400,000 398,000
CSN Islands VIII Corp.
9.75%, due 12/16/13 (c) 750,000 817,500
Votorantim Overseas III
7.875%, due 1/23/14 (c) 200,000 207,500
------------
1,423,000
------------
CHILE (0.4%)
AES Gener S.A.
7.50%, due 3/25/14 (e) 550,000 549,633
Empresa Nacional de Petroleo
6.75%, due 11/15/12 (c) 100,000 106,554
------------
656,187
------------
COLOMBIA (1.0%)
Bavaria S.A.
8.875%, due 11/1/10 (c) 1,085,000 1,181,294
Chivor S.A. E.S.P.
9.75%, due 12/30/14 (c) 500,000 543,750
------------
1,725,044
------------
GERMANY (0.9%)
Citibank Global Markets (Severstal) Deutschland
9.25%, due 4/19/14 (c) 460,000 494,500
Kyivstar GSM
7.75%, due 4/27/12 (c) 400,000 398,080
10.375%, due 8/17/09 (c) 580,000 637,275
------------
1,529,855
------------
HONG KONG (0.3%)
Panva Gas Holdings Ltd.
8.25%, due 9/23/11 500,000 521,784
------------
LUXEMBOURG (2.5%)
Gazprom International S.A.
7.201%, due 2/1/20 (c) 1,695,000 1,803,056
Mobile Telesystems Finance
9.75%, due 1/30/08 (c) 750,000 798,750
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
LUXEMBOURG (CONTINUED)
Sistema Finance S.A.
10.25%, due 4/14/08 $ 500,000 $ 531,500
Tengizchevroil Finance Co.
6.124%, due 11/15/14 (c) 320,000 320,800
Vimpel Communications
8.375%, due 10/22/11 (c) 200,000 207,200
Wimm-Bill-Dann Foods OJSC
8.50%, due 5/21/08 (c) 600,000 606,000
------------
4,267,306
------------
MALAYSIA (0.3%)
Tenga Nasional Berhad
5.25%, due 5/5/15 (c) 485,000 478,264
------------
MAURITIUS (0.2%)
Antam Finance Ltd.
7.375%, due 9/30/10 300,000 300,347
------------
MEXICO (0.5%)
Desarrolladora Homex S.A. de C.V.
7.50%, due 9/28/15 (c) 100,000 96,500
Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
12.50%, due 6/15/12 540,000 623,700
Innova S de RL
9.375%, due 9/19/13 100,000 110,750
------------
830,950
------------
NETHERLANDS (1.3%)
Intergas Finance BV
6.875%, due 11/4/11 (c) 570,000 584,250
Kazkommerts International BV
7.00%, due 11/3/09 (c) 500,000 505,000
Paiton Energy Funding BV
9.34%, due 2/15/14 (c) 500,000 525,000
Series Reg S
9.34%, due 2/15/14 550,000 576,125
------------
2,190,375
------------
PHILIPPINES (0.4%)
Philippine Long Distance Telephone Co.
8.35%, due 3/6/17 70,000 72,450
11.375%, due 5/15/12 550,000 679,250
------------
751,700
------------
RUSSIA (2.8%)
OAO Gazprom
9.625%, due 3/1/13 (c) 1,720,000 2,066,150
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
RUSSIA (CONTINUED)
Siberian Oil Co.
Series Reg S
10.75%, due 1/15/09 $ 1,195,000 $ 1,342,821
Tyumen Oil Co.
11.00%, due 11/6/07 (c) 1,250,000 1,366,250
------------
4,775,221
------------
SOUTH KOREA (0.1%)
LG Electronics, Inc.
5.00%, due 6/17/10 (c) 150,000 146,209
------------
UNITED STATES (4.1%)
General Motors Acceptance Corp.
8.00%, due 11/1/31 (e) 600,000 619,405
Indosat Tbk PT
7.125%, due 6/22/12 (c) 250,000 249,500
PEMEX Project Funding Master Trust
Series Reg S
5.75%, due 12/15/15 2,000,000 1,949,300
V Pemex Project Funding Master Trust
7.375%, due 12/15/14 2,960,000 3,235,280
Southern Peru Copper Corp.
7.50%, due 7/27/35 (c) 1,100,000 1,053,175
------------
7,106,660
------------
Total Corporate Bonds
(Cost $29,153,170) 30,051,920
------------
GOVERNMENTS & FEDERAL AGENCIES (69.7%)
- ---------------------------------------------------------------------------------
ARGENTINA (2.9%)
Argentine Republic
4.005%, due 8/3/12 (a)(d) 2,030,000 1,791,597
5.83%, due 12/31/33 1,883,335 796,651
8.28%, due 12/31/33 2,503,798 2,434,944
------------
5,023,192
------------
BRAZIL (15.8%)
Republic of Brazil
8.00%, due 1/15/18 450,000 464,850
V 8.00%, due 1/15/18 4,501,000 4,645,032
8.25%, due 1/20/34 3,000,000 2,919,000
Series B
8.875%, due 4/15/24 1,475,000 1,526,625
9.25%, due 10/22/10 1,160,000 1,273,680
9.375%, due 4/7/08 2,425,000 2,606,875
10.125%, due 5/15/27 1,500,000 1,732,500
10.50%, due 7/14/14 1,230,000 1,441,560
V 11.00%, due 1/11/12 2,500,000 2,975,000
V 11.00%, due 8/17/40 2,765,000 3,322,147
</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)
- ---------------------------------------------------------------------------------
BRAZIL (CONTINUED)
11.50%, due 3/12/08 $ 1,560,000 $ 1,751,100
12.25%, due 3/6/30 1,140,000 1,519,050
14.50%, due 10/15/09 900,000 1,146,150
------------
27,323,569
------------
COLOMBIA (4.5%)
Republic of Colombia
8.125%, due 5/21/24 1,650,000 1,709,400
10.00%, due 1/23/12 1,960,000 2,307,900
10.375%, due 1/28/33 500,000 625,000
10.50%, due 7/9/10 1,170,000 1,375,920
11.75%, due 2/25/20 430,000 578,350
12.00%, due 10/22/15 COP 2,300,000,000 1,232,961
------------
7,829,531
------------
COSTA RICA (0.3%)
Republic of Costa Rica
Series Reg S
8.11%, due 2/1/12 500,000 538,750
------------
DOMINICAN REPUBLIC (0.4%)
Dominican Republic
9.04%, due 1/23/18 (c) 627,081 664,706
------------
ECUADOR (2.1%)
Republic of Ecuador
Series Reg S
10.00%, beginning 8/1/06
8.00%, due 8/15/30 1,730,000 1,535,375
Series Reg S
12.00%, due 11/15/12 (c) 1,055,000 1,060,275
12.00%, due 11/15/12 960,000 950,400
------------
3,546,050
------------
EGYPT (0.4%)
Arab Republic of Egypt
Series Reg S
8.75%, due 7/11/11 610,000 717,665
------------
EL SALVADOR (0.3%)
Republic of El Salvador
7.75%, due 1/24/23 (c) 100,000 108,250
Series Reg S
7.75%, due 1/24/23 100,000 108,250
8.25%, due 4/10/32 (c) 250,000 261,875
------------
478,375
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GERMANY (2.2%)
Aries Vermoegensverwaltungs
9.60%, due 10/25/14 (c) $ 2,250,000 $ 2,880,000
Series Reg S
9.60%, due 10/25/14 750,000 960,975
------------
3,840,975
------------
INDONESIA (0.3%)
Republic of Indonesia
7.25%, due 4/20/15 (c) 550,000 541,750
------------
IVORY COAST (0.1%)
Republic of Ivory Coast
Series 20 year
2.50%, due 3/29/18 (a) 1,400,000 241,500
------------
LEBANON (0.6%)
Republic of Lebanon
Series Reg S
11.625%, due 5/11/16 900,000 1,075,500
------------
MEXICO (4.4%)
United Mexican States
7.50%, due 1/14/12 800,000 886,400
V 8.125%, due 12/30/19 4,650,000 5,561,400
10.00%, due 12/5/24 MXN11,000,000 1,097,603
------------
7,545,403
------------
PANAMA (2.7%)
Republic of Panama
8.125%, due 4/28/34 250,000 271,250
8.875%, due 9/30/27 920,000 1,069,500
9.375%, due 7/23/12 350,000 407,750
9.375%, due 4/1/29 1,635,000 1,998,787
9.625%, due 2/8/11 770,000 885,500
------------
4,632,787
------------
PERU (2.3%)
Republic of Peru
7.35%, due 7/21/25 435,000 439,350
V 9.125%, due 2/21/12 3,000,000 3,468,000
------------
3,907,350
------------
PHILIPPINES (5.2%)
Republic of Philippines
8.00%, due 1/15/16 650,000 651,625
9.375%, due 1/18/17 830,000 908,850
V 9.50%, due 2/2/30 3,800,000 4,009,000
9.875%, due 1/15/19 1,670,000 1,857,875
10.625%, due 3/16/25 1,290,000 1,488,337
------------
8,915,687
------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GOVERNMENTS & FEDERAL AGENCIES (CONTINUED)
- ---------------------------------------------------------------------------------
RUSSIA (8.8%)
Russian Federation
5.00%, due 3/31/30 (c)
7.50%, beginning 3/31/07 $ 28,205 $ 31,308
Series Reg S
V 5.00%, due 3/31/30
7.50%, beginning 3/31/07 9,699,750 10,782,242
Series Reg S
V 11.00%, due 7/24/18 3,010,000 4,391,289
------------
15,204,839
------------
SOUTH AFRICA (0.6%)
Republic of South Africa
7.375%, due 4/25/12 950,000 1,049,750
------------
TURKEY (7.0%)
Republic of Turkey
7.00%, due 6/5/20 300,000 292,500
7.25%, due 3/15/15 1,510,000 1,568,512
7.375%, due 2/5/25 2,980,000 2,950,200
9.00%, due 6/30/11 1,000,000 1,130,000
9.875%, due 3/19/08 980,000 1,068,200
11.00%, due 1/14/13 550,000 692,312
11.75%, due 6/15/10 700,000 859,250
11.875%, due 1/15/30 1,160,000 1,682,000
12.375%, due 6/15/09 1,470,000 1,778,700
------------
12,021,674
------------
UKRAINE (1.0%)
Ukraine Government
6.875%, due 3/4/11 (c) 350,000 360,938
7.65%, due 6/11/13 (c) 900,000 965,250
Series Reg S
11.00%, due 3/15/07 306,062 321,120
------------
1,647,308
------------
URUGUAY (1.3%)
Republic of Uruguay
7.50%, due 3/15/15 960,000 940,800
7.875%, due 1/15/33 (f) 1,291,288 1,226,724
9.25%, due 5/17/17 130,000 142,240
------------
2,309,764
------------
VENEZUELA (6.5%)
Republic of Venezuela
Series Reg S
5.194%, due 4/20/11 (a) 500,000 493,750
8.50%, due 10/8/14 2,170,000 2,365,300
V 9.25%, due 9/15/27 3,938,000 4,587,770
9.375%, due 1/13/34 2,215,000 2,576,045
10.75%, due 9/19/13 680,000 829,600
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
VENEZUELA (CONTINUED)
13.625%, due 8/15/18 $ 200,000 $ 290,500
------------
11,142,965
------------
Total Governments & Federal Agencies
(Cost $106,230,573) 120,199,090
------------
LOAN PARTICIPATIONS (0.2%)
- ---------------------------------------------------------------------------------
ALGERIA (0.2%)
Republic of Algeria
Tranche 1
0.938%, due 3/4/10 (a)(g) Y 18,421,055 157,452
Tranche 1
2.813%, due 9/4/06 (a)(g) $ 50,000 49,750
Tranche 3
4.809%, due 3/4/10 (a)(g) 150,000 149,850
------------
357,052
------------
MOROCCO (0.0%)++
Kingdom of Morocco
Tranche A
2.563%, due 1/1/09 (a)(g) 75,569 75,380
------------
Total Loan Participations
(Cost $388,940) 432,432
------------
YANKEE BOND (0.6%)(H)
- ---------------------------------------------------------------------------------
ARGENTINA (0.6%)
YPF Sociedad Anonima
9.125%, due 2/24/09 880,000 963,600
------------
Total Yankee Bond
(Cost $854,954) 963,600
------------
Total Long-Term Bonds
(Cost $142,115,805) 158,276,163
------------
SHORT-TERM INVESTMENTS (7.4%)
- ---------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.0%)++
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (a)(i) 44,630 44,630
------------
Total Certificate of Deposit
(Cost $44,630) 44,630
------------
COMMERCIAL PAPER (6.7%)
American General Finance Corp.
3.85%, due 11/9/05 410,000 409,648
Compass Securitization
3.993%, due 11/22/05 (i) 31,878 31,878
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (i) 19,127 19,127
</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>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL PAPER (CONTINUED)
International Business Machines Corp.
3.77%, due 11/9/05 $ 1,445,000 $ 1,443,789
Merck & Co., Inc.
3.74%, due 11/1/05 140,000 140,000
Merrill Lynch & Co., Inc.
3.84%, due 11/14/05 530,000 529,265
3.94%, due 11/4/05 1,085,000 1,084,644
Silver Tower U.S. Funding
3.932%, due 11/15/05 (i) 18,926 18,926
Toyota Motor Credit Corp.
3.81%, due 11/8/05 130,000 129,904
UBS Finance Delaware LLC
4.00%, due 11/1/05 7,720,000 7,720,000
------------
11,527,181
------------
Total Commercial Paper
(Cost $11,527,181) 11,527,181
------------
<Caption>
SHARES
INVESTMENT COMPANY (0.2%)
BGI Institutional Money Market Fund(i) 290,742 290,742
------------
Total Investment Company
(Cost $290,742) 290,742
------------
<Caption>
PRINCIPAL
AMOUNT
TIME DEPOSITS (0.5%)
Bank of the West (The)
4.02%, due 12/8/05 (i) 121,138 121,138
Barclays
3.92%, due 12/5/05 (i) 51,006 51,006
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
3.94%, due 11/28/05 (i) $ 57,381 $ 57,381
Credit Suisse First Boston Corp.
3.74%, due 11/1/05 (i) 44,630 44,630
Deutsche Bank
3.95%, due 12/2/05 (i) 51,006 51,006
First Tennessee National Corp.
3.88%, due 11/14/05 (i) 51,006 51,006
Fortis Bank
4.00%, due 12/12/05 (i) 57,381 57,381
Halifax Bank of Scotland
3.75%, due 11/1/05 (i) 51,006 51,006
Keybank
4.00%, due 11/1/05 (i) 57,034 57,034
Marshall & Ilsley Bank
3.97%, due 12/29/05 (i) 51,006 51,006
Societe Generale
3.77%, due 11/1/05 (i) 108,387 108,387
UBS AG
4.01%, due 12/13/05 (i) 51,006 51,006
Wells Fargo & Co.
4.00%, due 11/25/05 (i) 51,006 51,006
------------
Total Time Deposits
(Cost $802,993) 802,993
------------
Total Short-Term Investments
(Cost $12,665,546) 12,665,546
------------
Total Investments
(Cost $154,781,351)(l) 99.1% 170,941,709(m)
Cash and Other Assets Less Liabilities 0.9 1,619,178
-------------- ------------
Net Assets 100.0% $172,560,887
============== ============
</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, 2005 (CONTINUED)
<Table>
(a) Floating rate. Rate shown is the rate in effect at
October 31, 2005.
(b) 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.
(c) May be sold to institutional investors only.
(d) Fair valued security. The total market value of these
securities at October 31, 2005 is $1,791,597, which
reflects 1.0% of the Fund's net assets.
(e) Represents security, or a portion thereof, which is out
on loan.
(f) CIK ("Cash in Kind")--Interest payment is made with
cash or additional securities.
(g) Restricted security. (See Note 6)
(h) Yankee Bond--dollar-denominated bond issued in the
United States by a foreign bank or corporation.
(i) Represents security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(j) Brady Bonds--U.S. dollar-denominated bond of developing
countries.
(k) Step Bond. Coupon rate increases in increments to
maturity. Rate shown is rate in effect at October 31,
2005.
(l) The cost for federal income tax purposes is
$155,095,293.
(m) At October 31, 2005 net unrealized appreciation for
securities was $15,846,416, 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
$16,202,606 and aggregate gross unrealized depreciation
for all investments on which there was an excess of
cost over market value of $356,190.
The following abbreviations are used in the above portfolio:
COP--Colombian Peso
Y--Japanese Yen
MXN--Mexican Peso
</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 ASSETS AND LIABILITIES AS OF OCTOBER 31, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $154,781,351) including
$1,181,713 market value of securities loaned $170,941,709
Cash denominated in foreign currencies
(identified cost $52,804) 51,589
Cash 5,507
Receivables:
Dividends and interest 2,972,545
Fund shares sold 498,514
Other assets 20,843
Unrealized appreciation on foreign currency
forward contracts 43,805
-------------
Total assets 174,534,512
-------------
LIABILITIES:
Securities lending collateral 1,208,295
Payables:
Transfer agent 113,090
Fund shares redeemed 112,145
NYLIFE Distributors 88,701
Shareholder communication 42,831
Professional 29,562
Manager 60,440
Custodian 11,546
Accrued expenses 12,831
Dividend payable 294,184
-------------
Total liabilities 1,973,625
-------------
Net assets $172,560,887
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized:
Class A $ 75,611
Class B 50,628
Class C 25,132
Additional paid-in capital 154,553,932
Accumulated undistributed net investment
income 3,157,851
Accumulated net realized loss on investments
and foreign currency transactions (1,505,012)
Net unrealized appreciation on investments 16,160,358
Net unrealized appreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts 42,387
-------------
Net assets $172,560,887
=============
CLASS A
Net assets applicable to outstanding shares $ 86,514,793
=============
Shares of beneficial interest outstanding 7,561,063
=============
Net asset value per share outstanding $ 11.44
Maximum sales charge (4.50% of offering price) 0.54
-------------
Maximum offering price per share outstanding $ 11.98
=============
CLASS B
Net assets applicable to outstanding shares $ 57,499,552
=============
Shares of beneficial interest outstanding 5,062,789
=============
Net asset value and offering price per share
outstanding $ 11.36
=============
CLASS C
Net assets applicable to outstanding shares $ 28,546,542
=============
Shares of beneficial interest outstanding 2,513,183
=============
Net asset value and offering price per share
outstanding $ 11.36
=============
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 10,974,804
Income from securities loaned--net 26,061
-------------
Total income 11,000,865
-------------
EXPENSES:
Manager 955,904
Distribution--Class B 364,445
Distribution--Class C 167,232
Transfer agent 408,624
Distribution/Service--Class A 164,168
Service--Class B 121,482
Service--Class C 55,744
Professional 62,709
Shareholder communication 61,135
Custodian 47,050
Registration 43,474
Recordkeeping 40,322
Trustees 12,083
Miscellaneous 21,849
-------------
Total expenses before reimbursement 2,526,221
Expense reimbursement from Manager (38,120)
-------------
Net expenses 2,488,101
-------------
Net investment income 8,512,764
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain on:
Security transactions 2,953,140
Foreign currency transactions 3,203,981
-------------
Net realized gain on investment and foreign
currency transactions 6,157,121
-------------
Net change in unrealized appreciation on:
Security transactions (1,506,778)
Translation of other assets and liabilities
in foreign currencies and foreign currency
forward contracts (53,277)
-------------
Net change in unrealized appreciation on
investments and foreign currency forward
contracts (1,560,055)
-------------
Net realized and unrealized gain on
investments and foreign currency
transactions 4,597,066
-------------
Net increase in net assets resulting from
operations 13,109,830
=============
</Table>
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.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 8,512,764 $ 5,703,949
Net realized gain on investment and
foreign currency transactions 6,157,121 1,778,385
Net change in unrealized
appreciation on investments and
foreign currency contracts (1,560,055) 2,576,485
---------------------------
Net increase in net assets
resulting from operations 13,109,830 10,058,819
---------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (4,386,769) (2,799,067)
Class B (2,937,455) (1,859,204)
Class C (1,371,905) (898,462)
From net realized gain on investments:
Class A (779,565) --
Class B (583,594) --
Class C (318,843) --
---------------------------
Total dividends and distributions to
shareholders (10,378,131) (5,556,733)
---------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 37,315,909 16,372,761
Class B 17,485,890 8,174,613
Class C 16,717,985 9,442,582
Net asset value of shares issued in
connection with acquisition of
MainStay International Bond Fund:
Class A 17,036,563 --
Class B 15,539,762 --
Class C 2,080,147 --
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions:
Class A 2,772,217 1,422,701
Class B 2,694,234 1,246,570
Class C 986,646 466,294
---------------------------
112,629,353 37,125,521
Cost of shares redeemed:
Class A (16,475,481) (9,883,518)
Class B (10,583,141) (6,548,822)
Class C (8,089,607) (5,130,052)
---------------------------
(35,148,229) (21,562,392)
Increase in net assets derived
from capital share transactions 77,481,124 15,563,129
---------------------------
Net increase in net assets 80,212,823 20,065,215
</Table>
<Table>
<Caption>
2005 2004
NET ASSETS:
Beginning of year 92,348,064 72,282,849
---------------------------
End of year $172,560,887 $ 92,348,064
===========================
Accumulated undistributed net
investment income at end of year $ 3,157,851 $ 424,834
===========================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
--------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 11.17 $ 10.49 $ 8.89 $ 8.72 $ 8.49 $ 8.58
------- ------- ----------- ------- ------ ------
Net investment income 0.73 0.76 0.63 0.73 0.85 (e) 0.85
Net realized and unrealized
gain (loss) on investments 0.49 0.67 1.56 0.19 0.24 (e) (0.08)
Net realized and unrealized
gain (loss) on foreign
currency transactions 0.00 (a) 0.00 (a) 0.00 (a) (0.01) -- 0.00 (a)
------- ------- ----------- ------- ------ ------
Total from investment
operations 1.22 1.43 2.19 0.91 1.09 0.77
------- ------- ----------- ------- ------ ------
Less dividends and
distributions:
From net investment income (0.76) (0.75) (0.59) (0.74) (0.86) (0.86)
From net realized gain on
investments (0.19) -- -- -- -- --
------- ------- ----------- ------- ------ ------
Total dividends and
distributions (0.95) (0.75) (0.59) (0.74) (0.86) (0.86)
------- ------- ----------- ------- ------ ------
Net asset value at end of
period $ 11.44 $ 11.17 $ 10.49 $ 8.89 $ 8.72 $ 8.49
======= ======= =========== ======= ====== ======
Total investment return (b) 11.35% 14.26% 25.21%(d) 11.01% 13.59% 9.30%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 6.63% 7.29% 7.75%+ 8.49% 10.11%(e) 10.05%
Net expenses 1.43% 1.53% 1.63%+ 1.70% 1.70% 1.71%(c)
Expenses (before
reimbursement) 1.46% 1.53% 1.63%+ 1.91% 2.27% 2.53%
Portfolio turnover rate 34% 24% 34% 92% 111% 96%
Net assets at end of period
(in 000's) $86,515 $44,434 $34,371 $22,754 $9,894 $8,827
</Table>
<Table>
<Caption>
CLASS C
-------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 11.10 $ 10.44 $ 8.86 $ 8.68 $ 8.46 $ 8.54
------- ------- ----------- ------ ------ ------
Net investment income 0.65 0.69 0.57 0.67 0.79 (e) 0.79
Net realized and unrealized
gain (loss) on investments 0.48 0.65 1.54 0.20 0.23 (e) (0.08)
Net realized and unrealized
gain (loss) on foreign
currency transactions (0.00)(a) (0.00)(a) 0.00 (a) (0.01) -- (0.00)(a)
------- ------- ----------- ------ ------ ------
Total from investment
operations 1.13 1.34 2.11 0.86 1.02 0.71
------- ------- ----------- ------ ------ ------
Less dividends and
distributions:
From net investment income (0.68) (0.68) (0.53) (0.68) (0.80) (0.79)
From net realized gain on
investments (0.19) -- -- -- -- --
Total dividends and
distributions (0.87) (0.68) (0.53) (0.68) (0.80) (0.79)
------- ------- ----------- ------ ------ ------
Net asset value at end of
period $ 11.36 $ 11.10 $ 10.44 $ 8.86 $ 8.68 $ 8.46
======= ======= =========== ====== ====== ======
Total investment return(b) 10.62% 13.36% 24.33%(d) 10.33% 12.69% 8.58%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 5.88% 6.54% 7.00%+ 7.74% 9.36%(e) 9.30%
Net expenses 2.18% 2.28% 2.38%+ 2.45% 2.45% 2.46%(c)
Expenses (before
reimbursement) 2.21% 2.28% 2.38%+ 2.66% 3.02% 3.28%
Portfolio turnover rate 34% 24% 34% 92% 111% 96%
Net assets at end of period
(in 000's) $28,547 $16,455 $11,031 $8,060 $ 957 $ 460
</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 SELECT PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
--------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 11.10 $ 10.44 $ 8.86 $ 8.68 $ 8.46 $ 8.54
------- ------- ----------- ------- ------ ------
0.65 0.69 0.57 0.67 0.79 (e) 0.79
0.48 0.65 1.54 0.20 0.23 (e) (0.08)
(0.00)(a) (0.00)(a) 0.00 (a) (0.01) -- (0.00)(a)
------- ------- ----------- ------- ------ ------
1.13 1.34 2.11 0.86 1.02 0.71
------- ------- ----------- ------- ------ ------
(0.68) (0.68) (0.53) (0.68) (0.80) (0.79)
(0.19) -- -- -- -- --
------- ------- ----------- ------- ------ ------
(0.87) (0.68) (0.53) (0.68) (0.80) (0.79)
------- ------- ----------- ------- ------ ------
$ 11.36 $ 11.10 $ 10.44 $ 8.86 $ 8.68 $ 8.46
======= ======= =========== ======= ====== ======
10.62% 13.36% 24.33%(d) 10.33% 12.69% 8.58%
5.88% 6.54% 7.00%+ 7.74% 9.36%(e) 9.30%
2.18% 2.28% 2.38%+ 2.45% 2.45% 2.46%(c)
2.21% 2.28% 2.38%+ 2.66% 3.02% 3.28%
34% 24% 34% 92% 111% 96%
$57,500 $31,459 $26,881 $16,708 $6,715 $5,498
</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 nineteen 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. The 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'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. 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 accounting
principles generally accepted in the United States of America 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.
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.
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. Securities for which market
quotations are not readily available are valued by methods deemed in good faith
by 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 principal market is temporarily closed at a
time when under normal conditions it would be open. At October 31, 2005, the
Fund held securities with a value of $1,791,597 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
20 MainStay Global High Income Fund
impact on the price of such securities as a result of such events.
(B) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward contract is
an agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. During the period the forward contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" such contract on a daily basis to reflect the
market value of the contract at the end of each day's trading. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into foreign currency forward
contracts primarily to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates or to try to enhance the Fund's returns.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized 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. ( See Note 6.)
(C) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933 (the "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. (See Note 6.)
(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 6.)
(E) 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.
Unfunded commitment 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.
(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 accounting principles
generally accepted in the United States of America. 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 loss, accumulated net realized gain on investments and additional
paid-in capital arising
www.MAINSTAYfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
from permanent differences, net assets at October 31, 2005, are not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT LOSS ON ADDITIONAL
INCOME INVESTMENTS PAID-IN-CAPITAL
$ 6,253,280 $ (6,250,452) $ (2,828)
</Table>
The reclassifications for the Fund are primarily due to premium amortization
adjustments, foreign currency 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. 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. 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 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, are reflected in
unrealized foreign exchange gains or losses at period end exchange rates.
(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 transfer agent expenses and 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.
Certain amounts have been reclassified to conform to current year presentation.
Such reclassifications had no effect on the Fund's net income or capital.
(L) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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 advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
22 MainStay Global High Income Fund
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual percentage of the Fund's
average daily net assets as follows: 0.70% on assets up to $500 million and
0.65% on assets over $500 million. Effective August 1, 2005, the Manager has
entered into a written expense limitation agreement, under which the Manager has
agreed to reimburse the expenses of the Fund so that the total operating
expenses (excluding taxes, interest, litigation, extraordinary expenses, and
brokerage and other transaction expenses relating to the purchase or sale of
portfolio investments) do not exceed, on an annualized basis, 1.40% of the
average daily net assets of the Class A shares. An equivalent reimbursement, in
an equal amount of basis points, will be applied to the other share classes. The
Manager, within three years of incurring such expenses, may recoup the amount of
any management fee waiver or expense reimbursement from the Fund pursuant to
this agreement if such recoupment does not cause the Fund to exceed the expense
limitations. At October 31, 2005, the Fund had $38,120 of recoupment available.
This amount is available until October 31, 2008. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. Prior to
August 1, 2005, (and after December 1, 2004), NYLIM voluntarily agreed to
reimburse the expenses of the Fund so that total annual fund operating expenses
would not exceed on an annualized basis 1.51% of the average daily net assets of
the Class A shares, and such that there would be an equivalent reduction for the
other classes of shares. Prior to December 1, 2004, the manager voluntarily
agreed to reimburse the expenses of the Fund so that total annual fund operating
expenses would not 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, 2005, the Manager earned fees from
the Fund in the amount of $955,904, and reimbursed expenses in the amount of
$38,120.
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
0.35% 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 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 $54,775 for the year ended
October 31, 2005. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $1,239, $59,632 and $15,023, respectively, for the year ended October
31, 2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $408,624.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
www.MAINSTAYfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(F) CAPITAL. At October 31, 2005, New York Life held shares of Class A with a
net asset values of $17,623,861. This represents 20.4% of the Class A net assets
and 10.2% of the Fund's total net assets at period end.
(G) OTHER. Pursuant to the Management Agreement, 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
$3,787 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $40,322 for the year ended
October 31, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, The Bank of New York acted as custodian for the Fund.
NOTE 5--FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER TOTAL
ORDINARY CAPITAL TEMPORARY UNREALIZED ACCUMULATED
INCOME LOSSES DIFFERENCES APPRECIATION GAIN
$3,559,235 $(1,260,445) $(332,009) $ 15,888,803 $17,855,584
-------------------------------------------------------------------
-------------------------------------------------------------------
</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).
At October 31, 2005, for federal income tax purposes, capital loss carryforwards
of $1,260,445 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 AMOUNTS
AVAILABLE THROUGH (000'S)
2007 $ 512
2008 337
2012 309
2013 102
-------------------------------------------
$1,260
-------------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2005
and October 31, 2004, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2005 2004
Distributions paid from:
Ordinary income $ 9,043,816 $5,556,733
Long-term capital gains 1,334,315 --
- -----------------------------------------------------------
$10,378,131 $5,556,733
- -----------------------------------------------------------
</Table>
NOTE 6--PORTFOLIO SECURITIES LOANED, RESTRICTED SECURITIES, FOREIGN CURRENCY
FORWARD CONTRACTS AND FOREIGN CURRENCY:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $1,181,713. The Fund received $1,208,295 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.
Restricted securities held at October 31, 2005:
<Table>
<Caption>
DATE(S) OF PRINCIPAL 10/31/05 PERCENT OF
SECURITY ACQUISITION AMOUNT COST VALUE NET ASSETS
Kingdom of Morocco
Tranche A
2.56%, due 1/1/09 11/30/99-1/6/00 $ 75,569 $ 72,962 $ 75,380 0.1%
- --------------------------------------------------------------------------------------------------------------------------------
Republic of Algeria
Tranche 1
0.94%, due 3/4/10 2/4/05 Y18,421,055 129,985 157,452 0.1%
2.81%, due 9/4/06 8/13/99-1/6/00 $ 50,000 48,449 49,750 0.0%(a)
Tranche 3
4.81%, due 3/4/10 10/3/02 $ 150,000 137,545 149,850 0.1%
- --------------------------------------------------------------------------------------------------------------------------------
$ 388,941 $432,432 0.3%
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Less then one tenth of a percent
24 MainStay Global High Income Fund
Foreign currency forward contracts open at October 31, 2005:
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT UNREALIZED
FOREIGN CURRENCY BUY CONTRACTS PURCHASED SOLD APPRECIATION
Brazilian Real vs. U.S. Dollar, expiring 03/09/06 BRL 800,000 $ 1,974,400 $ 39,040
- --------------------------------------------------------------------------------------------------------------------
Turkish Lira vs. U.S. Dollar, expiring 03/14/06 TRL 1,000,000 1,404,500 4,765
- --------------------------------------------------------------------------------------------------------------------
Unrealized appreciation on foreign currency forward
contracts $ 43,805
- --------------------------------------------------------------------------------------------------------------------
</Table>
Foreign currency held at October 31, 2005:
<Table>
<Caption>
CURRENCY COST MARKET VALUE
Euro E 42,947 $ 52,679 $ 51,470
Japanese Yen Y13,875 125 119
- --------------------------------------------------------------------------------------------------------------
$ 52,804 $ 51,589
- --------------------------------------------------------------------------------------------------------------
</Table>
NOTE 7--FUND ACQUISITIONS:
On February 4, 2005, the Fund acquired the assets, including investments, and
assumed the identified liabilities of MainStay International Bond Fund.
This reorganization was completed after shareholders approved the plan on
February 2, 2005. The aggregate net assets of MainStay Global High Income Fund
immediately before the acquisition was $106,307,781 and the combined net assets
after the acquisition was $140,964,253.
The acquisition was accomplished by a tax-free exchange of the following:
<Table>
<Caption>
SHARES VALUE
MainStay International Bond Fund
- -------------------------------------------------------------------
Class A 1,976,347 $17,036,563
- -------------------------------------------------------------------
Class B 1,817,243 15,539,762
- -------------------------------------------------------------------
Class C 243,248 2,080,147
- -------------------------------------------------------------------
</Table>
In exchange for the MainStay International Bond Fund shares and net assets,
MainStay Global High Income Fund issued the following number of shares:
<Table>
<Caption>
SHARES
Class A 1,500,957
- ---------------------------------------------------
Class B 1,377,153
- ---------------------------------------------------
Class C 184,397
- ---------------------------------------------------
</Table>
MainStay International Bond Fund's net assets after adjustments for any
permanent book-to-tax differences at the acquisition date were as follows, which
include the following amounts of capital stock, unrealized appreciation,
accumulated net realized loss and temporary book-to-tax differences:
<Table>
<Caption>
ACCUMULATED UNDISTRIBUTED
TOTAL NET UNREALIZED NET REALIZED NET INVESTMENT
ASSETS CAPITAL STOCK APPRECIATION LOSS INCOME
MainStay International Bond Fund $34,656,472 $33,905,686 $ 5,196,449 $ (652,726) $(3,792,937)
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $77,426 and $44,133, 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
www.MAINSTAYfunds.com 25
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,
2005.
NOTE 10--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C
Shares sold 3,297 1,561 1,484
- ---------------------------------------------------------
Shares issued in connection
with acquisition of
MainStay International
Bond Fund(a) 1,501 1,377 184
- ---------------------------------------------------------
Shares issued in
reinvestment of dividends 246 241 88
- ---------------------------------------------------------
5,044 3,179 1,756
- ---------------------------------------------------------
Shares redeemed (1,463) (950) (725)
- ---------------------------------------------------------
Net increase 3,581 2,229 1,031
- ---------------------------------------------------------
</Table>
<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>
(a) On February 4, 2005 and pursuant to shareholder approval, the assets of
MainStay International Bond Fund were acquired by the MainStay Global High
Income Fund.
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 have cooperated fully and completely responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those agreements and certain other levels of trading by
fund shareholders over the period from 1999 to 2003 may have had on the Funds.
As a result of this review, in December 2005, NYLIM made payments totaling $5.9
million to nine MainStay funds. The amount paid to the MainStay Global High
Income Fund was $11,000. NYLIM has also agreed to reimburse or pay all expenses
relating to the Board of Trustees' review of this matter, and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
26 MainStay Global High 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 Global High Income Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2005, and the related statement of operations for the year then ended, and the
statements of changes in net assets and financial highlights for each of the
years in the two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005,
the results of its operations for the year then ended, and the changes in its
net assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
28 MainStay Global High Income Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 29
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
30 MainStay Global High Income Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's better-than-average performance
when compared over several time periods with funds concluded by Trustees to be
peers of the Fund.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund, with the expectation that the Manager intended, over time, to
implement measures designed to reduce the Trust's transfer agency fees. The
Trustees considered certain benefits expected for, and risks borne by, the
Manager and its affiliates, including benefits from soft dollar arrangements.
The Trustees considered the services provided to the Fund by affiliates of the
Manager, NYLIFE Distributors and NYLIM Service, under other agreements, and the
benefits to the Manager and its affiliates from those relationships. The
information provided to the Trustees indicated that the profitability to the
Manager and its affiliates arising directly from those other agreements was not
excessive. The Trustees acknowledged certain benefits to the reputation of the
Manager and its affiliates, as well to that of the Trust, from their association
with each other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distributing shares
of various series of the Trust. They noted the Manager's willingness to
implement contractual
www.MAINSTAYfunds.com 31
breakpoints, and that the contractual breakpoints in place for the management
fee were intended to provide that the Fund's shareholders would share in
benefits from economies of scale arising from the growth of Fund assets. The
Trustees acknowledged that the Fund had not yet reached the asset level at which
breakpoints would reduce the contractual management fee to which the Fund is
subject. Acknowledging the difficulty of forecasting economies of scale, the
Trustees generally expressed an intention to monitor the Manager's profitability
and consider the application of fee breakpoints or other appropriate measures as
the Board may determine from time to time. The Trustees reviewed historical
information about changes in the Fund's expense and asset levels over time, as
well as information about certain Fund expenses that would remain fixed even as
Fund assets increase and, therefore, provide the Fund with benefits from
economies of scale as the Fund grows. The Trustees noted that, to the extent the
Fund's gross expenses currently are higher than its net expenses, economies of
scale achieved through an increase in the Fund's assets might not directly
benefit the Fund through lower net expenses. The Trustees considered various
information about transfer agency expenses, including information showing that
transfer agency fees of the Fund and a significant number of series of the Trust
(although not every such series or with respect to every share class of each
series) tended to be high, when aggregated and expressed as a percentage of the
assets of certain series, compared to the mutual fund industry average according
to certain studies reviewed by the Board and, therefore, adversely affected
gross expense ratios. The Board received information about potential effects on
the Manager were it to subsidize certain portions of the Trust's transfer agency
fees. The Trustees noted that a significant number of shareholders of the
Trust's series had small amounts invested in the series, and have considered
measures intended to increase average shareholder account size and/or otherwise
reduce the Trust's transfer agency fees and expenses, including steps that the
Manager has taken to encourage shareholders to consolidate or close small
accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated gross and net expense ratios, and various components of that expense
ratio, in comparison to other funds in comparison groupings prepared by outside
data providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
32 MainStay Global High Income 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, 2005) 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 $1,334,315 on December 18,
2005.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
www.MAINSTAYfunds.com 33
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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
34 MainStay Global High Income Fund
(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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A08037 [RECYCLE LOGO] MS475-05 MSGH11-12/05
20
(MAINSTAY LOGO)
MAINSTAY
CONVERTIBLE FUND
The MainStay Funds
Annual Report
October 31, 2005
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/S/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 2
- ----------------------------------------------------
Investment and Performance Comparison 3
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 7
- ----------------------------------------------------
Portfolio of Investments 10
- ----------------------------------------------------
Financial Statements 15
- ----------------------------------------------------
Notes to Financial Statements 20
- ----------------------------------------------------
Report of Independent Registered Public
Accounting Firm 26
- ----------------------------------------------------
Trustees and Officers 27
- ----------------------------------------------------
Board Consideration and Approval of Management
and Subadvisory Agreements 30
- ----------------------------------------------------
Federal Income Tax Information 32
- ----------------------------------------------------
Proxy Voting Policies and Procedures 32
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 32
- ----------------------------------------------------
MainStay Funds 33
</Table>
2 MainStay Convertible Fund
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 5.09% 1.63% 7.64%
Excluding sales charges 11.21 2.79 8.25
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
MERRILL LYNCH ALL CONVERTIBLE
MAINSTAY CONVERTIBLE FUND SECURITIES INDEX
------------------------- -----------------------------
10/31/95 9450 10000
10699 11773
12455 14299
12004 14188
14546 18282
18197 21620
16099 18015
15225 16226
18034 20963
18775 22666
10/31/05 20879 23683
</Table>
<Table>
-- MainStay Convertible Fund -- Merrill Lynch All Convertible
Securities Index
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 5.35% 1.69% 7.49%
Excluding sales charges 10.35 2.01 7.49
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
MERRILL LYNCH ALL CONVERTIBLE
MAINSTAY CONVERTIBLE FUND SECURITIES INDEX
------------------------- -----------------------------
10/31/95 10000 10000
11266 11773
13029 14299
12469 14188
15006 18282
18634 21620
16367 18015
15357 16226
18052 20963
18653 22666
10/31/05 20583 23683
</Table>
<Table>
-- MainStay Convertible Fund -- Merrill Lynch All Convertible
Securities Index
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 9.35% 2.01% 7.49%
Excluding sales charges 10.35 2.01 7.49
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
MERRILL LYNCH ALL CONVERTIBLE
MAINSTAY CONVERTIBLE FUND SECURITIES INDEX
------------------------- -----------------------------
10/31/95 10000 10000
11266 11773
13029 14299
12469 14188
15006 18282
18634 21620
16367 18015
15357 16226
18052 20963
18653 22666
10/31/05 20583 23683
</Table>
<Table>
-- MainStay Convertible Fund -- Merrill Lynch All Convertible
Securities 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%.
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 contractual and may be modified or terminated only with the
approval of the Board of Trustees. 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 THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.MAINSTAYfunds.com 3
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Merrill Lynch All Convertible Securities Index(1) 4.49% 1.84% 9.00%
Average Lipper convertible securities fund(2) 6.76 2.49 8.42
</Table>
1. The Merrill Lynch All Convertible Securities Index is an unmanaged weighted
index of domestic corporate convertible securities. To be included in the
Index, bonds and preferred stocks must be convertible only to common stock
and have a market value or original par value of at least $50 million.
Results assume reinvestment of all income and capital gains. The Merrill
Lynch All 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.
THE DISCLOSURE AND FOOTNOTES ON THE PREVIOUS PAGE ARE AN INTEGRAL PART OF THE
TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Convertible Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY CONVERTIBLE FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% RETURN EXPENSES
ACCOUNT RETURNS AND PAID AND ACTUAL PAID
VALUE EXPENSES) DURING EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,093.50 $ 6.33 $1,019.00 $6.11
- -------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,089.25 $10.27 $1,015.25 $9.91
- -------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,089.25 $10.27 $1,015.25 $9.91
- -------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio for each class
(1.20% for Class A and 1.95% for Class B and Class C) multiplied by the
average account value over the period, divided by 365, multiplied by 184 (to
reflect the one-half year period).
www.MAINSTAYfunds.com 5
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-TERM
INVESTMENTS
(COLLATERAL FROM LIABILITIES IN EXCESS
CONVERTIBLE SECURITIES LENDING OF CASH AND OTHER
CONVERTIBLE BONDS PREFERRED STOCKS IS 15.6%) COMMON STOCKS ASSETS
- ----------------- ---------------- ----------- ------------- ---------------------
70.1% 18.5 18.0 8.3 -14.9
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Pride International, Inc. 3.25%, due 5/1/33
2. Lehman Brothers Holdings, Inc., Series WFMI
(Whole Foods Markets, Inc.) 1.25%, due 8/5/12
3. Chesapeake Energy Corp. 4.50%
4. Teva Pharmaceutical Finance NV 0.375%, due
11/15/22
5. Halliburton Co. 3.125%, due 7/15/23
6. Schlumberger Ltd. 1.50%, due 6/1/23
7. Amerada Hess Corp. 7.00%
8. Cooper Cameron Corp. 1.50%, due 5/15/24
9. American Express Co. 1.85%, due 12/1/33
10. SLM Corp. 4.15%, due 7/25/35
</Table>
6 MainStay Convertible Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Edward Silverstein, CFA, and Edmund C.
Spellman of MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests at least 80% of its assets in convertible securities
such as bonds, debentures, corporate notes, and preferred stocks or other
securities that are convertible into common stock or the cash value of a stock
or a basket or index of equity securities. The Fund takes a flexible approach by
investing in a broad range of securities of a variety of companies and
industries. The Fund invests in high-yield debt securities and may invest
without restriction in securities rated BB or B by S&P or Ba or B by Moody's.(1)
The balance of the Fund may be invested or held in nonconvertible debt, equity
securities that do not pay regular dividends, U.S. government securities, and
cash or cash equivalents. In selecting convertible securities for purchase or
sale, we take into account a variety of investment considerations, including the
potential return of the common stock, credit risk, projected interest return,
and the premium for the convertible security relative to the underlying common
stock. We may sell a security if we no longer believe it will contribute to
meeting the investment objective of the Fund.
WHAT FACTORS INFLUENCED THE CONVERTIBLE BOND MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2005?
Convertible bonds are hybrid instruments whose results depend on the performance
of related equity and fixed-income markets. Although the stock market was
volatile during the reporting period, the S&P 500(R) Index advanced 8.72% during
the 12 months ended October 31, 2005. During the same period, the Federal Open
Market Committee raised the federal funds target rate eight times, with a
25-basis-point increase on each occasion. (A basis point is one-hundredth of a
percentage point.) Rising interest rates and widening credit spreads depressed
the value of straight corporate debt and convertible bonds. For the 12-month
period, energy equipment & services convertibles were strong, while airline and
automotive convertibles were weak.
HOW DID THE FUND PERFORM RELATIVE TO THE CONVERTIBLE MARKET AS A WHOLE?
Excluding all sales charges, all of the Fund's share classes outperformed the
Merrill Lynch All Convertible Securities Index,(2) the Fund's primary benchmark,
during the 12 months ended October 31, 2005. The Fund's outperformance resulted
largely from security and sector selection. Continuing a theme from last year,
the Fund remained heavily overweighted in the energy equipment & services
industry, with large positions in the convertible bonds of Halliburton,
Schlumberger, and Pride International, all of which contributed positively to
the Fund's performance. Specific investments in other sectors also outperformed
the Fund's primary benchmark. Automotive and airlines issues tended to
underperform, so our decision to underweight the Fund in these areas helped
relative performance.
WHICH OF THE FUND'S SECURITIES WERE STRONG PERFORMERS DURING THE REPORTING
PERIOD?
The best performer for the Fund in terms of absolute dollar gain was Whole Foods
Markets, followed by
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. Issuers of convertible
securities may not be as financially strong as those issuing securities with
higher credit ratings and may be more vulnerable to changes in the economy. If
an issuer stops making interest payments, principal payments, or both on its
convertible securities, these securities may become worthless and the Fund could
lose its entire investment in them.
1. Debt rated BB by Standard & Poor's is deemed by Standard & Poor's to be less
vulnerable to nonpayment than other speculative issues. In the opinion of
Standard & Poor's, however, debt rated BB faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation. Debt rated 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. Bonds rated Ba by Moody's Investors Service are
judged by Moody's to have speculative elements, and Moody's believes that the
future of the bonds cannot be considered well- assured. Moody's believes that
often, the protection of interest and principal payments on such bonds may be
very moderate and thereby not well safeguarded during both good and bad times
in the future. According to Moody's, uncertainty of position characterizes
bonds in this class. 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. 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 and table on page 4 for more information about the Merrill Lynch
All Convertible Securities Index.
www.MAINSTAYfunds.com 7
Halliburton, Pride International, and Teva Pharmaceutical Industries.
Whole Foods Markets benefited from same-store sales and earnings that remained
well above analysts' expectations. We have confidence in the company's excellent
management, fundamental business, pristine balance sheet, and excess cash flow.
High energy prices and increased exploration and production activity benefited
energy equipment & services companies Halliburton, Pride International, and
Schlumberger. The share prices and convertible bonds of these companies rose
sharply during the reporting period. Convertible bonds of Teva Pharmaceutical
Industries advanced on positive developments in the generic drug market. The
company obtained the right to distribute generic Allegra for allergies and
generic Effexor for depression. A court decision granted Teva Pharmaceutical
Industries the right to be the exclusive generic seller of Pravachol, a drug
developed by Bristol-Meyers Squibb.
Other strong performers included Sirius Satellite Radio, Amerada Hess, and
Chesapeake Energy. Sirius Satellite Radio convertibles advanced on faster-than-
expected subscriptions. In January 2006, radio personality Howard Stern will
begin airing on Sirius, which provides a variety of commercial-free music and
talk offerings. Amerada Hess and Chesapeake Energy, two oil & gas exploration &
production companies, benefited from high oil and natural gas prices. Since U.S.
refining capacity has not increased in decades and demand for gasoline and
heating oil has remained high, refining operations at Amerada Hess enjoyed
strong margins.
WHICH SECURITIES DETRACTED FROM THE FUND'S PERFORMANCE?
In terms of dollars lost, the Fund's worst-performing position was a convertible
bond of biotechnology company Elan Capital. Other detractors included securities
of Lucent Technologies, Ford Motor, International Paper, and Flextronics
International.
Elan Capital's common stock tumbled in February 2005 when a recently introduced
multiple sclerosis therapy, Tysabri, was pulled from the market. The Fund held
convertible bonds and convertible preferred shares of Lucent Technologies, which
declined when the company's profitability failed to meet investor expectations.
Although the Fund was underweighted in the automobile industry, a Ford Motor
convertible preferred suffered when the company faced poor vehicle sales, weak
resale values, and retiree and health care costs that were above
the industry's averages.
International Paper's convertible bonds remained weak while the market continued
to wait for the paper & forest products industry to feel the combined effects of
global economic growth and high commodity prices. We recently sold some of our
other forest products holdings, such as Bowater and Smurfit Stone Container, but
the Fund continues to hold International Paper. Flextronics International
provides contract manufacturing services for electronics products. The company's
stock and convertible bonds declined sharply in October 2005 after the company
reported disappointing sales and earnings. We continue to hold the company's
convertible bonds because we believe the securities have limited downside risk.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE FUND'S FISCAL YEAR?
We added to the Fund's convertible bond position in Hilton Hotels on strong
lodging-industry fundamentals. Hilton derives a high percentage of its revenues
from New York and Hawaii, which are strong mar-
kets, and the company is generating large amounts of free cash flow because
nearly all of the revenue from increased room rates falls to the bottom line.
We purchased Diamond Offshore Drilling convertible bonds to replace the Fund's
holdings in BJ Services, which were called by the issuer. Diamond Offshore,
which owns drilling rigs and leases them to exploration & production companies,
has benefited from new leases, higher day rates, and the ongoing search for
additional energy reserves.
Amgen is a leading biotechnology company, perhaps best known for products that
help oncology and dialysis patients boost red-blood-cell production. The
company's promising pipeline of colon cancer, osteoporosis, and arthritis
offerings is expected to help Amgen's share price rise, and we purchased the
company's convertible bonds to participate in the upside potential. The bonds
have an attractive put feature that significantly reduces downside risk without
limiting upside potential.
The Fund added to its position in Amerada Hess convertible preferred shares to
take advantage of several potential catalysts that may increase the price of the
securities. The company's hedging strategies and its plans to return operations
to Libya may help the company's long-term outlook.
We purchased Amazon.com convertible bonds for the Fund because they offer high
current yield, limited downside risk, and maturity in less than four years.
Although we are not bullish on the stock, the bonds are not particularly
sensitive to Amazon.com's common stock performance. We believe that with
8 MainStay Convertible Fund
Amazon.com's excellent balance sheet, the bonds will be easily paid off when
they mature.
WERE THERE ANY SIGNIFICANT SALES DURING THE REPORTING PERIOD?
We sold the Fund's Burlington Northern Santa Fe convertible bonds because we
believed that the share price fully reflected the positive outlook for the
company's rail transportation business. We eliminated the Fund's position in
Goodyear Tire & Rubber convertible bonds when we felt that the shares were fully
valued. Full valuation also accounted for our sales of the Fund's convertible
preferred shares of Northrop Grumman. When Symantec announced its intent to
acquire software company Veritas Software, we sold the Fund's position in
Symantec convertible bonds. In our opinion, the acquisition signaled that
Symantec's core business, security software, was slowing. We sold the Fund's
convertible preferred shares of Fannie Mae after a substantial decline in the
company's common share price. Although the Fund's defensive position was not
hurt as much as the common stock, we saw limited upside potential in the
preferred.
HOW DID THE FUND'S WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
With the sale of Navistar and Cummins, which we believe had little remaining
upside potential, the Fund's weighting in industrial/cyclicals declined during
the reporting period. Sales of forest products holdings largely accounted for a
drop in our allocation to the materials sector. The Fund's weighting in energy
declined slightly from the beginning of the reporting period to the end of
October. In July, the Fund's aggregate energy holdings approached a level that
we felt was too high for a diversified Fund.
The Fund's allocation to financials increased during the reporting period. The
Fund purchased significant positions in convertible bonds of US Bancorp and
Sallie Mae that offered substantial upside participation in the respective
companies' common stock with virtually no downside participation or
interest-rate risk. The Fund more than doubled its telecommunication services
allocation from the beginning of the period to the end. We increased the Fund's
Verizon convertible-bond holdings and initiated a position in NII Holdings,
which provides mobile communications services in Latin America.
HOW DID THE FUND'S WEIGHTINGS COMPARE WITH THOSE OF THE MERRILL LYNCH ALL
CONVERTIBLE SECURITIES INDEX?
As of October 31, 2005, the Fund was significantly overweighted in energy
relative to the Merrill Lynch All Convertible Securities Index. On the same
date, the Fund was substantially underweighted in technology, because we felt
that most technology companies were selling at fairly high valuations given
their cyclical nature and less-than-stellar fundamentals. The Fund was
overweighted in consumer staples, primarily because of our large position in
Whole Foods Markets. Other sectors did not deviate materially from the Index. In
health care, industrials, and materials, the Fund's weightings were slightly
lower than those of the Fund's benchmark. In telecommunications, financials, and
utilities, the Fund's weightings were slightly higher than those of the Merrill
Lynch All Convertible Securities 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
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, 2005
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE SECURITIES (88.6%)+
- ------------------------------------------------------------------------------
CONVERTIBLE BONDS (70.1%)
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.3%)
L-3 Communications Corp.
3.00%, due 8/1/35 (a) $ 6,455,000 $ 6,519,550
------------
AGRICULTURE (0.3%)
Bunge Ltd. Finance Corp.
3.75%, due 11/15/22 840,000 1,360,800
------------
BANKS (2.2%)
Credit Suisse First Boston, Inc.
0.50%, due 3/21/11 6,600,000 5,742,000
US Bancorp
2.117%, due 8/21/35 (a)(b) 5,325,000 5,271,750
------------
11,013,750
------------
BIOTECHNOLOGY (4.0%)
Amgen, Inc.
(zero coupon), due 3/1/32 6,720,000 5,233,200
Genzyme Corp.
1.25%, due 12/1/23 (a) 3,100,000 3,607,625
1.25%, due 12/1/23 (c) 5,410,000 6,295,887
Invitrogen Corp.
1.50%, due 2/15/24 6,375,000 5,347,031
------------
20,483,743
------------
COMMERCIAL SERVICES (0.5%)
Euronet Worldwide, Inc.
1.625%, due 12/15/24 (c) 1,405,000 1,445,394
3.50%, due 10/15/25 (a) 1,050,000 1,030,312
------------
2,475,706
------------
DISTRIBUTION & WHOLESALE (2.1%)
Costco Wholesale Corp.
(zero coupon), due 8/19/17 (c) 7,130,000 7,860,825
WESCO International, Inc.
2.625%, due 10/15/25 (a) 2,410,000 2,771,500
------------
10,632,325
------------
DIVERSIFIED FINANCIAL SERVICES (8.9%)
Affiliated Managers Group, Inc.
(zero coupon), due 5/7/21 4,140,000 5,475,150
V American Express Co.
1.85%, due 12/1/33 (c)(d) 10,190,000 10,788,662
Merrill Lynch & Co., Inc.
(zero coupon), due 3/13/32 7,710,000 7,999,125
V SLM Corp.
4.15%, due 7/25/35 (b)(c) 10,265,000 10,637,619
Verizon Global Funding Corp.
0.183%, due 5/15/21 (d) 16,765,000 10,561,950
------------
45,462,506
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
ELECTRIC (1.3%)
PG&E Corp.
9.50%, due 6/30/10 (c) $ 1,185,000 $ 3,229,125
Reliant Energy, Inc.
5.00%, due 8/15/10 (a) 1,940,000 2,880,900
5.00%, due 8/15/10 490,000 727,650
------------
6,837,675
------------
ELECTRONICS (4.2%)
Cymer, Inc.
3.50%, due 2/15/09 2,625,000 2,572,500
Fisher Scientific International, Inc.
2.50%, due 10/1/23 3,315,000 4,305,356
3.25%, due 3/1/24 (c) 4,635,000 4,519,125
Flextronics International Ltd.
1.00%, due 8/1/10 (c) 5,430,000 4,737,675
Vishay Intertechnology, Inc.
3.625%, due 8/1/23 (c) 5,500,000 5,170,000
------------
21,304,656
------------
ENTERTAINMENT (1.1%)
International Game Technology
(zero coupon), due 1/29/33 (c) 8,859,000 5,636,539
------------
ENVIRONMENTAL CONTROL (0.6%)
Waste Connections, Inc.
4.193%, due 5/1/22 (b) 2,765,000 3,032,099
------------
FOOD (4.3%)
V Lehman Brothers Holdings, Inc., Series WFMI
(Whole Foods Markets, Inc.)
1.25%, due 8/5/12 (e) 18,990,000 19,369,800
SUPERVALU, Inc.
(zero coupon), due 11/2/31 (c)(f) 7,305,000 2,474,569
------------
21,844,369
------------
FOREST PRODUCTS & PAPER (0.7%)
International Paper Co.
(zero coupon), due 6/20/21 6,705,000 3,729,656
------------
HEALTH CARE-PRODUCTS (1.4%)
Medtronic, Inc., Series B
1.25%, due 9/15/21 6,935,000 7,082,369
------------
</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.
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)
- ------------------------------------------------------------------------------
HEALTH CARE-SERVICES (1.0%)
Health Management Associates, Inc.
1.50%, due 8/1/23 $ 4,935,000 $ 4,990,519
------------
INSURANCE (1.4%)
AON Corp.
3.50%, due 11/15/12 4,550,000 7,331,187
------------
INTERNET (1.0%)
Amazon.com, Inc.
4.75%, due 2/1/09 5,415,000 5,211,938
At Home Corp.
4.75%, due 12/15/06 (g)(h)(i)(j) 9,147,056 915
------------
5,212,853
------------
LEISURE TIME (0.9%)
Carnival Corp.
1.132%, due 4/29/33 (d) 6,320,000 4,732,100
------------
LODGING (2.0%)
Hilton Hotels Corp.
3.375%, due 4/15/23 9,525,000 10,191,750
------------
MEDIA (3.7%)
Liberty Media Corp.
0.75%, due 3/30/23 (a) 2,460,000 2,709,075
0.75%, due 3/30/23 2,085,000 2,296,106
3.50%, due 1/15/31 (b) 5,115,000 4,987,125
Sirius Satellite Radio, Inc.
2.50%, due 2/15/09 2,440,000 3,687,450
Walt Disney Co. (The)
2.125%, due 4/15/23 4,835,000 4,925,656
------------
18,605,412
------------
MINING (1.0%)
Inco Ltd.
1.094%, due 3/14/23 3,805,000 5,027,356
------------
MISCELLANEOUS -- MANUFACTURING (1.4%)
Tyco International Group SA, Series A
2.75%, due 1/15/18 (c)(k) 5,990,000 7,038,250
------------
OIL & GAS (5.0%)
Diamond Offshore Drilling, Inc.
1.50%, due 4/15/31 4,610,000 5,653,013
V Pride International, Inc.
3.25%, due 5/1/33 15,870,000 19,916,848
------------
25,569,861
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
OIL & GAS SERVICES (8.6%)
V Cooper Cameron Corp.
1.50%, due 5/15/24 (c) $10,755,000 $ 13,040,438
V Halliburton Co.
3.125%, due 7/15/23 9,370,000 15,530,776
V Schlumberger Ltd.
1.50%, due 6/1/23 (c) 11,305,000 14,908,469
------------
43,479,683
------------
PHARMACEUTICALS (6.8%)
ALZA Corp.,
(zero coupon), due 7/28/20 7,025,000 6,076,625
IVAX Corp.
1.875%, due 12/15/24 (a) 295,000 408,206
1.875%, due 12/15/24 1,920,000 2,656,800
V Teva Pharmaceutical Finance NV
0.375%, due 11/15/22 9,840,000 17,515,200
Wyeth
3.32%, due 1/15/24 (b) 7,580,000 7,770,182
------------
34,427,013
------------
SEMICONDUCTORS (1.3%)
ASM International NV
4.25%, due 12/6/11 (a) 1,395,000 1,252,013
Cypress Semiconductor Corp.
1.25%, due 6/15/08 4,905,000 5,450,681
------------
6,702,694
------------
SOFTWARE (0.5%)
Computer Associates International, Inc.
1.625%, due 12/15/09 (c) 1,835,000 2,651,575
------------
TELECOMMUNICATIONS (2.6%)
AudioCodes Ltd.
2.00%, due 11/9/24 (a) 1,385,000 1,255,156
2.00%, due 11/9/24 (c) 1,605,000 1,446,506
CIENA Corp.
3.75%, due 2/1/08 3,035,000 2,773,231
NII Holdings, Inc.
2.75%, due 8/15/25 (a) 7,230,000 7,672,838
------------
13,147,731
------------
Total Convertible Bonds
(Cost $341,568,547) 356,523,727
------------
</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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
CONVERTIBLE PREFERRED STOCKS (18.5%)
- ------------------------------------------------------------------------------
AIRLINES (0.3%)
Continental Airlines Finance Trust II
6.00% 62,800 $ 1,232,450
------------
AUTO MANUFACTURERS (1.7%)
Ford Motor Co. Capital Trust II
6.50% 121,000 3,858,690
General Motors Corp.
5.25% 147,500 2,433,750
General Motors Corp. Class A
4.50% 106,487 2,483,277
------------
8,775,717
------------
BANKS (0.6%)
State Street Corp.
6.75% 13,000 3,172,000
------------
BUILDING MATERIALS (0.2%)
Owens Corning Capital LLC
6.50% (a)(c)(h) 58,200 1,018,500
------------
DIVERSIFIED FINANCIAL SERVICES (1.7%)
Citigroup Funding, Inc. (g)(l) 176,700 5,511,450
Lehman Brothers Holdings, Inc.
6.25% (c) 126,700 3,310,671
------------
8,822,121
------------
ELECTRIC (1.0%)
FPL Group, Inc.
8.00% (m) 78,800 5,103,088
------------
INSURANCE (3.7%)
Conseco, Inc.
5.501% 249,100 6,376,960
Hartford Financial Services Group, Inc.
7.00% (n) 76,100 5,447,238
Metlife, Inc.
6.375% 255,400 6,985,190
------------
18,809,388
------------
MINING (0.6%)
Freeport-McMoRan Copper & Gold, Inc.
5.50% 2,825 3,112,797
------------
OFFICE & BUSINESS EQUIPMENT (0.5%)
Xerox Corp. Class C
6.25% 21,600 2,493,720
------------
</Table>
<Table>
<Caption>
SHARES VALUE
OIL & GAS (6.4%)
V Amerada Hess Corp.
7.00% 134,800 $ 14,364,288
V Chesapeake Energy Corp.
4.50% 173,400 17,860,200
------------
32,224,488
------------
TELECOMMUNICATIONS (1.8%)
Lucent Technologies Capital Trust I
7.75% 9,107 9,080,817
------------
Total Convertible Preferred Stocks
(Cost $92,483,296) 93,845,086
------------
Total Convertible Securities
(Cost $434,051,843) 450,368,813
------------
COMMON STOCKS (8.3%)
- ------------------------------------------------------------------------------
CAPITAL MARKETS (1.5%)
S&P 500 Index -- SPDR Trust Series 1 (c)(o) 47,600 5,723,900
Semiconductor Holders Trust (c)(o) 53,900 1,808,345
------------
7,532,245
------------
DIVERSIFIED FINANCIAL SERVICES (0.8%)
Citigroup, Inc. 87,670 4,013,533
------------
ELECTRIC (0.6%)
AES Corp. (The) (g) 199,300 3,166,877
------------
ENGINEERING & CONSTRUCTION (0.6%)
McDermott International, Inc. (g) 86,600 3,146,178
------------
HOTELS, RESTAURANTS & LEISURE (0.0%)++
FHC Delaware, Inc. (g)(j) 54,216 542
------------
MEDIA (0.6%)
Sirius Satellite Radio, Inc. (c)(g) 442,900 2,763,696
------------
OIL & GAS (0.8%)
Rowan Cos., Inc. 61,900 2,042,081
Transocean, Inc. (g) 34,000 1,954,660
------------
3,996,741
------------
OIL & GAS SERVICES (2.2%)
BJ Services Co. (c) 52,200 1,813,950
Cooper Cameron Corp. (g) 17,900 1,319,767
Grant Prideco, Inc. (c)(g) 45,900 1,785,051
Input/Output, Inc. (c)(g) 84,700 650,496
Tidewater, Inc. 121,700 5,593,332
------------
11,162,596
------------
</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.
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)
- ------------------------------------------------------------------------------
PIPELINES (0.3%)
El Paso Corp. 143,861 $ 1,706,191
------------
RETAIL (0.2%)
Bed Bath & Beyond, Inc. (g) 29,700 1,203,444
------------
SOFTWARE (0.7%)
Microsoft Corp. 130,300 3,348,710
------------
Total Common Stocks
(Cost $35,677,081) 42,040,753
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (18.0%)
- ------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.6%)
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (b)(p) $ 2,921,647 $ 2,921,647
------------
Total Certificate of Deposit
(Cost $2,921,647) 2,921,647
------------
COMMERCIAL PAPER (2.8%)
Compass Securitization
3.993%, due 11/22/05 (p) 2,086,890 2,086,890
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (p) 1,252,134 1,252,134
ING US Funding LLC
4.04%, due 12/27/05 1,940,000 1,927,808
Silver Tower U.S. Funding
3.932%, due 11/15/05 (p) 1,238,954 1,238,954
UBS Finance Delaware LLC
4.00%, due 11/1/05 7,480,000 7,480,000
------------
Total Commercial Paper
(Cost $13,985,786) 13,985,786
------------
<Caption>
SHARES VALUE
INVESTMENT COMPANIES (4.3%)
BGI Institutional Money Market Fund (p) 19,033,116 $ 19,033,116
Merrill Lynch Funds -- Premier Institutional Fund 2,925,257 2,925,257
------------
Total Investment Companies
(Cost $21,958,373) 21,958,373
------------
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (10.3%)
Bank of the West (The)
4.02%, due 12/8/05 (p) $ 7,930,183 $ 7,930,183
Barclays
3.92%, due 12/5/05 (p) 3,339,025 3,339,025
3.94%, due 11/28/05 (p) 3,756,403 3,756,403
Credit Suisse First Boston, Inc. 3.74%, due
11/1/05 (p) 2,921,647 2,921,647
Deutsche Bank
3.95%, due 12/2/05 (p) 3,339,025 3,339,025
First Tennessee National Corp.
3.88%, due 11/14/05 (p) 3,339,025 3,339,025
Fortis Bank
4.00%, due 12/12/05 (p) 3,756,403 3,756,403
Halifax Bank of Scotland
3.75%, due 11/1/05 (p) 3,339,025 3,339,025
Keybank
4.00%, due 11/1/05 (p) 3,733,696 3,733,696
Marshall & Ilsley Bank
3.97%, due 12/29/05 (p) 3,339,025 3,339,025
Societe Generale
3.77%, due 11/1/05 (p) 7,095,427 7,095,427
UBS AG
4.01%, due 12/13/05 (p) 3,339,025 3,339,025
Wells Fargo & Co.
4.00%, due 11/25/05 (p) 3,339,025 3,339,025
------------
Total Time Deposits
(Cost $52,566,934) 52,566,934
------------
Total Short-Term Investments
(Cost $91,432,740) 91,432,740
------------
Total Investments
(Cost $561,161,664) (q) 114.9% 583,842,306(r)
Liabilities in Excess of
Cash and Other Assets (14.9) (75,690,963)
----------- ------------
Net Assets 100.0% $508,151,343
=========== ============
</Table>
<Table>
++ Less than one tenth of a percent.
V Among the Fund's 10 largest holdings, excluding
short-term investments. May be subject to change daily.
(a) May be sold to institutional investors only.
(b) Floating rate. Rate shown is the rate in effect at
October 31, 2005.
(c) Represents security, or a portion thereof, which is out
on loan.
(d) Step Bond. Coupon rate increases in increments to
maturity. Rate shown is the rate in effect at October
31, 2005.
(e) Synthetic Convertible -- An equity-linked security
issued by an entity other than the issuer of the
underlying equity instrument.
</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, 2005 (CONTINUED)
<Table>
(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) Non-income producing security.
(h) Issue in default.
(i) Issuer in bankruptcy
(j) Fair valued security. The total market value of these
securities at October 31, 2005 is $1,457, which
reflects 0.0% of the Fund's net assets.
(k) Yankee Bond -- dollar-denominated bond issued in the
United States by a foreign bank or corporation.
(l) Variable rate securities that may be tendered back to
the issuer at any time prior to maturity at par.
(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
$50.00 by August 16, 2006.
(o) Exchange Traded Fund -- represents a basket of
securities that are traded on an exchange.
(p) Represents security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(q) The cost for federal income tax purposes is
$563,047,792.
(r) At October 31, 2005 net unrealized appreciation was
$20,794,514, 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 $37,331,510 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $16,536,996.
</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, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $561,161,664) including
$76,309,840 market value of securities
loaned $583,842,306
Cash 16,884
Receivables:
Investment securities sold 10,005,957
Dividends and interest 1,897,277
Fund shares sold 122,489
Other assets 25,922
-------------
Total assets 595,910,835
-------------
LIABILITIES:
Securities lending collateral 79,099,675
Payables:
Investment securities purchased 7,019,181
Fund shares redeemed 424,576
Transfer agent 411,918
NYLIFE Distributors 371,294
Manager 239,231
Shareholder communication 110,875
Custodian 6,364
Accrued expenses 76,378
-------------
Total liabilities 87,759,492
-------------
Net assets $508,151,343
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 70,795
Class B 293,490
Class C 18,049
Additional paid-in capital 533,170,007
Accumulated undistributed net investment
income 248,504
Accumulated net realized loss on investments (48,330,144)
Net unrealized appreciation on investments 22,680,642
-------------
Net assets $508,151,343
=============
CLASS A
Net assets applicable to outstanding shares $ 93,995,996
=============
Shares of capital stock outstanding 7,079,488
=============
Net asset value per share outstanding $ 13.28
Maximum sales charge (5.50% of offering price) 0.77
-------------
Maximum offering price per share outstanding $ 14.05
=============
CLASS B
Net assets applicable to outstanding shares $390,163,033
=============
Shares of capital stock outstanding 29,349,043
=============
Net asset value and offering price per share
outstanding $ 13.29
=============
CLASS C
Net assets applicable to outstanding shares $ 23,992,314
=============
Shares of capital stock outstanding 1,804,861
=============
Net asset value and offering price per share
outstanding $ 13.29
=============
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 7,853,046
Dividends 5,688,110
Income from securities loaned -- net 291,006
------------
Total income 13,832,162
------------
EXPENSES:
Manager 3,836,288
Distribution -- Class B 3,102,654
Distribution -- Class C 191,367
Transfer agent 1,654,776
Distribution/Service -- Class A 240,162
Service -- Class B 1,034,218
Service -- Class C 63,789
Shareholder communication 154,360
Professional 141,006
Recordkeeping 80,193
Registration 49,600
Custodian 45,821
Trustees 39,394
Portfolio pricing 8,603
Miscellaneous 16,757
------------
Total expenses before waiver/reimbursement 10,658,988
Expense waiver/reimbursement from Manager (935,148)
Net expenses 9,723,840
------------
Net investment income 4,108,322
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 38,968,649
Net change in unrealized appreciation on
investments 10,973,165
------------
Net realized and unrealized gain on
investments 49,941,814
------------
Net increase in net assets resulting from
operations $ 54,050,136
============
</Table>
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 YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 4,108,322 $ 3,550,913
Net realized gain on investments 38,968,649 34,244,695
Net change in unrealized
appreciation (depreciation) on
investments 10,973,165 (17,030,732)
-----------------------------
Net increase in net assets
resulting from operations 54,050,136 20,764,876
-----------------------------
Dividends to shareholders:
From net investment income:
Class A (1,266,634) (1,319,769)
Class B (2,245,163) (2,780,272)
Class C (137,512) (173,958)
-----------------------------
Total dividends to shareholders (3,649,309) (4,273,999)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 18,535,270 33,706,889
Class B 12,183,390 28,550,484
Class C 2,385,934 9,747,429
Net asset value of shares issued
to shareholders in reinvestment
of dividends:
Class A 1,093,305 1,139,095
Class B 2,081,858 2,561,103
Class C 102,145 119,314
-----------------------------
36,381,902 75,824,314
Cost of shares redeemed:
Class A (29,578,330) (31,970,061)
Class B (93,490,476) (84,733,276)
Class C (7,945,433) (9,608,010)
-----------------------------
(131,014,239) (126,311,347)
Decrease in net assets derived
from capital share
transactions (94,632,337) (50,487,033)
-----------------------------
Net decrease in net assets (44,231,510) (33,996,156)
</Table>
<Table>
<Caption>
2005 2004
NET ASSETS:
Beginning of year 552,382,853 586,379,009
-----------------------------
End of year $ 508,151,343 $ 552,382,853
=============================
Accumulated undistributed
(distribution in excess of) net
investment income at end of year $ 248,504 $ (210,509)
=============================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 12.10 $ 11.78 $ 10.31 $ 11.58 $ 12.45 $ 14.53
----------- ----------- ----------- ------- ------- -------
Net investment income 0.18(e) 0.15 0.16 0.25 0.36(d) 0.56
Net realized and unrealized
gain (loss) on investments 1.23 0.34 1.46 (1.27) (0.87)(d) 0.42
Net realized and unrealized
gain (loss) on foreign
currency transactions -- -- -- 0.00(b) 0.00(d) 0.01
----------- ----------- ----------- ------- ------- -------
Total from investment
operations 1.41 0.49 1.62 (1.02) (0.51) 0.99
----------- ----------- ----------- ------- ------- -------
Less dividends and
distributions:
From net investment income (0.23) (0.17) (0.15) (0.25) (0.36) (0.57)
From net realized gain on
investments -- -- -- -- -- (2.50)
----------- ----------- ----------- ------- ------- -------
Total dividends and
distributions (0.23) (0.17) (0.15) (0.25) (0.36) (3.07)
----------- ----------- ----------- ------- ------- -------
Net asset value at end of
period $ 13.28 $ 12.10 $ 11.78 $ 10.31 $ 11.58 $ 12.45
=========== =========== =========== ======= ======= =======
Total investment return (a) 11.21% 4.11% 15.86%(c) (8.88%) (4.01%) 7.24%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.38%(e) 1.22% 1.85%+ 2.30% 2.97%(d) 3.63%
Net expenses 1.20% 1.34% 1.38%+ 1.37% 1.29% 1.24%
Expenses (before
waiver/reimbursement) 1.38% 1.35% 1.38%+ 1.37% 1.29% 1.24%
Portfolio turnover rate 93% 96% 73% 94% 175% 245%
Net assets at end of period
(in 000's) $93,996 $95,015 $89,751 $68,871 $74,317 $70,915
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 12.11 $ 11.79 $ 10.33 $ 11.59 $ 12.46 $14.53
----------- ----------- ----------- ------- ------- ------
Net investment income 0.08(e) 0.06 0.10 0.17 0.27(d) 0.45
Net realized and unrealized
gain (loss) on investments 1.23 0.33 1.45 (1.27) (0.87)(d) 0.43
Net realized and unrealized
gain (loss) on foreign
currency transactions -- -- -- 0.00(b) 0.00(d) 0.01
----------- ----------- ----------- ------- ------- ------
Total from investment
operations 1.31 0.39 1.55 (1.10) (0.60) 0.89
----------- ----------- ----------- ------- ------- ------
Less dividends and
distributions:
From net investment income (0.13) (0.07) (0.09) (0.16) (0.27) (0.46)
From net realized gain on
investments -- -- -- -- -- (2.50)
----------- ----------- ----------- ------- ------- ------
Total dividends and
distributions (0.13) (0.07) (0.09) (0.16) (0.27) (2.96)
----------- ----------- ----------- ------- ------- ------
Net asset value at end of
period $ 13.29 $ 12.11 $ 11.79 $ 10.33 $ 11.59 $12.46
=========== =========== =========== ======= ======= ======
Total investment return (a) 10.35% 3.32% 15.09%(c) (9.50%) (4.76%) 6.51%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.63%(e) 0.47% 1.10%+ 1.55% 0.22%(d) 2.88%
Net expenses 1.95% 2.09% 2.13%+ 2.12% 2.04% 1.99%
Expenses (before
waiver/reimbursement) 2.13% 2.10% 2.13%+ 2.12% 2.04% 1.99%
Portfolio turnover rate 93% 96% 73% 94% 175% 245%
Net assets at end of period
(in 000's) $23,992 $27,041 $26,079 $15,289 $13,241 $7,946
</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 then one cent per share.
(c) Total return is not annualized.
(d) As required, effective January 1, 2001, the Fund 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 the 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>
<Table>
(e) Net investment income and the ratio of net investment income includes $0.01 per share and
0.07%, respectively as a result of a special one time dividend from Microsoft Corp.
</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>
CLASS B
---------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 12.11 $ 11.79 $ 10.33 $ 11.59 $ 12.46 $ 14.53
----------- ----------- ----------- -------- -------- --------
0.08(e) 0.06 0.10 0.17 0.27(d) 0.45
1.23 0.33 1.45 (1.27) (0.87)(d) 0.43
-- -- -- 0.00(b) 0.00(d) 0.01
----------- ----------- ----------- -------- -------- --------
1.31 0.39 1.55 (1.10) (0.60) 0.89
----------- ----------- ----------- -------- -------- --------
(0.13) (0.07) (0.09) (0.16) (0.27) (0.46)
-- -- -- -- -- (2.50)
----------- ----------- ----------- -------- -------- --------
(0.13) (0.07) (0.09) (0.16) (0.27) (2.96)
----------- ----------- ----------- -------- -------- --------
$ 13.29 $ 12.11 $ 11.79 $ 10.33 $ 11.59 $ 12.46
=========== =========== =========== ======== ======== ========
10.35% 3.32% 15.09%(c) (9.50%) (4.76%) 6.51%
0.63%(e) 0.47% 1.10%+ 1.55% 2.22%(d) 2.88%
1.95% 2.09% 2.13%+ 2.12% 2.04% 1.99%
2.13% 2.10% 2.13%+ 2.12% 2.04% 1.99%
93% 96% 73% 94% 175% 245%
$390,163 $430,326 $470,459 $436,572 $561,254 $655,343
</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 nineteen 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 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 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. 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 accounting
principles generally accepted in the United States of America 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 normally are taken
from the principal 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 in good faith by 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 principal
market is temporarily closed at a time when under normal conditions it would be
open. At October 31, 2005, the Fund held securities with a value of $1,457 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.
20 MainStay Convertible 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 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) 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 and
unrealized appreciation or depreciation is recorded 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, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the market price of the underlying security or foreign
currency increase but, as long as the obligation as a writer continues, have
retained the risk of loss should the price of the underlying security decline.
By writing a covered put option, the Fund, in exchange for the premium, accepts
the risk of decline in the market value of the underlying security or foreign
currency below the exercise price. After writing a put option, the Fund may
incur a loss equal to the difference between the exercise price of the option
and the sum of the market value of the underlying security plus the premium
received from the sale of the option. 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) 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) 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 accounting principles generally accepted in
the United States of America. 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 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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.
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) 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 such foreign currency
denominated assets and liabilities, other than investments, are reflected in
unrealized foreign exchange gains or losses at period end exchange rates.
(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 transfer agent expenses and 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) 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.
(K) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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 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 percentage of the Fund's
average daily net assets as follows: 0.72% 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. NYLIM has voluntarily agreed to waive its management fee by 0.05% to
0.67% on assets up to $500 million, 0.62% on assets from $500 million to $1
billion and 0.57% on assets in excess of $1 billion. Effective August 1, 2005,
the Manager has entered into a written expense limitation agreement, under which
the Manager has agreed to reimburse the expenses of the Fund so that the total
22 MainStay Convertible Fund
operating expenses (excluding taxes, interest, litigation, extraordinary
expenses, and brokerage and other transaction expenses relating to the purchase
or sale of portfolio investments) do not exceed, on an annualized basis, 1.20%
of the average daily net assets of the Class A shares. An equivalent
reimbursement, in an equal amount of basis points, will be applied to the other
share classes. The Manager, within three years of incurring such expenses, may
recoup the amount of any management fee waiver or expense reimbursement from the
Fund pursuant to this agreement if such recoupment does not cause the Fund to
exceed the expense limitations. At October 31, 2005, the Fund had $213,955 of
recoupment available. This amount is available until October 31, 2008. This
expense limitation may be modified or terminated only with the approval of the
Board of Trustees. Prior to August 1, 2005 and after December 1, 2004, NYLIM had
agreed to voluntarily reimburse the expenses of the Fund so that total annual
fund operating expenses would not exceed on an annualized basis 1.20% of the
average daily net assets of the Class A shares, and such that there would be an
equivalent reduction for the other classes of shares. For the year ended October
31, 2005, the Manager earned fees from the Fund in the amount of $3,836,288, and
waived its fees and/or reimbursed expenses in the amount of $935,148.
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 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 $47,455 for the year ended
October 31, 2005. 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 $2,503, $259,488 and $3,639, respectively, for the year ended October
31, 2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $1,654,776.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(F) OTHER. Pursuant to the Management Agreement, fees for the cost of legal
services, included in Professional fees as shown on the Statement of Operations,
provided to the Fund by the Office of the General Counsel of NYLIM amounted to
$13,858 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
www.MAINSTAYfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
provided to the Fund by the Manager amounted to $80,193 for the year ended
October 31, 2005.
NOTE 4 -- CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, State Street Bank and Trust Company acted as custodian for
the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED TOTAL
ORDINARY CAPITAL AND UNREALIZED ACCUMULATED
INCOME OTHER LOSSES APPRECIATION LOSS
$406,763 $(46,602,275) $20,794,514 $(25,400,998)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals.
At October 31, 2005, for federal income tax purposes, capital loss carryforwards
of $46,602,275 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
2010 $41,599
2011 5,003
- -----------------------------------------------
$46,602
- -----------------------------------------------
</Table>
The Fund utilized $38,995,498 of capital loss carryforwards during the year
ended October 31, 2005.
The tax character of distributions paid during the years ended October 31, 2005
and October 31, 2004, shown in the Statement of Changes in Net Assets, were as
follows:
<Table>
<Caption>
2005 2004
Distributions paid from Ordinary
income $3,649,309 $4,273,999
- -----------------------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $479,140 and $556,619, respectively.
NOTE 7 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $76,309,840. The Fund received $79,099,675 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, 2005.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C
Shares sold 1,448 949 187
- -------------------------------------------------------------
Shares issued in reinvestment of
dividends 83 156 8
- -------------------------------------------------------------
1,531 1,105 195
- -------------------------------------------------------------
Shares redeemed (2,305) (7,289) (623)
- -------------------------------------------------------------
Net decrease (774) (6,184) (428)
- -------------------------------------------------------------
</Table>
<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 93 208 10
- -------------------------------------------------------------
2,832 2,527 804
- -------------------------------------------------------------
Shares redeemed (2,599) (6,910) (783)
- -------------------------------------------------------------
Net increase (decrease) 233 (4,383) 21
- -------------------------------------------------------------
</Table>
24 MainStay Convertible Fund
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.9 million to nine MainStay funds. No payment was made with respect
to the MainStay Convertible Fund. NYLIM has also agreed to reimburse or pay all
expenses relating to the Board of Trustees' review of this matter and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
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, 2005, and the
related statement of operations for the year then ended, and the statements of
changes in net assets and financial highlights for each of the years in the
two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the
results of its operations for the year then ended, and the changes in its net
assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
www.MAINSTAYfunds.com 27
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
28 MainStay Convertible Fund
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 29
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's underperformance over certain
recent periods, a short-term period of significant underperformance in 2003 that
has adversely affected the Fund's relative performance over various time
periods, recent change of personnel on the portfolio management team serving the
Fund, and recent improvements in the Fund's performance resulting in the Fund's
having improved comparative performance against a group of Funds concluded by
the Trustees to be peers of the Fund.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund, with the expectation that the Manager intended, over time, to
implement measures designed to reduce the Trust's transfer agency fees. The
Trustees considered certain benefits expected for, and risks borne by, the
Manager and its affiliates, including benefits from soft dollar arrangements.
The Trustees considered the services provided to the Fund by affiliates of the
Manager, NYLIFE Distributors and NYLIM Service, under other agreements, and the
benefits to the Manager and its affiliates from those relationships. The
information provided to the Trustees indicated that the profitability to the
Manager and its affiliates arising directly from those other agreements was not
excessive. The Trustees acknowledged certain benefits to the reputation of the
Manager and its affiliates, as well to that of the Trust, from their association
with each other.
30 MainStay Convertible Fund
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distributing shares
of various series of the Trust. They noted the Manager's willingness to
implement contractual breakpoints, and that the contractual breakpoints in place
for the management fee were intended to provide that the Fund's shareholders
would share in benefits from economies of scale arising from the growth of Fund
assets. The Trustees noted that the Fund's contractual management fee had been
reduced in accordance with the terms of the breakpoint schedule applicable to
the Fund. Acknowledging the difficulty of forecasting economies of scale, the
Trustees generally expressed an intention to monitor the Manager's profitability
and consider the application of fee breakpoints or other appropriate measures as
the Board may determine from time to time. The Trustees reviewed historical
information about changes in the Fund's expense and asset levels over time, as
well as information about certain Fund expenses that would remain fixed even as
Fund assets increase and, therefore, provide the Fund with benefits from
economies of scale as the Fund grows. The Trustees noted that, to the extent the
Fund's gross expenses currently are higher than its net expenses, economies of
scale achieved through an increase in the Fund's assets might not directly
benefit the Fund through lower net expenses. The Trustees considered various
information about transfer agency expenses, including information showing that
transfer agency fees of the Fund and a significant number of series of the Trust
(although not every such series or with respect to every share class of each
series) tended to be high, when aggregated and expressed as a percentage of the
assets of certain series, compared to the mutual fund industry average according
to certain studies reviewed by the Board and, therefore, adversely affected
gross expense ratios. The Board received information about potential effects on
the Manager were it to subsidize certain portions of the Trust's transfer agency
fees. The Trustees noted that a significant number of shareholders of the
Trust's series had small amounts invested in the series, and have considered
measures intended to increase average shareholder account size and/or otherwise
reduce the Trust's transfer agency fees and expenses, including steps that the
Manager has taken to encourage shareholders to consolidate or close small
accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated gross and net expense ratios, and various components of that expense
ratio, in comparison to other funds in comparison groupings prepared by outside
data providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
www.MAINSTAYfunds.com 31
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2005,
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 2006, 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 2005. 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, 2005.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
32 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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
www.MAINSTAYfunds.com 33
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[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) 2005 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A07990 (RECYCLE LOGO) M475-05 MSC11-12/05
05
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
COMMON STOCK FUND
The MainStay Funds
Annual Report
October 31, 2005
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 2
- --------------------------------------------------------------------------------
Investment and Performance Comparison 3
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 30
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures 32
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 32
- --------------------------------------------------------------------------------
MainStay Funds 33
</Table>
2 MainStay Common Stock Fund
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF TO MARKET VOLATILITY, CURRENT
PERFORMANCE MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 4.52% -4.73% 2.61%
Excluding sales charges 10.60 -3.65 3.39
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
CLASS A RUSSELL 1000 INDEX S&P 500 INDEX
------- ------------------ -------------
6/1/98 9450 10000 10000
9894 10036 10133
12606 12603 12734
14580 13744 13510
10706 10166 10146
8902 8681 8613
10255 10619 10404
10946 11609 11385
10/31/05 12106 12825 12378
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 4.84% -4.74% 2.63%
Excluding sales charges 9.84 -4.36 2.63
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
CLASS B RUSSELL 1000 INDEX S&P 500 INDEX
------- ------------------ -------------
6/1/98 10000 10000 10000
10430 10036 10133
13200 12603 12734
15149 13744 13510
11038 10166 10146
9108 8681 8613
10418 10619 10404
11038 11609 11385
10/31/05 12124 12825 12378
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 8.84% -4.36% 2.63%
Excluding sales charges 9.84 -4.36 2.63
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
CLASS C RUSSELL 1000 INDEX S&P 500 INDEX
------- ------------------ -------------
6/1/98 10000 10000 10000
10430 10036 10133
13200 12603 12734
15149 13744 13510
11038 10166 10146
9108 8681 8613
10408 10619 10404
11038 11609 11385
10/31/05 12124 12825 12378
</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. 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 contractual and
may be modified or terminated only with the approval of the Board of Trustees.
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 through
8/31/98, performance of Class I shares (first offered 12/28/04) includes the
historical performance of Class A shares adjusted to reflect the applicable
sales charge (or CDSC) and fees and expenses for Class I shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.MAINSTAYfunds.com 3
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
11.13% -3.35% 3.69%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
CLASS I RUSSELL 1000 INDEX S&P 500 INDEX
------- ------------------ -------------
6/1/98 10000 10000 10000
10478 10036 10133
13384 12603 12734
15517 13744 13510
11422 10166 10146
9523 8681 8613
10999 10619 10404
11773 11609 11385
10/31/05 13083 12825 12378
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Russell 1000(R) Index(1) 10.47% -1.38% 3.41%
S&P 500(R) Index(2) 8.72 -1.74 2.92
Average Lipper large-cap core fund(3) 8.35 -3.06 1.92
</Table>
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 PREVIOUS PAGE ARE AN INTEGRAL PART OF THE
TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Common Stock Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY COMMON STOCK FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT ENDING ACCOUNT
VALUE (BASED VALUE (BASED
BEGINNING ON ACTUAL EXPENSES ON HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD 10/31/05 PERIOD
CLASS A SHARES(1) $1,000.00 $1,069.30 $ 7.20 $1,018.10 $ 7.02
- -------------------------------------------------------------------------------------------------------------------
CLASS B SHARES(1) $1,000.00 $1,066.15 $11.09 $1,014.35 $10.81
- -------------------------------------------------------------------------------------------------------------------
CLASS C SHARES(1) $1,000.00 $1,066.15 $11.09 $1,014.35 $10.81
- -------------------------------------------------------------------------------------------------------------------
CLASS I SHARES(1) $1,000.00 $1,072.60 $ 3.97 $1,021.20 $ 3.87
- -------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.38% for Class A and 2.13% for Class B and Class C and 0.76% for Class I)
multiplied by the average account value over the period, divided by 365,
multiplied by 184 (to reflect the one-half year period).
www.MAINSTAYfunds.com 5
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-TERM INVESTMENTS
(COLLATERAL FROM SECURITIES LIABILITIES IN EXCESS OF CASH
COMMON STOCKS LENDING IS 6.5%) AND OTHER ASSETS
- ------------- --------------------------- -----------------------------
99.7% 6.5% -6.2%
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. MBNA Corp.
2. ExxonMobil Corp.
3. General Electric Co.
4. Microsoft Corp.
5. Pfizer, Inc.
6. Intel Corp.
7. International Business Machines Corp.
8. S&P 500 Index -- SPDR Trust Series 1
9. AT&T Corp.
10. Cisco Systems, 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
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invest at least 80% of its assets in common stocks. We seek to
identify companies that are considered to have a high probability of
outperforming the S&P 500(R) Index(1) over the following six to twelve months.
Our underlying stock-selection process is based on a quantitative process that
ranks stocks based on traditional value measures, earnings quality, and
technical factors. These stocks are then generally held in larger or smaller
proportions based on their relative attractiveness. On occasion, trading
strategies that seek to realize returns over shorter periods may be employed.
The Fund normally invests in common stocks of well-established U.S. companies,
primarily those with large capitalizations. The Fund is managed with a core
orientation (including both growth and value equities). We use a bottom-up
approach that assesses 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 security if we no longer believe it will
contribute to meeting the investment objective of the Fund.
WHAT WERE THE MAJOR FACTORS AFFECTING THE STOCK MARKET DURING THE 12 MONTHS
ENDED OCTOBER 31, 2005?
For the 12 months ended October 31, 2005, all broadly watched equity indices
provided positive performance. Mid- and small-capitalization stocks generally
outperformed their large-cap counterparts. The market favored value stocks over
growth stocks at all capitalization levels. Despite wide fluctuations in
crude-oil prices, instability in many regions of the world, and the devastation
caused by hurricanes Katrina and Rita, the U.S. stock market posted significant
gains during the 12 months ended October 31, 2005.
The Federal Open Market Committee continued to raise its target for the federal
funds rate, with eight 25-basis-point increases during the reporting period. (A
basis point is one-hundredth of a percentage point.) At the end of October 2005,
the target rate stood at 3.75%, its highest level in more than four years. Among
the considerations that influenced the gradual tightening policy were mounting
inflationary pressures, low unemployment, an upward path of record energy
prices, and growing labor costs.
WERE THERE ANY CHANGES IN THE FUND'S POSITIONING OR MANAGEMENT DURING THE
REPORTING PERIOD?
MainStay Common Stock Fund uses a quantitative model. There were minor
adjustments to the model during the reporting period. We added a "change in
shares outstanding" factor and an "industry relative price to cash flow" factor.
The Fund has maintained a fairly neutral positioning during the reporting
period, with a projected beta very close to one.(2)
HOW WAS THE FUND ALLOCATED RELATIVE TO THE S&P 500(R) INDEX DURING THE REPORTING
PERIOD?
During the 12 months ended October 31, 2005, the Fund was overweighted relative
to the S&P 500(R) Index in the utilities, energy, information technology,
financials, and telecommunication services sectors. During the reporting period,
the Fund was under-weighted relative to the Index in the consumer staples,
industrials, consumer discretionary, materials, and health care sectors.
WHICH SECTORS AND INDIVIDUAL STOCKS MADE THE MOST SUBSTANTIAL POSITIVE
CONTRIBUTIONS TO THE FUND'S PERFORMANCE DURING THE 12-MONTH REPORTING PERIOD?
The Fund's five strongest-performing sectors were energy, financials, health
care, utilities, and consumer staples.
Among individual stocks, the strongest contributors to the Fund's performance
were ConocoPhillips, an integrated global energy company that continued to post
high earnings; UnitedHealth Group, a health care service provider that increased
earnings, lowered costs, and achieved higher membership; and the parent company
of Philip Morris and Kraft Foods, Altria Group, which benefited from optimism
over favorable court rulings.
WHICH SECTORS AND INDIVIDUAL STOCKS DETRACTED FROM THE FUND'S PERFORMANCE?
The Fund's five weakest-performing sectors during the 12-month reporting period
were telecommunication services, consumer discretionary, materials, industrials,
and information technology.
1. See footnote on page 4 for more information on the S&P 500(R) Index.
2. Beta is a measure of the volatility of a stock in relation to the market as a
whole. The S&P 500(R) Index has a beta of one. Stocks with a higher beta tend
to be more volatile than the market. Stocks with a lower beta tend to rise
and fall more slowly than the market.
www.MAINSTAYfunds.com 7
Among individual stocks, the weakest contributors to the Fund's performance were
Pfizer, a pharmaceutical company whose shares fell on negative news about
Celebrex; Fannie Mae, a government-sponsored mortgage provider that experienced
accounting problems; and Verizon Communications, a communication services
provider. Verizon Communications' shares declined when competitor Sprint merged
with Nextel Communications.
WERE THERE ANY SIGNIFICANT EQUITY PURCHASES OR SALES DURING THE REPORTING
PERIOD?
The Fund uses a quantitative model whose major inputs include
price-to-cash-flow, earnings trends, earnings quality, and price trends. A
combination of these factors may be used in determining additions to the Fund's
portfolio. In some instances, stocks are included in the Fund for
diversification and risk-control purposes even if they score poorly in the
model.
From November 2004 through July 2005, the Fund established a position in Vertex
Pharmaceuticals, a biotechnology company whose stock advanced when the company
announced that it would be streamlining its developmental pipeline. SanDisk
Corp. was purchased for the Fund in August 2005. The company, which designs,
develops, and markets flash-storage card products used in consumer electronics,
benefited from continued strong demand. From December 2004 through June 2005,
the Fund established a position in Murphy Oil. This holding company, which
engages in the exploration, production, refining, and marketing of oil and gas,
nearly doubled its profit because of higher energy prices.
We sold the Fund's entire positions in Delta Air Lines, Toys "R" Us, and Storage
Technology during the reporting period. Toys "R" Us and Storage Technology were
sold at a profit, but Delta Air Lines was sold at a loss. Delta Air Lines
struggled with increased competition and higher fuel prices. Toys "R" Us, which
sells toys, children's apparel, and baby products, had its stock bought out by a
private equity partnership. Storage Technology, a leading storage company, was
sold when our quantitative model indicated that its shares had become
overvalued.
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 Common Stock Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (99.7%)+
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.4%)
Boeing Co. (The) 27,300 $ 1,764,672
Goodrich Corp. 3,645 131,475
Honeywell International, Inc. 5,981 204,550
Lockheed Martin Corp. 14,180 858,741
Precision Castparts Corp. 5,786 274,025
Raytheon Co. 6,453 238,438
Rockwell Collins, Inc. 6,338 290,407
------------
3,762,308
------------
AIR FREIGHT & LOGISTICS (0.4%)
FedEx Corp. 4,738 435,564
Ryder System, Inc. 2,787 110,560
United Parcel Service, Inc. Class B 1,727 125,967
------------
672,091
------------
AIRLINES (0.0%) ++
Alaska Air Group, Inc. (a) 949 29,922
------------
AUTO COMPONENTS (0.1%)
ArvinMeritor, Inc. 503 8,063
Dana Corp. 1,132 8,501
Delphi Corp. 7,682 3,102
Goodyear Tire & Rubber Co. (The) (a)(b) 7,712 120,616
Lear Corp. 482 14,682
Visteon Corp. (a) 3,752 31,254
------------
186,218
------------
AUTOMOBILES (0.9%)
Ford Motor Co. 80,636 670,892
General Motors Corp. (b) 17,417 477,226
Harley-Davidson, Inc. (b) 4,387 217,288
------------
1,365,406
------------
BEVERAGES (0.7%)
Coca-Cola Co. (The) 9,750 417,105
Coca-Cola Enterprises, Inc. 4,347 82,158
Constellation Brands, Inc. Class A (a) 1,373 32,320
Pepsi Bottling Group, Inc. (The) 6,499 184,767
PepsiCo, Inc. 5,410 319,623
------------
1,035,973
------------
BIOTECHNOLOGY (0.8%)
Amgen, Inc. (a) 12,962 982,001
Applera Corp.-Applied BioSystems Group 1,703 41,332
Biogen Idec, Inc. (a)(b) 2,342 95,155
Invitrogen Corp. (a) 1,153 73,319
Techne Corp. (a) 834 45,219
Vertex Pharmaceuticals, Inc. (a) 1,177 26,777
------------
1,263,803
------------
BUILDING PRODUCTS (0.4%)
Masco Corp. 19,012 541,842
York International Corp. 304 17,057
------------
558,899
------------
</Table>
<Table>
<Caption>
SHARES VALUE
CAPITAL MARKETS (4.5%)
A.G. Edwards, Inc. 2,815 $ 119,131
Ameriprise Financial, Inc. (a) 5,887 219,107
Charles Schwab Corp. (The) 14,995 227,924
E*TRADE Financial Corp. (a) 16,147 299,527
Eaton Vance Corp. 846 21,057
Federated Investors, Inc. Class B 1,223 42,817
Franklin Resources, Inc. 2,142 189,289
Goldman Sachs Group, Inc. (The) 1,916 242,125
Investors Financial Services Corp. 543 20,732
Janus Capital Group, Inc. 6,799 119,322
LaBranche & Co., Inc. (a)(b) 875 8,347
Legg Mason, Inc. 4,836 518,951
Lehman Brothers Holdings, Inc. 1,943 232,519
Merrill Lynch & Co., Inc. 12,853 832,103
Morgan Stanley 17,423 947,985
Raymond James Financial, Inc. 410 13,952
V S&P 500 Index--SPDR Trust Series 1 (b)(c) 23,520 2,828,280
State Street Corp. 5,342 295,039
------------
7,178,207
------------
CHEMICALS (0.8%)
Chemtura Corp. 3,403 36,412
Dow Chemical Co. (The) 91 4,173
E.I. du Pont de Nemours & Co. 17,914 746,835
Eastman Chemical Co. 1,644 86,737
FMC Corp. (a) 1,079 58,741
Monsanto Co. 3,939 248,196
PPG Industries, Inc. 64 3,838
Scotts Miracle-Gro Co. (The) Class A 337 29,585
Sensient Technologies Corp. 1,617 28,605
------------
1,243,122
------------
COMMERCIAL BANKS (2.8%)
Bank of Hawaii Corp. 736 37,816
BB&T Corp. (b) 11,888 503,338
Colonial BancGroup, Inc. (The) 981 23,887
Comerica, Inc. 5,939 343,155
Compass Bancshares, Inc. 2,652 129,312
First Horizon National Corp. 1,824 70,552
</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, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
COMMERCIAL BANKS (CONTINUED)
Hibernia Corp. Class A 960 $ 28,483
Huntington Bancshares, Inc. (b) 1,353 31,471
KeyCorp 11,493 370,534
National City Corp. (b) 25,619 825,700
PNC Financial Services Group, Inc. 1,793 108,853
Regions Financial Corp. 3,889 126,587
SunTrust Banks, Inc. 3,317 240,416
SVB Financial Group (a) 256 12,726
U.S. Bancorp (b) 13,943 412,434
Unizan Financial Corp. 4,153 108,975
Wachovia Corp. 2,054 103,768
Wells Fargo & Co. 14,600 878,920
Wilmington Trust Corp. 1,403 53,188
Zions Bancorporation 677 49,739
------------
4,459,854
------------
COMMERCIAL SERVICES & SUPPLIES (1.4%)
Adesa, Inc. 1,201 25,701
Allied Waste Industries, Inc. (a)(b) 4,926 40,098
Brink's Co. (The) 395 15,512
Cendant Corp. 45,944 800,344
Corporate Executive Board Co. (The) 288 23,800
Dun & Bradstreet Corp. (The) (a) 1,480 93,714
Equifax, Inc. 5,716 197,031
Herman Miller, Inc. 1,120 30,699
HNI Corp. 1,160 56,724
R.R. Donnelley & Sons Co. 1,367 47,872
Republic Services, Inc. 1,785 63,100
Robert Half International, Inc. 1,233 45,473
Stericycle, Inc. (a) 310 17,844
Waste Management, Inc. 23,406 690,711
------------
2,148,623
------------
COMMUNICATIONS EQUIPMENT (3.4%)
ADC Telecommunications, Inc. (a) 809 14,117
ADTRAN, Inc. 969 29,312
V Cisco Systems, Inc. (a) 144,929 2,529,011
CommScope, Inc. (a) 403 7,867
Corning, Inc. (a) 61,321 1,231,939
Dycom Industries, Inc. (a) 283 5,640
Motorola, Inc. 71,948 1,594,368
Powerwave Technologies, Inc. (a)(b) 3,081 34,538
QUALCOMM, Inc. 264 10,497
------------
5,457,289
------------
COMPUTERS & PERIPHERALS (4.2%)
Apple Computer, Inc. (a) 13,420 772,858
Dell, Inc. (a) 22,326 711,753
Hewlett-Packard Co. 67,878 1,903,299
Imation Corp. 1,257 53,812
V International Business Machines Corp. 34,577 2,831,165
Lexmark International, Inc. (a) 848 35,209
NCR Corp. (a) 2,755 83,256
SanDisk Corp. (a) 1,272 74,908
Sun Microsystems, Inc. (a) 51,825 207,300
Western Digital Corp. (a) 2,604 31,508
------------
6,705,068
------------
CONSTRUCTION & ENGINEERING (0.0%)++
Granite Construction, Inc. 472 16,100
Quanta Services, Inc. (a) 4,591 52,751
------------
68,851
------------
CONSTRUCTION MATERIALS (0.3%)
Martin Marietta Materials, Inc. 2,034 160,503
Vulcan Materials Co. (b) 4,469 290,485
------------
450,988
------------
</Table>
<Table>
<Caption>
SHARES VALUE
CONSUMER FINANCE (4.3%)
American Express Co. 35,694 $ 1,776,490
AmeriCredit Corp. (a) 6,376 142,504
Capital One Financial Corp. 5,355 408,854
V MBNA Corp. 176,786 4,520,418
------------
6,848,266
------------
CONTAINERS & PACKAGING (0.1%)
Longview Fibre Co. 1,455 27,354
Pactiv Corp. (a) 6,462 127,301
------------
154,655
------------
DISTRIBUTORS (0.0%)++
Genuine Parts Co. 903 40,066
------------
DIVERSIFIED CONSUMER SERVICES (0.2%)
Career Education Corp. (a) 2,284 81,288
Education Management Corp. (a) 487 15,019
H&R Block, Inc. 7,525 187,071
Sotheby's Holdings, Inc. Class A (a) 322 5,014
------------
288,392
------------
DIVERSIFIED FINANCIAL SERVICES (2.6%)
CIT Group, Inc. 9,084 415,411
Citigroup, Inc. 51,273 2,347,278
JPMorgan Chase & Co. 21,872 800,953
Moody's Corp. 1,808 96,294
Principal Financial Group, Inc. 10,148 503,645
------------
4,163,581
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (3.4%)
V AT&T Corp. 138,507 2,739,668
CenturyTel, Inc. 4,888 159,984
</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.
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 TELECOMMUNICATION SERVICES (CONTINUED)
Cincinnati Bell, Inc. (a) 10,788 $ 42,720
Citizens Communications Co. (b) 6,899 84,444
Qwest Communications International, Inc. (a)(b) 33,594 146,470
Verizon Communications, Inc. 69,635 2,194,199
------------
5,367,485
------------
ELECTRIC UTILITIES (2.2%)
Allegheny Energy, Inc. (a)(b) 5,677 160,432
American Electric Power Co., Inc. 16,927 642,549
Cinergy Corp. 25,408 1,013,779
DPL, Inc. 1,871 48,216
Edison International 14,255 623,799
Entergy Corp. 6,592 466,186
FirstEnergy Corp. 8,370 397,575
Pepco Holdings, Inc. 1,360 29,226
Pinnacle West Capital Corp. 620 25,891
Sierra Pacific Resources (a) 5,593 72,429
------------
3,480,082
------------
ELECTRICAL EQUIPMENT (0.1%)
Emerson Electric Co. 3,001 208,720
Thomas & Betts Corp. (a) 165 6,422
------------
215,142
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.4%)
Agilent Technologies, Inc. (a) 7,125 228,071
Amphenol Corp. Class A 560 22,383
Arrow Electronics, Inc. (a) 3,422 100,983
Avnet, Inc. (a) 5,981 137,862
Plexus Corp. (a) 624 11,026
Sanmina-SCI Corp. (a) 11,258 41,092
Solectron Corp. (a)(b) 42,543 150,177
------------
691,594
------------
ENERGY EQUIPMENT & SERVICES (0.5%)
BJ Services Co. 2,345 81,489
Cooper Cameron Corp. (a) 722 53,233
Helmerich & Payne, Inc. 2,244 124,318
Patterson-UTI Energy, Inc. 2,616 89,284
Transocean, Inc. (a) 9,043 519,882
------------
868,206
------------
</Table>
<Table>
<Caption>
SHARES VALUE
FOOD & STAPLES RETAILING (0.9%)
Albertson's, Inc. 14,655 $ 367,987
Kroger Co. (The) (a) 23,307 463,809
Safeway, Inc. (b) 16,664 387,605
SUPERVALU, Inc. 4,941 155,296
Whole Foods Market, Inc. (b) 865 124,672
------------
1,499,369
------------
FOOD PRODUCTS (1.0%)
Archer-Daniels-Midland Co. 21,349 520,275
ConAgra Foods, Inc. (b) 5,993 139,457
Dean Foods Co. (a) 6,554 236,927
General Mills, Inc. (b) 7,577 365,666
JM Smucker Co. (The) 409 18,695
Kellogg Co. 2,634 116,344
McCormick & Co., Inc. 1,911 57,884
Tyson Foods, Inc. Class A 5,403 96,173
------------
1,551,421
------------
GAS UTILITIES (0.2%)
Equitable Resources, Inc. (b) 2,607 100,761
Nicor, Inc. 1,929 75,617
Questar Corp. 1,822 143,482
------------
319,860
------------
HEALTH CARE EQUIPMENT & SUPPLIES (0.9%)
Bausch & Lomb, Inc. 1,176 87,247
Baxter International, Inc. 14,985 572,877
Beckman Coulter, Inc. 468 23,054
Cytyc Corp. (a)(b) 795 20,153
Edwards Lifesciences Corp. (a) 878 36,332
Guidant Corp. 2,192 138,096
Hospira, Inc. (a) 4,067 162,070
Intuitive Surgical, Inc. (a) 242 21,473
PerkinElmer, Inc. 1,799 39,704
Thermo Electron Corp. (a)(b) 2,531 76,411
Varian Medical Systems, Inc. (a) 4,816 219,417
Varian, Inc. (a) 543 19,966
------------
1,416,800
------------
HEALTH CARE PROVIDERS & SERVICES (5.9%)
Aetna, Inc. 12,717 1,126,218
AmerisourceBergen Corp. 4,585 349,698
Apria Healthcare Group, Inc. (a) 1,489 34,351
Cardinal Health, Inc. 18,743 1,171,625
Caremark Rx, Inc. (a) 16,063 841,701
CIGNA Corp. 5,695 659,880
Community Health Systems, Inc. (a) 2,627 97,488
Coventry Health Care, Inc. (a) 2,388 128,928
HCA, Inc. (b) 18,755 903,803
Health Net, Inc. (a) 4,718 220,991
Humana, Inc. (a) 6,060 269,003
Lincare Holdings, Inc. (a) 2,285 93,342
Manor Care, Inc. 1,140 42,465
McKesson Corp. 13,093 594,815
Medco Health Solutions, Inc. (a) 6,169 348,548
Omnicare, Inc. 735 39,763
PacifiCare Health Systems, Inc. (a) 1,940 159,778
Patterson Cos., Inc. (a) 873 36,125
Tenet Healthcare Corp. (a) 3,350 28,207
</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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES (CONTINUED)
Triad Hospitals, Inc. (a) 2,393 $ 98,424
UnitedHealth Group, Inc. 34,611 2,003,631
Universal Health Services, Inc. Class B 2,500 117,850
------------
9,366,634
------------
HOTELS, RESTAURANTS & LEISURE (0.9%)
Boyd Gaming Corp. 470 19,387
Brinker International, Inc. (a)(b) 3,868 147,448
CBRL Group, Inc. 2,056 71,343
Darden Restaurants, Inc. 6,209 201,296
GTECH Holdings Corp. 4,266 135,829
Harrah's Entertainment, Inc. 1,142 69,068
Hilton Hotels Corp. 10,957 213,114
Marriott International, Inc. Class A 1,243 74,108
Ruby Tuesday, Inc. (b) 1,937 42,440
Wendy's International, Inc. 2,490 116,333
Yum! Brands, Inc. 6,287 319,820
------------
1,410,186
------------
HOUSEHOLD DURABLES (0.5%)
American Greetings Corp. Class A (b) 2,987 75,422
Black & Decker Corp. (The) 529 43,447
Fortune Brands, Inc. 452 34,338
Furniture Brands International, Inc. (b) 1,136 20,618
Lennar Corp. Class A 1,213 67,419
Maytag Corp. 3,239 55,776
Newell Rubbermaid, Inc. 12,025 276,455
Ryland Group, Inc. 751 50,542
Toll Brothers, Inc. (a)(b) 3,972 146,607
Tupperware Corp. 1,986 45,539
Whirlpool Corp. (b) 508 39,878
------------
856,041
------------
HOUSEHOLD PRODUCTS (2.4%)
Clorox Co. (The) 5,729 310,053
Colgate-Palmolive Co. 375 19,860
Energizer Holdings, Inc. (a) 3,091 156,065
Kimberly-Clark Corp. 20,288 1,153,170
Procter & Gamble Co. (The) 38,797 2,172,217
------------
3,811,365
------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.9%)
AES Corp. (The) (a) 21,415 340,284
Constellation Energy Group, Inc. 1,122 61,486
TXU Corp. 10,102 1,017,776
------------
1,419,546
------------
INDUSTRIAL CONGLOMERATES (2.8%)
V General Electric Co. 128,366 4,352,891
Teleflex, Inc. 591 39,118
Textron, Inc. 1,890 136,156
------------
4,528,165
------------
</Table>
<Table>
<Caption>
SHARES VALUE
INSURANCE (7.7%)
ACE Ltd. 12,511 $ 651,823
AFLAC, Inc. 21,861 1,044,519
Allmerica Financial Corp. (a) 853 32,499
American Financial Group, Inc. 1,113 38,042
American International Group, Inc. 26,589 1,722,967
AmerUs Group Co. 1,707 100,918
Aon Corp. 13,896 470,380
Chubb Corp. (The) 7,120 661,946
Everest Re Group Ltd. 2,057 204,569
Fidelity National Financial, Inc. 1,237 46,338
Hartford Financial Services Group, Inc. (The) 3,480 277,530
HCC Insurance Holdings, Inc. 3,043 91,290
Horace Mann Educators Corp. 868 16,848
Loews Corp. 1,956 181,869
MBIA, Inc. (b) 1,982 115,432
MetLife, Inc. 31,640 1,563,332
Old Republic International Corp. 1,154 29,900
Progressive Corp. (The) 8,675 1,004,652
Protective Life Corp. 3,041 133,317
Prudential Financial, Inc. 18,877 1,374,057
SAFECO Corp. 3,417 190,327
St. Paul Travelers Cos., Inc. (The) 29,459 1,326,539
Torchmark Corp. 789 41,683
UnumProvident Corp. (b) 12,838 260,483
W.R. Berkley Corp. 4,356 190,357
XL Capital Ltd. Class A 6,126 392,432
------------
12,164,049
------------
IT SERVICES (1.2%)
Acxiom Corp. 3,698 78,915
Ceridian Corp. (a) 1,049 22,984
Cognizant Technology Solutions Corp. Class A (a) 1,764 77,581
Computer Sciences Corp. (a) 8,113 415,791
CSG Systems International, Inc. (a) 1,699 39,943
DST Systems, Inc. (a) 1,538 86,313
First Data Corp. (b) 25,207 1,019,623
Fiserv, Inc. (a) 1,368 59,754
Sabre Holdings Corp. Class A 3,859 75,366
Unisys Corp. (a) 2,049 10,470
------------
1,886,740
------------
</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.
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)
- -----------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS (0.1%)
Brunswick Corp. 681 $ 25,967
Eastman Kodak Co. (b) 4,223 92,484
Hasbro, Inc. 2,543 47,910
------------
166,361
------------
MACHINERY (0.4%)
Cummins, Inc. (b) 640 54,637
Deere & Co. (b) 1,565 94,964
Eaton Corp. 1,054 62,007
Illinois Tool Works, Inc. (b) 2,086 176,809
Ingersoll-Rand Co. Class A 3,039 114,844
Joy Global, Inc. 1,166 53,484
Navistar International Corp. (a) 441 12,136
Nordson Corp. 230 8,549
Parker-Hannifin Corp. 1,699 106,493
SPX Corp. (b) 566 24,349
------------
708,272
------------
MARINE (0.0%) ++
Alexander & Baldwin, Inc. 1,255 61,420
------------
MEDIA (1.9%)
Catalina Marketing Corp. 615 16,027
Clear Channel Communications, Inc. 7,823 237,976
Comcast Corp. Class A (a)(b) 1,044 29,055
Emmis Communications Corp. Class A (a)(b) 1,308 25,598
Gannett Co., Inc. 6,965 436,427
Knight-Ridder, Inc. (b) 485 25,889
Media General, Inc. Class A 333 17,566
Omnicom Group, Inc. (b) 2,921 242,326
Readers Digest Association, Inc. (The) 2,909 44,566
Time Warner, Inc. 12,234 218,132
Viacom, Inc. Class B 53,356 1,652,435
Walt Disney Co. (The) 5,021 122,362
------------
3,068,359
------------
METALS & MINING (0.7%)
Freeport-McMoRan Copper & Gold, Inc. Class B 7,818 386,366
Nucor Corp. 1,012 60,568
Phelps Dodge Corp. 4,236 510,311
Steel Dynamics, Inc. 278 8,610
United States Steel Corp. 2,328 85,042
------------
1,050,897
------------
MULTILINE RETAIL (1.9%)
Dillard's, Inc. Class A 1,825 37,796
Dollar Tree Stores, Inc. (a) 3,216 69,337
Federated Department Stores, Inc. 9,628 590,870
J.C. Penney Co., Inc. 7,758 397,210
Nordstrom, Inc. 10,437 361,642
Saks, Inc. (a) 4,769 86,557
Sears Holdings Corp. (a)(b) 2,361 283,910
Target Corp. 20,675 1,151,391
------------
2,978,713
------------
</Table>
<Table>
<Caption>
SHARES VALUE
MULTI-UTILITIES (2.1%)
Centerpoint Energy, Inc. (b) 6,388 $ 84,577
CMS Energy Corp. (a) 6,113 91,145
Consolidated Edison, Inc. (b) 1,536 69,888
DTE Energy Co. 1,105 47,736
MDU Resources Group, Inc. 3,469 114,373
NiSource, Inc. 3,708 87,694
PG&E Corp. 16,161 587,937
Public Service Enterprise Group, Inc. 33,944 2,134,738
Puget Energy, Inc. 755 16,187
SCANA Corp. 811 32,172
TECO Energy, Inc. 2,775 48,007
Wisconsin Energy Corp. 1,720 65,068
------------
3,379,522
------------
OFFICE ELECTRONICS (0.1%)
Xerox Corp. (a) 12,835 174,171
------------
OIL, GAS & CONSUMABLE FUELS (10.4%)
Amerada Hess Corp. 2,936 367,294
Anadarko Petroleum Corp. 7,078 642,045
Arch Coal, Inc. (b) 399 30,751
Burlington Resources, Inc. 16,250 1,173,575
Chevron Corp. 14,408 822,265
ConocoPhillips 36,417 2,380,943
Devon Energy Corp. 19,833 1,197,517
El Paso Corp. 2,704 32,069
EOG Resources, Inc. (b) 1,852 125,529
V ExxonMobil Corp. 79,202 4,446,400
Forest Oil Corp. (a) 507 22,146
Kerr-McGee Corp. 4,419 375,792
Marathon Oil Corp. 15,721 945,775
Newfield Exploration Co. (a) 4,501 204,030
Occidental Petroleum Corp. 17,275 1,362,652
Overseas Shipholding Group, Inc. 224 10,662
Peabody Energy Corp. 955 74,643
Pioneer Natural Resources Co. 1,930 96,596
Plains Exploration & Production Co. (a) 1,802 70,278
Pogo Producing Co. (b) 1,318 66,559
Sunoco, Inc. 6,009 447,671
</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 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS (CONTINUED)
Valero Energy Corp. 11,526 $ 1,212,996
Williams Cos., Inc. (The) 16,570 369,511
------------
16,477,699
------------
PAPER & FOREST PRODUCTS (0.4%)
Georgia-Pacific Corp. 9,482 308,449
Louisiana-Pacific Corp. 1,481 36,921
MeadWestvaco Corp. 5,480 143,686
Potlatch Corp. 1,046 46,788
Weyerhaeuser Co. 925 58,590
------------
594,434
------------
PHARMACEUTICALS (4.6%)
Abbott Laboratories 490 21,095
Allergan, Inc. 1,438 128,413
Barr Pharmaceuticals, Inc. (a) 583 33,493
Eli Lilly & Co. (b) 4,793 238,643
Forest Laboratories, Inc. (a) 12,716 482,064
Johnson & Johnson 26,373 1,651,477
King Pharmaceuticals, Inc. (a) 5,181 79,943
Merck & Co., Inc. 54,304 1,532,459
Mylan Laboratories, Inc. 631 12,122
V Pfizer, Inc. 143,859 3,127,495
Watson Pharmaceuticals, Inc. (a) 2,195 75,859
------------
7,383,063
------------
REAL ESTATE (0.1%)
Apartment Investment & Management Co. Class A 1,254 48,154
Highwoods Properties, Inc. 374 10,551
Public Storage, Inc. (b) 1,325 87,715
------------
146,420
------------
ROAD & RAIL (0.9%)
Burlington Northern Santa Fe Corp. 5,040 312,782
CNF, Inc. 1,915 107,757
CSX Corp. 6,278 287,595
Norfolk Southern Corp. 12,200 490,440
Swift Transportation Co., Inc. (a) 2,196 40,077
Union Pacific Corp. 1,654 114,424
Yellow Roadway Corp. (a) 308 13,999
------------
1,367,074
------------
</Table>
<Table>
<Caption>
SHARES VALUE
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (3.9%)
Advanced Micro Devices, Inc. (a) 6,475 $ 150,350
Fairchild Semiconductor International, Inc. (a) 879 13,537
Freescale Semiconductor, Inc. Class B (a) 17,611 420,551
V Intel Corp. 126,504 2,972,844
Lam Research Corp. (a) 3,032 102,300
LSI Logic Corp. (a) 11,739 95,203
MEMC Electronic Materials, Inc. (a) 1,138 20,416
Micron Technology, Inc. (a) 26,766 347,690
National Semiconductor Corp. 15,221 344,451
NVIDIA Corp. (a)(b) 3,492 117,157
Texas Instruments, Inc. 56,590 1,615,645
------------
6,200,144
------------
SOFTWARE (3.1%)
Activision, Inc. (a) 4,139 65,267
Autodesk, Inc. 9,107 410,999
BMC Software, Inc. (a)(b) 9,601 188,084
Cadence Design Systems, Inc. (a) 1,989 31,784
Citrix Systems, Inc. (a) 2,259 62,281
Computer Associates International, Inc. 198 5,538
Compuware Corp. (a) 11,029 89,225
Fair Isaac Corp. 941 39,296
Intuit, Inc. (a) 5,532 254,085
Macromedia, Inc. (a) 1,213 53,275
McAfee, Inc. (a) 6,926 207,988
Mercury Interactive Corp. (a) 533 18,543
V Microsoft Corp. 126,369 3,247,683
Novell, Inc. (a) 8,166 62,225
Parametric Technology Corp. (a) 3,357 21,854
Reynolds & Reynolds Co. (The) Class A 369 9,793
Siebel Systems, Inc. 1,196 12,379
Sybase, Inc. (a) 2,580 57,405
Synopsys, Inc. (a) 6,277 118,949
------------
4,956,653
------------
SPECIALTY RETAIL (2.9%)
Abercrombie & Fitch Co. Class A 3,795 197,302
Advance Auto Parts, Inc. (a) 3,161 118,538
Aeropostale, Inc. (a) 385 7,523
American Eagle Outfitters, Inc. 1,832 43,144
AnnTaylor Stores Corp. (a) 527 12,790
AutoNation, Inc. (a) 1,288 25,605
AutoZone, Inc. (a) 2,315 187,284
Barnes & Noble, Inc. 2,622 94,812
Best Buy Co., Inc. 1,885 83,430
Borders Group, Inc. 2,609 51,215
Chico's FAS, Inc. (a) 3,914 154,760
Circuit City Stores, Inc. 2,394 42,589
Claire's Stores, Inc. 710 18,496
GameStop Corp. Class A (a) 166 5,890
Gap, Inc. (The) 8,358 144,426
Home Depot, Inc. (The) 25,744 1,056,534
Limited Brands, Inc. 8,231 164,702
Michaels Stores, Inc. 3,967 131,228
</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.
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)
- -----------------------------------------------------------------------------
SPECIALTY RETAIL (CONTINUED)
Office Depot, Inc. (a) 11,744 $ 323,312
OfficeMax, Inc. 1,024 28,692
O'Reilly Automotive, Inc. (a) 2,349 66,242
Pacific Sunwear of California, Inc. (a) 1,607 40,207
Payless ShoeSource, Inc. (a) 2,950 54,192
RadioShack Corp. 1,914 42,299
Rent-A-Center, Inc. (a) 2,682 48,330
Staples, Inc. 10,272 233,483
TJX Cos., Inc. (The) 7,500 161,475
Wal-Mart Stores, Inc. 21,681 1,025,728
------------
4,564,228
------------
TEXTILES, APPAREL & LUXURY GOODS (0.2%)
Coach, Inc. (a) 8,655 278,518
Jones Apparel Group, Inc. 1,750 47,740
Polo Ralph Lauren Corp. 432 21,254
Reebok International Ltd. 367 20,937
Timberland Co. Class A (a) 398 11,204
------------
379,653
------------
THRIFTS & MORTGAGE FINANCE (1.7%)
Countrywide Financial Corp. 13,053 414,694
Fannie Mae 15,417 732,616
Freddie Mac 2,327 142,761
Independence Community Bank Corp. (b) 3,362 132,967
IndyMac Bancorp, Inc. 474 17,694
PMI Group, Inc. (The) 656 26,161
Radian Group, Inc. 2,484 129,416
Washington Mutual, Inc. 26,157 1,035,817
------------
2,632,126
------------
TOBACCO (1.3%)
Altria Group, Inc. 24,790 1,860,490
UST, Inc. 3,687 152,605
------------
2,013,095
------------
TRADING COMPANIES & DISTRIBUTORS (0.1%)
GATX Corp. 2,173 81,205
United Rentals, Inc. (a) 3,028 59,258
------------
140,463
------------
WIRELESS TELECOMMUNICATION SERVICES (0.7%)
Sprint Nextel Corp. 47,245 1,101,281
Telephone & Data Systems, Inc. 745 28,176
------------
1,129,457
------------
Total Common Stocks
(Cost $151,031,831) 158,506,491
------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (6.5%)
- -----------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.2%)
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (d)(e) $378,301 $ 378,301
------------
Total Certificate of Deposit
(Cost $378,301) 378,301
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL PAPER (0.4%)
Compass Securitization
3.993%, due 11/22/05 (d) $270,215 $ 270,215
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (d) 162,129 162,129
Silver Tower U.S. Funding
3.932%, due 11/15/05 (d) 160,422 160,422
------------
Total Commercial Paper
(Cost $592,766) 592,766
------------
<Caption>
SHARES
INVESTMENT COMPANY (1.6%)
BGI Institutional Money Market Fund (d) 2,464,447 2,464,447
------------
Total Investment Company
(Cost $2,464,447) 2,464,447
------------
<Caption>
PRINCIPAL
AMOUNT
TIME DEPOSITS (4.3%)
Bank of the West (The)
4.02%, due 12/8/05 (d) $1,026,816 1,026,816
Barclays
3.92%, due 12/5/05 (d) 432,340 432,340
3.94%, due 11/28/05 (d) 486,387 486,387
Credit Suisse First Boston Corp.
3.74%, due 11/1/05 (d) 378,301 378,301
Deutsche Bank
3.95%, due 12/2/05 (d) 432,344 432,344
First Tennessee National Corp.
3.88%, due 11/14/05 (d) 432,344 432,344
Fortis Bank
4.00%, due 12/12/05 (d) 486,387 486,387
Halifax Bank of Scotland
3.75%, due 11/1/05 (d) 432,344 432,344
Keybank
4.00%, due 11/1/05 (d) 483,447 483,447
Marshall & Ilsley Bank
3.97%, due 12/29/05 (d) 432,344 432,344
Societe Generale
3.77%, due 11/1/05 (d) 918,730 918,730
</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 15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- -----------------------------------------------------------------------------
TIME DEPOSITS (CONTINUED)
UBS AG
4.01%, due 12/13/05 (d) $432,344 $ 432,344
Wells Fargo & Co.
4.00%, due 11/25/05 (d) 432,344 432,344
------------
Total Time Deposits
(Cost $6,806,472) 6,806,472
------------
Total Short-Term Investments
(Cost $10,241,986) 10,241,986
------------
Total Investments
(Cost $161,273,817) (f) 106.2% 168,748,477(g)
Liabilities in Excess of
Cash and Other Assets (6.2) (9,824,101)
---------- ------------
Net Assets 100.0% $158,924,376
========== ============
</Table>
<Table>
+ Percentages indicated are based on Fund net assets.
++ Less than one tenth of a percent.
V Among the Fund's 10 largest holdings, excluding short-term investments. May
be subject to change daily.
(a) Non-income producing security.
(b) Represents security, or a portion thereof, which is out on loan.
(c) Exchange Traded Fund--represents a basket of securities that are traded on
an exchange.
(d) Represents security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(e) Floating rate. Rate shown is the rate in effect at October 31, 2005.
(f) The cost for federal income tax purposes is $162,205,132.
(g) At October 31, 2005 net unrealized appreciation was $6,543,345, 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 $12,505,462 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $5,962,117.
</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, 2005
<Table>
ASSETS:
Investment in securities, at value (identified
cost $161,273,817) including $9,893,499
market value of securities loaned $168,748,477
Cash 835,001
Receivables:
Fund shares sold 386,149
Dividends and interest 169,724
Investment securities sold 46,393
Other assets 20,661
-------------
Total assets 170,206,405
-------------
LIABILITIES:
Securities lending collateral 10,241,986
Payables:
Investment securities purchased 643,178
Transfer agent 133,657
Fund shares redeemed 58,129
Manager 53,051
NYLIFE Distributors 53,018
Shareholder communication 45,365
Professional 26,096
Custodian 13,146
Accrued expenses 14,403
-------------
Total liabilities 11,282,029
-------------
Net assets $158,924,376
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 28,433
Class B 42,569
Class C 2,551
Class I 54,547
Additional paid-in capital 165,432,264
Accumulated undistributed net investment
income 539,396
Accumulated net realized loss on investments (14,650,044)
Net unrealized appreciation on investments 7,474,660
-------------
Net assets $158,924,376
=============
CLASS A
Net assets applicable to outstanding shares $ 35,886,352
=============
Shares of beneficial interest outstanding 2,843,309
=============
Net asset value per share outstanding $ 12.62
Maximum sales charge (5.50% of offering price) 0.73
-------------
Maximum offering price per share outstanding $ 13.35
=============
CLASS B
Net assets applicable to outstanding shares $ 50,815,321
=============
Shares of beneficial interest outstanding 4,256,907
=============
Net asset value and offering price per share
outstanding $ 11.94
=============
CLASS C
Net assets applicable to outstanding shares $ 3,045,462
=============
Shares of beneficial interest outstanding 255,145
=============
Net asset value and offering price per share
outstanding $ 11.94
=============
CLASS I
Net assets applicable to outstanding shares $ 69,177,241
=============
Shares of beneficial interest outstanding 5,454,710
=============
Net asset value and offering price per share
outstanding $ 12.68
=============
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 2,513,067
Interest 8,641
Income from securities loaned -- net 5,723
------------
Total income 2,527,431
------------
EXPENSES:
Manager 904,732
Transfer agent -- Classes A, B and C 483,554
Transfer agent -- Class I 54,251
Distribution -- Class B 401,783
Distribution -- Class C 22,811
Distribution/Service -- Class A 92,073
Service -- Class B 133,928
Service -- Class C 7,604
Professional 81,269
Custodian 62,984
Shareholder communication 53,927
Registration 52,863
Recordkeeping 39,591
Trustees 11,588
Miscellaneous 19,888
------------
Total expenses before reimbursement 2,422,846
Expense reimbursement from Manager (435,191)
------------
Net expenses 1,987,655
------------
Net investment income 539,776
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 5,348,262
Net change in unrealized appreciation on
investments 4,933,686
------------
Net realized and unrealized gain on investments 10,281,948
------------
Net increase in net assets resulting from
operations $10,821,724
============
</Table>
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 YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
INCREASE (DECREASE)
IN NET ASSETS:
Operations:
Net investment income (loss) $ 539,776 $ (482,199)
Net realized gain on
investments 5,348,262 13,500,040
Net change in unrealized
appreciation (depreciation)
on investments 4,933,686 (7,321,272)
---------------------------
Net increase in net assets
resulting from operations 10,821,724 5,696,569
---------------------------
Capital share transactions:
Net proceeds from sale of
shares:
Class A 5,515,785 5,169,738
Class B 5,493,154 6,295,159
Class C 744,231 722,432
Class I 72,005,439 --
---------------------------
83,758,609 12,187,329
Cost of shares redeemed:
Class A (8,254,644) (10,891,285)
Class B (13,379,710) (9,778,693)
Class C (911,526) (378,475)
Class I (4,633,637) --
---------------------------
(27,179,517) (21,048,453)
Increase (decrease) in net
assets derived from capital
share transactions 56,579,092 (8,861,124)
---------------------------
Net increase (decrease) in
net assets 67,400,816 (3,164,555)
NET ASSETS:
Beginning of year 91,523,560 94,688,115
---------------------------
End of year $158,924,376 $ 91,523,560
===========================
Accumulated undistributed net
investment income at end of
year $ 539,396 $ --
===========================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
------------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 11.41 $ 10.69 $ 9.02 $ 12.12 $ 14.74 $ 15.37
----------- ----------- ----------- ------- ------- -------
Net investment income
(loss)(a) 0.08 (d) (0.01) (0.01) (0.02) (0.05) (0.04)
Net realized and unrealized
gain (loss) on investments 1.13 0.73 1.68 (3.08) (2.57) (0.38)
----------- ----------- ----------- ------- ------- -------
Total from investment
operations 1.21 0.72 1.67 (3.10) (2.62) (0.42)
----------- ----------- ----------- ------- ------- -------
Less distributions:
From net realized gain on
investments -- -- -- -- -- (0.17)
In excess of net realized
gains -- -- -- -- -- (0.04)
----------- ----------- ----------- ------- ------- -------
Total distributions -- -- -- -- -- (0.21)
----------- ----------- ----------- ------- ------- -------
Net asset value at end of
period $ 12.62 $ 11.41 $ 10.69 $ 9.02 $ 12.12 $ 14.74
=========== =========== =========== ======= ======= =======
Total investment return(b) 10.60% 6.74% 18.51%(c) (25.58%) (17.77%) (2.70%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.67% (d) (0.05%) (0.06%)+ (0.24%) (0.42%) (0.26%)
Net expenses 1.38% 1.65% 1.65% + 1.65% 1.58% 1.49%
Expenses (before
reimbursement) 1.72% 1.77% 1.86% + 1.75% 1.58% 1.49%
Portfolio turnover rate 105% 136% 71% 130% 95% 70%
Net assets at end of period
(in 000's) $35,886 $34,957 $38,313 $28,639 $31,389 $38,040
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $10.87 $10.25 $ 8.71 $11.79 $14.45 $15.19
----------- ----------- ----------- ------ ------ ------
Net investment loss(a) (0.01)(d) (0.09) (0.06) (0.10) (0.15) (0.15)
Net realized and unrealized
gain (loss) on investments 1.08 0.71 1.60 (2.98) (2.51) (0.38)
----------- ----------- ----------- ------ ------ ------
Total from investment
operations 1.07 0.62 1.54 (3.08) (2.66) (0.53)
----------- ----------- ----------- ------ ------ ------
Less distributions:
From net realized gain on
investments -- -- -- -- -- (0.17)
In excess of net realized
gains -- -- -- -- -- (0.04)
----------- ----------- ----------- ------ ------ ------
Total distributions -- -- -- -- -- (0.21)
----------- ----------- ----------- ------ ------ ------
Net asset value at end of
period $11.94 $10.87 $10.25 $ 8.71 $11.79 $14.45
=========== =========== =========== ====== ====== ======
Total investment return(b) 9.84% 6.05% 17.68%(c) (26.12%) (18.41%) (3.46%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (0.08%)(d) (0.80%) (0.81%)+ (0.99%) (1.17%) (1.01%)
Net expenses 2.13% 2.40% 2.40% + 2.40% 2.33% 2.24%
Expenses (before
reimbursement) 2.47% 2.52% 2.61% + 2.50% 2.33% 2.24%
Portfolio turnover rate 105% 136% 71% 130% 95% 70%
Net assets at end of period
(in 000's) $3,045 $2,926 $2,429 $1,724 $1,683 $2,293
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ 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) Net investment income and the ratio of net investment income includes $0.03 per share and
0.24%, for Class A, Class B and Class C, respectively as a result of a special one time
dividend from Microsoft Corp.
</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>
CLASS B
------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 10.87 $ 10.26 $ 8.71 $ 11.79 $ 14.45 $ 15.19
----------- ----------- ----------- ------- ------- -------
(0.01)(d) (0.09) (0.06) (0.10) (0.15) (0.15)
1.08 0.70 1.61 (2.98) (2.51) (0.38)
----------- ----------- ----------- ------- ------- -------
1.07 0.61 1.55 (3.08) (2.66) (0.53)
----------- ----------- ----------- ------- ------- -------
-- -- -- -- -- (0.17)
-- -- -- -- -- (0.04)
----------- ----------- ----------- ------- ------- -------
-- -- -- -- -- (0.21)
----------- ----------- ----------- ------- ------- -------
$ 11.94 $ 10.87 $ 10.26 $ 8.71 $ 11.79 $ 14.45
=========== =========== =========== ======= ======= =======
9.84% 5.95% 17.80%(c) (26.12%) (18.41%) (3.46%)
(0.08%)(d) (0.80%) (0.81%)+ (0.99%) (1.17%) (1.01%)
2.13% 2.40% 2.40% + 2.40% 2.33% 2.24%
2.47% 2.52% 2.61% + 2.50% 2.33% 2.24%
105% 136% 71% 130% 95% 70%
$50,815 $53,640 $53,946 $48,434 $73,048 $91,246
</Table>
<Table>
<Caption>
CLASS I
------------
DECEMBER 28,
2004**
THROUGH
OCTOBER 31,
2005
$ 12.25
------------
0.10
0.33
------------
0.43
------------
--
--
------------
--
------------
$ 12.68
============
3.51%(c)
0.94% +
0.76% +
1.10% +
105%
$69,177
</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 nineteen 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 four 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. Distribution of Class I shares commenced on
December 28, 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 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.
The Fund's investment objective is to seek long-term growth of capital, with
income as a secondary consideration.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America 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 normally are taken from the principal 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 in good faith by 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 principal
market is temporarily closed at a time when under normal conditions it would be
open. The Fund did not hold securities at October 31, 2005, 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 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 accounting principles generally accepted in
the United States of America. 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.
22 MainStay Common Stock Fund
The following table discloses the current period reclassification between
undistributed net investment income, accumulated net realized loss on
investments and additional paid-in capital arising from permanent differences;
net assets at October 31, 2005, are not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT LOSS ON ADDITIONAL
INCOME INVESTMENTS PAID-IN-CAPITAL
$ (380) $ 4,770 $ (4,390)
</Table>
The reclassifications for the Fund are primarily due to the fact that net
operating losses cannot be carried forward for federal income tax purposes and
real estate investment trusts investments.
(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 transfer agent expenses and 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.
(H) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the Fund.
NOTE 3 -- FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER. New York Life Investment Management LLC ("NYLIM" or the
"Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's Manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. The Fund
is advised by the Manager directly, without a Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual percentage of the Fund's
average daily net assets as follows: 0.70% on assets up to $500 million and
0.65% on assets in excess of $500 million. Effective August 1, 2005, the Manager
has entered into a written expense limitation agreement, under which the Manager
has agreed to reimburse the expenses of the Fund so that the total operating
expenses (excluding taxes, interest, litigation, extraordinary expenses, and
brokerage and other transaction expenses relating to the purchase or sale of
portfolio investments) do not exceed, on an annualized basis, 1.30% of the
average daily net assets of the Class A shares. An equivalent reimbursement, in
an equal amount of basis points, will be applied to the other share classes. The
Manager, within three years of incurring such expenses, may recoup the amount of
any management fee waiver or expense reimbursement from the Fund pursuant to
this agreement if such recoupment does not cause the Fund to exceed the expense
limitations. At October 31, 2005, the Fund had $124,534 of recoupment available.
This amount is available until October 31, 2008. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. Prior to
August 1, 2005 and after December 1, 2004, the Manager had agreed to reimburse
the expenses of the Fund so that total operating expenses would not exceed, on
an annualized basis, 1.38% of the average daily net assets of the Class A
shares, and such that there would be an equivalent reduction for the other
classes of shares. Prior to December 1, 2004, the Manager voluntarily agreed to
reimburse the expenses of the Fund so that operating expenses would not exceed
on an annualized basis 1.65%, 2.40%, and 2.40% of average daily net assets of
the Class A, Class B, and Class C shares, respectively. For the year ended
October 31, 2005, the Manager earned fees from the
www.MAINSTAYfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fund in the amount of $904,732, and waived its fees and/or reimbursed expenses
in the amount of $435,191.
(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 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 $13,578 for the year ended
October 31, 2005. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $1,495, $77,935 and $579, respectively, for the year ended October 31,
2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $537,805.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(F) CAPITAL. At October 31, 2005, New York Life and its affiliates held shares
of Class A with a net value of $12,313,969. This represents 34.3% of Class A
shares net assets and 7.7% of the Funds total net assets at period end.
(G) OTHER. Pursuant to the Management Agreement, 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
$3,537 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $39,591 for the year ended
October 31, 2005.
NOTE 4 -- CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, The Bank of New York acted as custodian for the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
ORDINARY CAPITAL AND UNREALIZED ACCUMULATED
INCOME OTHER LOSSES APPRECIATION LOSS
$539,396 $(13,718,729) $ 6,543,345 $(6,635,988)
</Table>
At October 31, 2005, for federal income tax purposes, capital loss carryforwards
of $13,718,729 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
24 MainStay Common Stock 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 AMOUNTS
AVAILABLE THROUGH (000'S)
2010 $11,364
2011 2,355
-------------------------------------------
$13,719
-------------------------------------------
</Table>
The Fund utilized $5,887,435 of capital loss carryforward during the year ended
October 31, 2005.
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $189,622 and $135,603, respectively.
NOTE 7 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $9,893,499. The Fund received $10,241,986 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, 2005.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C CLASS I*
Shares sold 455 473 65 5,823
- --------------------------------------------------------------
Shares redeemed (675) (1,149) (79) (368)
- --------------------------------------------------------------
Net increase
(decrease) (220) (676) (14) 5,455
- --------------------------------------------------------------
</Table>
<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>
* Commenced operations on December 28, 2004.
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to agreements with certain registered
representatives of broker-dealers relating to the level of trading by clients of
those registered representatives in shares of certain funds of the Trust. All
such arrangements were terminated by the fourth quarter of 2003. NYLIM and the
Trustees of the Trust have reviewed the possible dilutive effects that
transactions under those arrangements and certain other levels of trading by
fund shareholders over the period from 1999 to 2003 may have had on the funds.
As a result of this review in December 2005, NYLIM made payments totaling $5.9
million to nine MainStay funds. No payment was made with respect to the MainStay
Common Stock Fund. NYLIM has also agreed to reimburse or pay all expenses
relating to the Board of Trustees' review of this matter and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
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, 2005, and
the related statement of operations for the year then ended, and the statements
of changes in net assets and financial highlights for each of the years in the
two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the
results of its operations for the year then ended, and the changes in its net
assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
www.MAINSTAYfunds.com 27
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
28 MainStay Common Stock Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
----------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since 2005 Management LLC (including predecessor
2/8/59 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
----------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
----------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax since Vice President, New York Life Insurance 58 None
ZUCCARO 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
----------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 29
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement, the Board of
Trustees requested and received from the Manager, and reviewed, a wide variety
of information. The Trustees also requested and received information from
outside data providers and information and analysis from a third party
consultant. The Trustees considered various industry and regulatory trends in
their deliberations. In considering approval of the Agreement, and in evaluating
the fairness of the compensation to be paid by the Fund, the Trustees met a
number of times as a full Board and in executive sessions of only the Non-
Interested Trustees to discuss the Board's consideration of the approval of the
Agreement, and took into account a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager. The Trustees reviewed the services that the Manager has
provided historically to the Fund, and also generally to other series of the
Trust. The Manager's services to the Trust have included investment management
services, including the day-to-day management of the portfolio and the selection
and supervision of portfolio managers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Trustees considered, among other things, the Manager's management, personnel,
resources, operations and portfolio management capabilities. In considering the
Manager's practices relating to best execution of portfolio trades, the Board
reviewed reports of the Fund's Brokerage Committee including with respect to
analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager and certain other service providers. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager were such that, in the context of the Board's overall review of various
factors, the Management Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's recent performance that was
slightly better than mid-range of funds determined to be comparable to the Fund
and the Fund's underperformance over a longer time period relative to the
average of a grouping of funds having similar investment objectives.
The Trustees considered the cost to the Manager of the Agreement and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund, with the expectation that the Manager intended, over time, to
implement measures designed to reduce the Trust's transfer agency fees. The
Trustees considered certain benefits expected for, and risks borne by, the
Manager and its affiliates, including benefits from soft dollar arrangements.
The Trustees considered the services provided to the Fund by affiliates of the
Manager, NYLIFE Distributors and NYLIM Service, under other agreements, and the
benefits to the Manager and its affiliates from those relationships. The
information provided to the Trustees indicated that the profitability to the
Manager and its affiliates arising directly from those other agreements was not
excessive. The Trustees acknowledged certain benefits to the reputation of the
Manager and its affiliates, as well to that of the Trust, from their association
with each other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distributing shares
of various series of the Trust. They noted the Manager's willingness to
implement contractual breakpoints, and that the contractual breakpoints in place
for the management fee were intended to provide that the Fund's shareholders
would share in benefits from economies of scale arising from the growth of Fund
assets. The Trustees acknowledged that the Fund had not yet reached
30 MainStay Common Stock Fund
the asset level at which breakpoints would reduce the contractual management fee
to which the Fund is subject. Acknowledging the difficulty of forecasting
economies of scale, the Trustees generally expressed an intention to monitor the
Manager's profitability and consider the application of fee breakpoints or other
appropriate measures as the Board may determine from time to time. The Trustees
reviewed historical information about changes in the Fund's expense and asset
levels over time, as well as information about certain Fund expenses that would
remain fixed even as Fund assets increase and, therefore, provide the Fund with
benefits from economies of scale as the Fund grows. The Trustees noted that, to
the extent the Fund's gross expenses currently are higher than its net expenses,
economies of scale achieved through an increase in the Fund's assets might not
directly benefit the Fund through lower net expenses. The Trustees considered
various information about transfer agency expenses, including information
showing that transfer agency fees of the Fund and a significant number of series
of the Trust (although not every such series or with respect to every share
class of each series) tended to be high, when aggregated and expressed as a
percentage of the assets of certain series, compared to the mutual fund industry
average according to certain studies reviewed by the Board and, therefore,
adversely affected gross expense ratios. The Board received information about
potential effects on the Manager were it to subsidize certain portions of the
Trust's transfer agency fees. The Trustees noted that a significant number of
shareholders of the Trust's series had small amounts invested in the series, and
have considered measures intended to increase average shareholder account size
and/or otherwise reduce the Trust's transfer agency fees and expenses, including
steps that the Manager has taken to encourage shareholders to consolidate or
close small accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager, including other registered funds and separate
institutional accounts, that had investment objectives similar to that of the
Fund. The Trustees took into account information provided by the Manager about
the relative scope of services provided to the Fund and to those accounts or
explanations about the accounts' histories. In considering the extent of the
fees received by the Manager for providing services to the Fund, the Trustees
evaluated factors such as the fees and expenses borne by other registered funds
in the market pursuing strategies generally similar to those followed by the
Fund. The Trustees considered the Fund's historical and proposed contractual and
net management fees, its anticipated gross and net expense ratios, and various
components of that expense ratio, in comparison to other funds in comparison
groupings prepared by outside data providers using objective methodologies.
The Trustees acknowledged the historical relationship between the Manager and
the Trust and the likely difficulties in implementing an alternative to the
investment management arrangement between them. The Trustees also took account
of the results of their various discussions with the Manager concerning the
levels of the Fund's contractual and net management fees and the Fund's
anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreement. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreement.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreement, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of this Agreement was in the best
interests of the Fund and its shareholders.
www.MAINSTAYfunds.com 31
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
32 MainStay Common Stock 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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
www.MAINSTAYfunds.com 33
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(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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A07972 (RECYCLE LOGO) MS475-05 MSCS11-12/05
21
(MAINSTAY INVESTMENT LOGO)
MAINSTAY
SMALL CAP GROWTH FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay Small Cap Growth Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/s/ Christopher O. Blunt
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 8
- ----------------------------------------------------
Portfolio of Investments 10
- ----------------------------------------------------
Financial Statements 13
- ----------------------------------------------------
Notes to Financial Statements 18
- ----------------------------------------------------
Report of Independent Registered Public
Accounting Firm 22
Trustees and Officers 23
- ----------------------------------------------------
Board Consideration and Approval of Management
and Subadvisory Agreements 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 (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 3.58% -7.01% 5.00%
Excluding sales charges 9.61 -5.95 5.80
</Table>
(PERFORMANCE GRAPH) (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
13102 10298 13890
10/31/05 14361 11421 15568
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 3.79% -7.03% 4.99%
Excluding sales charges 8.79 -6.66 4.99
</Table>
(PERFORMANCE GRAPH) (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
13198 10298 13890
10/31/05 14358 11421 15568
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 7.79% -6.66% 4.99%
Excluding sales charges 8.79 -6.66 4.99
</Table>
(PERFORMANCE GRAPH) (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
13198 10298 13890
10/31/05 14358 11421 15568
</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 contractual and may be modified or terminated only with the
approval of the Board of Trustees. 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 THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Small Cap Growth Fund
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- ------------------------------------------------------------------------------------
Russell 2000(R) Growth Index(1) 10.91% -1.62% 1.81%
Russell 2000(R) Index(2) 12.08 6.75 6.15
Average Lipper small-cap growth fund(3) 11.79 -1.73 5.43
</Table>
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 in-come 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 mea-sures 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.
THE DISCLOSURE AND FOOTNOTES ON THE PREVIOUS PAGE ARE AN INTEGRAL PART OF THE
TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.MAINSTAYfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY SMALL CAP GROWTH FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
VALUE
ENDING ACCOUNT (BASED ON
VALUE (BASED HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% RETURN EXPENSES
ACCOUNT RETURNS AND PAID AND ACTUAL PAID
VALUE EXPENSES) DURING EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,094.05 $ 8.71 $1,016.75 $ 8.39
- --------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,090.30 $12.64 $1,013.00 $12.18
- --------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,090.30 $12.64 $1,013.00 $12.18
- --------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.65% for Class A and 2.40% for Class B and Class C multiplied by the
average account value over the period, divided by 365, multiplied by 184 (to
reflect the one-half year period).
6 MainStay Small Cap Growth Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-TERM INVESTMENTS
(COLLATERAL FROM SECURITIES LIABILITIES IN EXCESS OF CASH AND
COMMON STOCKS LENDING IS 17.9%) OTHER ASSETS
- ------------- --------------------------- ---------------------------------
99.9% 18.5% -18.4%
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Sierra Health Services, Inc.
2. Cal Dive International, Inc.
3. Coldwater Creek, Inc.
4. Terex Corp.
5. Affiliated Managers Group, Inc.
6. MSC Industrial Direct Co. Class A
7. Jarden Corp.
8. Guitar Center, Inc.
9. WCI Communities, Inc.
10. Meritage Homes Corp.
</Table>
www.MAINSTAYfunds.com 7
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 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, 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, participation in growing markets, 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 the stock's earnings growth rate decelerates, if its valuation is
deemed too high in relation to its growth rate or its peer group, or if we no
longer believe that the security will help the Fund meet its investment
objective.
WHAT MAJOR FACTORS INFLUENCED STOCK-MARKET PERFORMANCE DURING THE 12 MONTHS
ENDED OCTOBER 31, 2005?
Among the most significant factors that influenced the equity markets during the
reporting period were Federal Reserve interest-rate hikes, high energy prices,
rising inflation, and the apparent slowdown in the rate of corporate earnings
growth and economic advancement. An influx of hurricanes in the late summer and
early fall took a toll not only on the Gulf states but also on the overall
market.
WHAT SECTORS HAD THE GREATEST IMPACT ON THE FUND'S RELATIVE PERFORMANCE DURING
THE REPORTING PERIOD?
The Fund's performance was helped most by favor-able stock selection in the
consumer discretionary sector. The Fund's holdings in this sector outperformed
related stocks in the Russell 2000(R) Growth Index.(2) An overweighted position
in the energy sector and an underweighted position in the information technology
sector also helped the Fund's results. The Fund's stock selection in the
information technology and health care sectors, however, detracted from
performance.
For the 12 months ended October 31, 2005, we maintained the Fund's overweighted
position in the consumer discretionary sector. Our decision to do so had a
positive effect on the Fund's performance. Our decision to increase the Fund's
weighting among energy stocks also strengthened the Fund's returns.
WHAT WERE SOME OF THE FUND'S STOCK-SPECIFIC SUCCESS STORIES?
Cal Dive International was the strongest positive contributor to the Fund's
performance. With operations in the Gulf of Mexico, this energy services company
benefited from higher energy prices and continued strong demand. Coldwater
Creek, originally a catalog and mail order house, advanced on rapid expansion of
the company's retail store chain. Shares of Arch Coal, a company that mines,
processes, and markets low-sulfur coal, rose steadily throughout the reporting
period because of higher energy prices
and growing global demand. Ryland Group is a homebuilder that benefited from
continued strong demand and industry consolidation. Shares of Sierra Health
Services, a Las Vegas-based managed health care organization, rose with
commercial enrollment-driven earnings growth because of the company's dominant
market presence in Nevada.
WHICH STOCKS DETRACTED FROM THE FUND'S RESULTS?
Several of the Fund's holdings failed to meet our expectations. Sigmatel is a
semiconductor company that supplies memory chips for Apple iPod Shuffles. The
company's stock dropped sharply in October 2005 because of faster-than-expected
product transition. PETCO Animal Supplies--a retailer of pet food, supplies, and
services--was hurt by reduced store traffic and by a shift in marketing strategy
that failed to generate anticipated sales. Trex manufactures and distributes
wood/plastic composite products primarily for residential and commercial decking
and railing. Trex had a rough 12-month period because of lower-than-expected
volume, which stemmed from excess inventory among dealers and from significant
increases in the price of raw materials. Bradley Pharmaceuticals, a specialty
phar-
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 devel- opments than mid- or large-capitalization
companies. The Fund may experience a portfolio turnover rate of over 100% and
may generate short-term capital gains which are taxable.
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.
8 MainStay Small Cap Growth Fund
maceutical company, suffered a sharp stock-price decline when the company
announced that its accounting practices would be investigated by the Securities
and Exchange Commission. Innovative Solutions & Support--a company that designs,
manufactures, and sells flight-information computers, flat-panel displays, and
monitoring systems--reported disappointing first-quarter 2005 results. We sold
the Fund's positions in Sigmatel, Trex, and Bradley Pharmaceuticals during the
reporting period.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
Since energy prices remained high, we added Grant Prideco to the Fund. The
company produces oil-field drill pipe and other products and services used in
drilling for oil and gas. We also established a Fund position in James River
Coal, which engages in mining, processing, and selling coal in eastern Kentucky.
We initiated a Fund position in Electronic Boutiques Holdings, which recently
merged with GameStop to form a leading global retailer of video-game and
entertainment software. We believe that the merger may help the company enter
new international markets and compete more effectively in the highly competitive
U.S. video-game industry. In the consumer discretionary sector, we added
Children's Place, a retailer of children's apparel and accessories that recently
acquired the Disney Store chain. Earnings at The Children's Place Retail Stores
are expected to benefit from acquisition-related synergies and cost reductions.
We also established a Fund position in Jos. A. Bank Clothiers, which designs,
retails, and markets men's tailored and casual clothing and men's accessories in
the United States.
WHICH STOCKS DID THE FUND SELL DURING THE REPORTING PERIOD?
In addition to the sales we've already mentioned, the Fund eliminated its
holdings in Bluegreen and Corinthian Colleges during the reporting period.
Bluegreen offers timeshare vacation properties and builds residential
communities. The company experienced a sharp stock-price correction when it
reported disappointing earnings because of higher-than-expected costs and
lower-than-expected sales. We sold the Fund's position in Corinthian Colleges
because of disappointing earnings results and concerns about government
investigations into the industry's marketing practices.
DID THE FUND CHANGE ITS SECTOR WEIGHTINGS DURING THE REPORTING PERIOD?
From October 31, 2004, to October 31, 2005, we substantially increased the
Fund's weighting in the energy sector. We also increased the Fund's weighting
among industrial stocks. During the reporting period, the Fund decreased its
weightings in the consumer discretionary, health care, and information
technology sectors.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2005, the Fund was overweighted relative to the Russell
2000(R) Growth Index in the consumer discretionary, energy, and industrial
sectors. On the same date, the Fund held under-weighted positions in the
consumer staples, health care, materials, and information technology sectors. At
the end of the period, the Fund had no holdings in the telecommunication
services or utilities sectors.
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, 2005
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (99.9%)+
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (3.1%)
Ceradyne, Inc. (a)(b) 71,950 $ 2,820,440
DRS Technologies, Inc. 58,700 2,891,562
Innovative Solutions &
Support, Inc. (a)(b) 112,800 1,611,912
------------
7,323,914
------------
BIOTECHNOLOGY (1.3%)
CV Therapeutics, Inc. (a)(b) 56,300 1,410,878
Nektar Therapeutics (a)(b) 106,700 1,606,902
------------
3,017,780
------------
BUILDING PRODUCTS (1.2%)
Builders FirstSource, Inc. (a) 75,800 1,481,890
Simpson Manufacturing Co., Inc. 36,300 1,432,398
------------
2,914,288
------------
CAPITAL MARKETS (3.3%)
V Affiliated Managers Group, Inc. (a)(b) 57,821 4,437,762
Jefferies Group, Inc. 78,700 3,341,602
------------
7,779,364
------------
COMMERCIAL BANKS (4.6%)
Hanmi Financial Corp. 129,800 2,376,638
UCBH Holdings, Inc. 156,400 2,721,360
Westcorp 42,500 2,677,925
Wintrust Financial Corp. 56,000 3,006,080
------------
10,782,003
------------
COMMERCIAL SERVICES & SUPPLIES (1.1%)
CRA International, Inc. (a) 56,000 2,478,560
------------
COMMUNICATIONS EQUIPMENT (1.7%)
Avocent Corp. (a) 65,200 1,999,032
Ixia (a) 167,500 2,113,850
------------
4,112,882
------------
CONSTRUCTION MATERIALS (0.5%)
Eagle Materials, Inc. 11,200 1,192,688
------------
ELECTRICAL EQUIPMENT (1.3%)
Genlyte Group, Inc. (a) 61,000 3,109,170
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (3.7%)
FARO Technologies, Inc. (a)(b) 82,800 1,718,928
FLIR Systems, Inc. (a) 79,400 1,664,224
Global Imaging Systems, Inc. (a)(b) 70,700 2,517,627
Trimble Navigation Ltd. (a) 94,000 2,713,780
------------
8,614,559
------------
</Table>
<Table>
<Caption>
SHARES VALUE
ENERGY EQUIPMENT & SERVICES (8.8%)
Atwood Oceanics, Inc. (a) 44,600 $ 3,140,732
Bronco Drilling Co., Inc. (a) 86,000 2,084,640
V Cal Dive International, Inc. (a)(b) 82,700 5,089,358
Dresser-Rand Group, Inc. (a) 53,300 1,156,610
Grant Prideco, Inc. (a) 91,100 3,542,879
Grey Wolf, Inc. (a)(b) 255,300 1,960,704
TETRA Technologies, Inc. (a) 131,650 3,682,250
------------
20,657,173
------------
HEALTH CARE EQUIPMENT & SUPPLIES (7.3%)
ArthroCare Corp. (a) 67,900 2,493,967
Cooper Cos., Inc. (The) 44,500 3,063,380
Dade Behring Holdings, Inc. 97,000 3,492,970
Gen-Probe, Inc. (a) 33,100 1,351,804
Immucor, Inc. (a) 86,000 2,229,120
Integra LifeSciences Holdings Corp. (a) 58,100 2,004,450
SurModics, Inc. (a)(b) 62,400 2,466,048
------------
17,101,739
------------
HEALTH CARE PROVIDERS & SERVICES (7.1%)
American Healthways, Inc. (a) 80,000 3,244,800
Matria Healthcare, Inc. (a) 51,600 1,730,148
PRA International (a) 49,100 1,304,096
SFBC International, Inc. (a)(b) 36,800 1,569,152
V Sierra Health Services, Inc. (a) 70,400 5,280,000
Symbion, Inc. (a) 47,200 1,068,136
Ventiv Health, Inc. (a) 60,000 1,514,400
WellCare Health Plans, Inc. (a) 33,500 1,055,250
------------
16,765,982
------------
HOTELS, RESTAURANTS & LEISURE (1.4%)
Penn National Gaming, Inc. (a) 108,900 3,217,995
------------
HOUSEHOLD DURABLES (11.2%)
Beazer Homes USA, Inc. (b) 62,300 3,610,285
Hovnanian Enterprises, Inc. Class A (a) 68,000 3,059,320
V Jarden Corp. (a)(b) 122,450 4,137,586
M.D.C. Holdings, Inc. 35,694 2,448,608
M/I Homes, Inc. 36,400 1,634,360
V Meritage Homes Corp. (a) 62,700 3,904,329
Ryland Group, Inc. 52,800 3,553,440
V WCI Communities, Inc. (a) 157,600 3,943,152
------------
26,291,080
------------
</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.
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)
- -----------------------------------------------------------------------------
INTERNET & CATALOG RETAIL (1.9%)
V Coldwater Creek, Inc. (a) 168,375 $ 4,544,441
------------
INTERNET SOFTWARE & SERVICES (1.2%)
Digitas, Inc. (a) 263,600 2,846,880
------------
MACHINERY (6.7%)
A.S.V., Inc. (a)(b) 110,400 2,576,736
Actuant Corp. Class A 57,300 2,790,510
CLARCOR, Inc. 81,700 2,246,750
V Terex Corp. (a) 80,800 4,441,576
Wabtec Corp. 134,400 3,655,680
------------
15,711,252
------------
MARINE (1.8%)
Genco Shipping & Trading Ltd. (a) 58,200 956,226
Kirby Corp. (a) 64,700 3,343,049
------------
4,299,275
------------
OIL, GAS & CONSUMABLE FUELS (10.5%)
Alliance Resource Partners, LP (b) 73,800 3,117,312
Arch Coal, Inc. (b) 44,900 3,460,443
Bois d'Arc Energy, Inc. (a)(b) 77,300 1,117,758
Foundation Coal Holdings, Inc. 36,000 1,350,000
Giant Industries, Inc. (a) 13,500 772,065
Holly Corp. 30,500 1,756,800
InterOil Corp. (a)(b) 73,300 1,409,559
James River Coal Co. (a)(b) 79,000 3,378,040
Massey Energy Co. 68,500 2,744,795
OMI Corp. (b) 132,000 2,386,560
Remington Oil & Gas Corp. (a) 93,100 3,258,500
------------
24,751,832
------------
PERSONAL PRODUCTS (1.3%)
Chattem, Inc. (a)(b) 93,900 3,098,700
------------
REAL ESTATE (0.7%)
American Home Mortgage Investment Corp. 64,200 1,735,326
------------
ROAD & RAIL (2.0%)
Knight Transportation, Inc. 73,900 2,010,819
Old Dominion Freight Line, Inc. (a) 78,200 2,767,498
------------
4,778,317
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (1.9%)
Diodes, Inc. (a) 60,100 2,179,226
Tessera Technologies, Inc. (a)(b) 85,500 2,385,450
------------
4,564,676
------------
SOFTWARE (3.0%)
Epicor Software Corp. (a) 157,500 1,934,100
</Table>
<Table>
<Caption>
SHARES VALUE
SOFTWARE (CONTINUED)
FactSet Research Systems, Inc. 70,700 $ 2,479,449
MICROS Systems, Inc. (a) 59,600 2,736,832
------------
7,150,381
------------
SPECIALTY RETAIL (7.4%)
A.C. Moore Arts & Crafts, Inc. (a)(b) 74,500 1,025,120
Children's Place Retail Stores, Inc. (The) (a) 80,200 3,442,986
GameStop Corp. Class A (a)(b) 30,808 1,093,068
V Guitar Center, Inc. (a) 77,600 4,043,736
Hibbett Sporting Goods, Inc. (a) 113,925 2,988,253
Jos. A. Bank Clothiers, Inc. (a)(b) 92,800 3,787,168
PETCO Animal Supplies, Inc. (a) 55,800 1,060,758
------------
17,441,089
------------
THRIFTS & MORTGAGE FINANCE (0.9%)
Commercial Capital Bancorp, Inc. 131,366 2,109,738
------------
TRADING COMPANIES & DISTRIBUTORS (3.0%)
Hughes Supply, Inc. 86,300 2,886,735
V MSC Industrial Direct Co. Class A 109,700 4,188,346
------------
7,075,081
------------
Total Common Stocks
(Cost $185,244,541) 235,466,165
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (18.5%)
- -----------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.7%)
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (c)(d) $1,559,708 1,559,708
------------
Total Certificate of Deposit
(Cost $1,559,708) 1,559,708
------------
COMMERCIAL PAPER (1.6%)
Compass Securitization
3.993%, due 11/22/05 (c) 1,114,077 1,114,077
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (c) 668,446 668,446
Silver Tower U.S. Funding
3.932%, due 11/15/05 (c) 661,410 661,410
UBS Finance Delaware LLC
4.00%, due 11/1/05 1,330,000 1,330,000
------------
Total Commercial Paper
(Cost $3,773,933) 3,773,933
------------
</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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
INVESTMENT COMPANY (4.3%)
BGI Institutional Money Market Fund (c) 10,160,742 $ 10,160,742
------------
Total Investment Company
(Cost $10,160,742) 10,160,742
------------
<Caption>
PRINCIPAL
AMOUNT
TIME DEPOSITS (11.9%)
Bank of the West (The)
4.02%, due 12/8/05 (c) $4,233,492 4,233,492
Barclays
3.92%, due 12/5/05 (c) 1,782,523 1,782,523
3.94%, due 11/28/05 (c) 2,005,338 2,005,338
Credit Suisse First Boston Corp.
3.74%, due 11/1/05 (c) 1,559,708 1,559,708
Deutsche Bank
3.95%, due 12/2/05 (c) 1,782,523 1,782,523
First Tennessee National Corp.
3.88%, due 11/14/05 (c) 1,782,523 1,782,523
Fortis Bank
4.00%, due 12/12/05 (c) 2,005,338 2,005,338
Halifax Bank of Scotland
3.75%, due 11/1/05 (c) 1,782,523 1,782,523
Keybank
4.00%, due 11/1/05 (c) 1,993,216 1,993,216
Marshall & Ilsley Bank
3.97%, due 12/29/05 (c) 1,782,523 1,782,523
Societe Generale
3.77%, due 11/1/05 (c) 3,787,861 3,787,861
UBS AG
4.01%, due 12/13/05 (c) 1,782,523 1,782,523
Wells Fargo & Co.
4.00%, due 11/25/05 (c) 1,782,523 1,782,523
------------
Total Time Deposits
(Cost $28,062,614) 28,062,614
------------
Total Short-Term Investments
(Cost $43,556,997) 43,556,997
------------
Total Investments
(Cost $228,801,538) (e) 118.4% 279,023,162(f)
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Liabilities in Excess of
Cash and Other Assets $ (18.4) $(43,426,020)
---------- ------------
Net Assets 100.0% $235,597,142
========== ============
</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.
(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) Floating rate. Rate shown is the rate in effect at October 31, 2005.
(e) The cost for federal income tax purposes is $228,893,510.
(f) At October 31, 2005 net unrealized appreciation was $50,129,652, 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 $56,607,540 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $6,477,888.
</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.
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, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $228,801,538) including
$40,687,036 market value of securities
loaned $ 279,023,162
Cash 15,989
Receivables:
Fund shares sold 389,553
Dividends and interest 23,682
Other assets 21,890
-------------
Total assets 279,474,276
-------------
LIABILITIES:
Securities lending collateral 42,226,997
Payables:
Fund shares redeemed 530,505
Investment securities purchased 439,300
Transfer agent 330,867
NYLIFE Distributors 152,046
Manager 37,591
Custodian 2,829
Accrued expenses 156,999
-------------
Total liabilities 43,877,134
-------------
Net assets $ 235,597,142
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized:
Class A $ 46,168
Class B 112,940
Class C 5,128
Additional paid-in capital 336,812,109
Accumulated net realized loss on investments (151,600,827)
Net unrealized appreciation on investments 50,221,624
-------------
Net assets $ 235,597,142
=============
CLASS A
Net assets applicable to outstanding shares $ 68,981,310
=============
Shares of beneficial interest outstanding 4,616,804
-------------
Net asset value per share outstanding $ 14.94
Maximum sales charge (5.50% of offering
price) 0.87
-------------
Maximum offering price per share outstanding $ 15.81
=============
CLASS B
Net assets applicable to outstanding shares $ 159,379,903
=============
Shares of beneficial interest outstanding 11,293,995
=============
Net asset value and offering price per share
outstanding $ 14.11
=============
CLASS C
Net assets applicable to outstanding shares $ 7,235,929
=============
Shares of beneficial interest outstanding 512,779
=============
Net asset value and offering price per share
outstanding $ 14.11
=============
</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 13
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 1,344,071
Income from securities loaned -- net 197,925
Interest 30,178
------------
Total income 1,572,174
------------
EXPENSES:
Manager 2,545,742
Transfer agent 1,392,375
Distribution -- Class B 1,299,067
Distribution -- Class C 57,521
Distribution/Service -- Class A 184,240
Service -- Class B 433,022
Service -- Class C 19,174
Shareholder communication 110,430
Professional 84,519
Recordkeeping 52,124
Registration 43,557
Custodian 27,999
Trustees 20,346
Miscellaneous 14,023
------------
Total expenses before waiver/reimbursement 6,284,139
Expense waiver/reimbursement from Manager (731,987)
------------
Net expenses 5,552,152
------------
Net investment loss (3,979,978)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 28,174,588
Net change in unrealized appreciation on
investments (1,279,874)
------------
Net realized and unrealized gain on investments 26,894,714
------------
Net increase in net assets resulting from
operations $22,914,736
============
</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 YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
DECREASE IN NET ASSETS:
Operations:
Net investment loss $ (3,979,978) $ (5,687,301)
Net realized gain on investments 28,174,588 23,113,053
Net change in unrealized
appreciation on investments (1,279,874) (15,879,751)
---------------------------
Net increase in net assets
resulting from operations 22,914,736 1,546,001
---------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 14,733,413 20,245,691
Class B 14,988,007 24,389,759
Class C 979,051 1,934,333
---------------------------
30,700,471 46,569,783
Cost of shares redeemed:
Class A (23,310,406) (21,999,005)
Class B (43,395,956) (31,265,949)
Class C (1,801,933) (2,275,389)
---------------------------
(68,508,295) (55,540,343)
Decrease in net assets derived
from capital share
transactions (37,807,824) (8,970,560)
---------------------------
Net decrease in net assets (14,893,088) (7,424,559)
NET ASSETS:
Beginning of year 250,490,230 257,914,789
---------------------------
End of year $235,597,142 $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 15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
----------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 13.63 $ 13.46 $ 9.88 $ 13.90 $ 17.11 $ 21.82
------- ------- ----------- ------- ------- -------
Net investment loss (a) (0.15) (0.22) (0.18) (0.22) (0.22) (0.26)
Net realized and unrealized
gain (loss) on investments 1.46 0.39 3.76 (3.80) (2.99) (4.17)
------- ------- ----------- ------- ------- -------
Total from investment
operations 1.31 0.17 3.58 (4.02) (3.21) (4.43)
------- ------- ----------- ------- ------- -------
Less distributions:
From net realized gain on
investments -- -- -- -- -- (0.28)
------- ------- ----------- ------- ------- -------
Net asset value at end of
period $ 14.94 $ 13.63 $ 13.46 $ 9.88 $ 13.90 $ 17.11
======= ======= =========== ======= ======= =======
Total investment return (b) 9.61% 1.26% 36.23%(c) (28.92%) (18.76%) (20.24%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.03%) (1.63%) (1.93%)+ (1.86%) (1.56%) (1.20%)
Net expenses 1.65% 1.91% 2.12% + 2.07% 1.90% 1.70%
Expenses (before
waiver/reimbursement) 1.94% 1.95% 2.12% + 2.07% 1.90% 1.70%
Portfolio turnover rate 57% 75% 69% 132% 111% 122%
Net assets at end of period
(in 000's) $68,981 $70,616 $71,451 $44,037 $61,197 $99,415
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $12.97 $12.90 $ 9.54 $13.51 $16.75 $21.55
------ ------ ----------- ------ ------ ------
Net investment loss (a) (0.25) (0.31) (0.24) (0.30) (0.32) (0.42)
Net realized and unrealized
gain (loss) on investments 1.39 0.38 3.60 (3.67) (2.92) (4.10)
------ ------ ----------- ------ ------ ------
Total from investment
operations 1.14 0.07 3.36 (3.97) (3.24) (4.52)
------ ------ ----------- ------ ------ ------
Less distributions:
From net realized gain on
investments -- -- -- -- -- (0.28)
------ ------ ----------- ------ ------ ------
Net asset value at end of
period $14.11 $12.97 $12.90 $ 9.54 $13.51 $16.75
====== ====== =========== ====== ====== ======
Total investment return (b) 8.79% 0.54% 35.22%(c) (29.39%) (19.34%) (20.91%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.78%) (2.38%) (2.68%)+ (2.61%) (2.31%) (1.95%)
Net expenses 2.40% 2.66% 2.87% + 2.82% 2.65% 2.45%
Expenses (before
waiver/reimbursement) 2.69% 2.70% 2.87% + 2.82% 2.65% 2.45%
Portfolio turnover rate 57% 75% 69% 132% 111% 122%
Net assets at end of period
(in 000's) $7,236 $7,396 $7,734 $5,248 $6,628 $9,843
</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>
CLASS B
-----------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 12.97 $ 12.90 $ 9.54 $ 13.51 $ 16.75 $ 21.55
--------- --------- ----------- -------- -------- --------
(0.25) (0.31) (0.24) (0.30) (0.32) (0.42)
1.39 0.38 3.60 (3.67) (2.92) (4.10)
--------- --------- ----------- -------- -------- --------
1.14 0.07 3.36 (3.97) (3.24) (4.52)
--------- --------- ----------- -------- -------- --------
-- -- -- -- -- (0.28)
--------- --------- ----------- -------- -------- --------
$ 14.11 $ 12.97 $ 12.90 $ 9.54 $ 13.51 $ 16.75
========= ========= =========== ======== ======== ========
8.79% 0.54% 35.22%(c) (29.39%) (19.34%) (20.91%)
(1.78%) (2.38%) (2.68%)+ (2.61%) (2.31%) (1.95%)
2.40% 2.66% 2.87% + 2.82% 2.65% 2.45%
2.69% 2.70% 2.87% + 2.82% 2.65% 2.45%
57% 75% 69% 132% 111% 122%
$159,380 $172,478 $178,730 $131,404 $196,859 $260,999
</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 nineteen 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 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
larger-capitalization companies.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America 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 normally are taken from the principal 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 in good faith by 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 principal
market is temporarily closed at a time when under normal conditions it would be
open. The Fund did not hold securities at October 31, 2005, 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 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 accounting principles generally accepted in
the United States of America. 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 and
18 MainStay Small Cap Growth Fund
additional paid-in-capital arising from permanent differences; net assets at
October 31, 2005, are not affected.
<Table>
<Caption>
ADDITIONAL
NET INVESTMENT LOSS PAID-IN-CAPITAL
$3,979,978 $(3,979,978)
</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 transfer agent expenses and 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.
(H) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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 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 percentage of the Fund's
average daily net assets as follows: 1.00% on assets up to $1.0 billion and
0.95% on assets in excess of $1.0 billion. NYLIM agrees to voluntarily waive its
management fee by 0.15% to 0.85%. Effective August 1, 2005, the Manager has
entered into a written expense limitation agreement, under which the Manager has
agreed to reimburse the expenses of the Fund so that the total operating
expenses (excluding taxes, interest, litigation, extraordinary expenses, and
brokerage and other transaction expenses relating to the purchase or sale of
portfolio investments) do not exceed, on an annualized basis, 1.48% of the
average daily net assets of the Class A shares. An equivalent reimbursement, in
an equal amount of basis points, will be applied to the other share classes. The
Manager, within three years of incurring such expenses, may recoup the amount of
any management fee waiver or expense reimbursement from the Fund pursuant to
this agreement if such recoupment does not cause the Fund to exceed the expense
limitations. There were no amounts available for recoupment at October 31, 2005.
This expense limitation may be modified or terminated only with the approval of
the Board of Trustees. Prior to August 1, 2005 and after December 1, 2004, NYLIM
agreed to voluntarily reimburse the expenses of the Fund so that the total
operating expenses would not exceed on an annualized basis 1.70% of the average
daily net assets of the Class A shares, and such that there would be an
equivalent reduction for the other classes of shares. For the year ended October
31, 2005, the manager earned fees from the Fund in the amount of $2,545,742 and
waived its fees and/or reimbursed expenses in the amount of $731,987.
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
0.50% of the average daily net assets of the Fund. To the extent the
www.MAINSTAYfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 $42,687 for the year ended
October 31, 2005. 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 $5,693, $245,716 and $855, respectively, for the year ended October
31, 2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $1,392,375.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(F) CAPITAL. At October 31, 2005, New York Life held shares of Class A with a
net asset value of $5,221,338. This represents 7.5% of the Class A shares net
assets and 2.2% of the Fund's total net assets at October 31, 2005.
(G) OTHER. Pursuant to the Management Agreement, 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
$6,605 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $52,124 for the year ended
October 31, 2005.
NOTE 4 -- CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, The Bank of New York acted as custodian for the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED CAPITAL UNREALIZED TOTAL ACCUMULATED
AND OTHER LOSSES APPRECIATION LOSS
$(151,508,855) $50,129,652 $(101,379,203)
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals.
At October 31, 2005, for federal income tax purposes, capital loss carryforwards
of $151,508,855 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
20 MainStay Small Cap Growth Fund
probable that the capital gains so offset will not be distributed to
shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2009 $108,332
2010 40,252
2011 2,925
---------------------------------------------
$151,509
---------------------------------------------
</Table>
The Fund utilized $27,664,156 capital loss carryforwards during the year ended
October 31, 2005.
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $146,208 and $189,158, respectively.
NOTE 7 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $40,687,036. The Fund received $42,226,997 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, 2005.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C
Shares sold 990 1,061 70
- ------------------------------------------------------------
Shares redeemed (1,555) (3,068) (127)
- ------------------------------------------------------------
Net decrease (565) (2,007) (57)
- ------------------------------------------------------------
</Table>
<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 decrease (126) (551) (29)
- ------------------------------------------------------------
</Table>
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review in December 2005, NYLIM made payments totaling
$5.9 million to nine MainStay funds. The amount paid to the MainStay Small Cap
Growth Fund was $38,000. NYLIM has also agreed to reimburse or pay all expenses
relating to the Board of Trustees' review of this matter and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
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 ("the Fund"), one
of the funds constituting The MainStay Funds, as of October 31, 2005, and the
related statement of operations for the year then ended, and the statements of
changes in net assets and financial highlights for each of the years in the
two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the
results of its operations for the year then ended, and the changes in its net
assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
www.MAINSTAYfunds.com 23
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
24 MainStay Small Cap Growth Fund
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 25
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's underperformance when compared
over several time periods with funds concluded by Trustees to be peers of the
Fund.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund, with the expectation that the Manager intended, over time, to
implement measures designed to reduce the Trust's transfer agency fees. The
Trustees considered certain benefits expected for, and risks borne by, the
Manager and its affiliates, including benefits from soft dollar arrangements.
The Trustees considered the services provided to the Fund by affiliates of the
Manager, NYLIFE Distributors and NYLIM Service, under other agreements, and the
benefits to the Manager and its affiliates from those relationships. The
information provided to the Trustees indicated that the profitability to the
Manager and its affiliates arising directly from those other agreements was not
excessive. The Trustees acknowledged certain benefits to the reputation of the
Manager and its affiliates, as well to that of the Trust, from their association
with each other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distributing shares
of various series of the Trust. They noted the Manager's willingness to
implement contractual
26 MainStay Small Cap Growth Fund
breakpoints, and that the contractual breakpoints in place for the management
fee were intended to provide that the Fund's shareholders would share in
benefits from economies of scale arising from the growth of Fund assets. The
Trustees acknowledged that the Fund had not yet reached the asset level at which
breakpoints would reduce the contractual management fee to which the Fund is
subject. Acknowledging the difficulty of forecasting economies of scale, the
Trustees generally expressed an intention to monitor the Manager's profitability
and consider the application of fee breakpoints or other appropriate measures as
the Board may determine from time to time. The Trustees reviewed historical
information about changes in the Fund's expense and asset levels over time, as
well as information about certain Fund expenses that would remain fixed even as
Fund assets increase and, therefore, provide the Fund with benefits from
economies of scale as the Fund grows. The Trustees noted that, to the extent the
Fund's gross expenses currently are higher than its net expenses, economies of
scale achieved through an increase in the Fund's assets might not directly
benefit the Fund through lower net expenses. The Trustees considered various
information about transfer agency expenses, including information showing that
transfer agency fees of the Fund were among the highest of the series of the
Trust, and also that transfer agency fees of a significant number of series of
the Trust (although not every such series or with respect to every share class
of each series) tended to be high, when aggregated and expressed as a percentage
of the assets of certain series, compared to the mutual fund industry average
according to certain studies reviewed by the Board and, therefore, adversely
affected gross expense ratios. The Board received information about potential
effects on the Manager were it to subsidize certain portions of the Trust's
transfer agency fees. The Trustees noted that a significant number of
shareholders of the Trust's series had small amounts invested in the series, and
have considered measures intended to increase average shareholder account size
and/or otherwise reduce the Trust's transfer agency fees and expenses, including
steps that the Manager has taken to encourage shareholders to consolidate or
close small accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated gross and net expense ratios, and various components of that expense
ratio, in comparison to other funds in comparison groupings prepared by outside
data providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
28 MainStay Small Cap Growth 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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
www.MAINSTAYfunds.com 29
This page intentionally left blank
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 The MainStay Funds
(C) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A08040 (RECYCLE LOGO) MS475-05 MSSG11-12/05
24
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP VALUE FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay Small Cap Value Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- --------------------------------------------------------------------------------
Investment and Performance Comparison 4
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 8
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 13
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 23
Trustees and Officers 24
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 27
- --------------------------------------------------------------------------------
Federal Income Tax Information 29
- --------------------------------------------------------------------------------
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 (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -2.28% 8.61% 8.19%
Excluding sales charges 3.41 9.85 9.02
</Table>
(PERFORMANCE GRAPH) (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
17346 17430
10/31/05 17937 19703
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges -1.55% 8.76% 8.21%
Excluding sales charges 2.67 9.04 8.21
</Table>
(PERFORMANCE GRAPH) (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
17503 17430
10/31/05 17970 19703
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- -------------------------------------------------
With sales charges 1.81% 9.04% 8.21%
Excluding sales charges 2.65 9.04 8.21
</Table>
(PERFORMANCE GRAPH) (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
17503 17430
10/31/05 17967 19703
</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 max-imum 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. 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
contractual and may be modified or terminated only with the approval of the
Board of Trustees. 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 through 2/15/05, performance of Class I shares (first offered 2/16/05)
includes the historical performance of Class A shares adjusted to reflect the
applicable sales charge (or CDSC) and fees and expenses for Class I shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Small Cap Value Fund
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- ------------------------------------------
3.87% 10.17% 9.32%
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY SMALL CAP VALUE FUND RUSSELL 2000 VALUE INDEX
----------------------------- ------------------------
6/1/98 10000 10000
8219 8408
8701 8469
11939 9934
13089 10803
12435 10530
16254 14772
18652 17430
10/31/05 19375 19703
</Table>
<Table>
<Caption>
ONE FIVE SINCE
BENCHMARK PERFORMANCE YEAR YEARS INCEPTION
- -----------------------------------------------------------------
Russell 2000(R) Value Index(1) 13.04% 14.68% 9.57%
Average Lipper small-cap core fund(2) 13.22 8.40 7.82
</Table>
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 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.
THE DISCLOSURE AND FOOTNOTES ON THE PREVIOUS PAGE ARE AN INTEGRAL PART OF THE
TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.MAINSTAYfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY SMALL CAP VALUE FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT ENDING ACCOUNT
VALUE (BASED VALUE (BASED
BEGINNING ON ACTUAL EXPENSES ON HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD 10/31/05 PERIOD
CLASS A SHARES(1) $1,000.00 $1,036.35 $ 7.55 $1,017.65 $ 7.48
- -----------------------------------------------------------------------------------------------------------------------
CLASS B SHARES(1) $1,000.00 $1,033.20 $11.38 $1,013.90 $11.27
- -----------------------------------------------------------------------------------------------------------------------
CLASS C SHARES(1) $1,000.00 $1,033.20 $11.38 $1,013.90 $11.27
- -----------------------------------------------------------------------------------------------------------------------
CLASS I SHARES(1) $1,000.00 $1,040.45 $ 5.30 $1,019.85 $ 5.24
- -----------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund annualized expense ratio of each class (1.47%
for Class A and 2.22% for Class B and Class C and 1.03% for Class I)
multiplied by the average account value over the period, divided by 365,
multiplied by 184 (to reflect the one-half year period).
6 MainStay Small Cap Value Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-TERM INVESTMENTS
(COLLATERAL FROM SECURITIES LIABILITIES IN EXCESS OF CASH AND
COMMON STOCKS LENDING IS 8.5%) OTHER ASSETS
- ------------- --------------------------- ---------------------------------
99.1% 8.5% -7.6%
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Cost Plus, Inc.
2. GrafTech International Ltd.
3. Zoran Corp.
4. Premiere Global Services, Inc.
5. Banta Corp.
6. Journal Register Co.
7. Actel Corp.
8. La-Z-Boy, Inc.
9. Jo-Ann Stores, Inc.
10. Global Industries Ltd.
</Table>
www.MAINSTAYfunds.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Caroline Evascu of MacKay Shields LLC
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 companies in the Russell
2000(R) Value Index(1) and invests primarily in common stocks and securities
convertible into common stock. In implementing this strategy, we use an
investment selection process that focuses on stocks that meet three criteria:
inexpensive valuations, free cash flow, and multiple sources of potential growth
or earnings. 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 when they meet our price objective or when we
believe there is a negative change in the fundamental performance of the issuer.
WHAT MAJOR FACTORS INFLUENCED THE STOCK MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2005?
The stock market reacted to concerns about the potential impact of higher energy
prices and rising interest rates on consumer spending. According to Russell
data, mid-capitalization stocks showed the strongest performance during the
12-month reporting period, followed by small-caps, and then large-cap stocks.
From a style perspective, value stocks outperformed growth stocks at all
capitalization levels. In the Russell 2000(R) Value Index, the consumer
discretionary sector sold off more than 4% during the third calendar quarter of
2005 and continued to be weak as the market reacted to fears of a slowdown in
consumer spending, exacerbated by hurricanes Katrina and Rita.
WHAT FACTORS HAD A SIGNIFICANT IMPACT ON THE FUND'S PERFORMANCE DURING THE
REPORTING PERIOD?
Excluding all sales charges, all share classes of the Fund underperformed the
Russell 2000(R) Value Index during the 12-month reporting period. The Fund's
overweighted positions in consumer discretionary and information technology, the
two worst-performing sectors in the Index, were partly to blame. During the
reporting period, we increased the Fund's position in Graftech International to
place it among the Fund's largest holdings. Since this stock showed particularly
weak performance, however, it detracted from the Fund's results during the
reporting period.
WHICH OF THE FUND'S HOLDINGS WERE STRONG PERFORMERS DURING THE REPORTING PERIOD?
Parker Drilling, an oil and gas contract drilling company, provided strong
performance during the period, reflecting positive fundamentals in the energy
sector. The company also sold several of its assets and used the proceeds to
improve its balance sheet, putting the company on a much stronger financial
footing. Global Industries, an offshore oil and gas construction company, was
also a strong performer during the period, benefiting from trends similar to
those that helped Parker Drilling.
Trammel Crow, a real estate management company, was also a strong performer for
the 12-month reporting period. The company benefited from a recovery in the
nonresidential real estate market, which had been weak despite the strength in
residential home building. THQ, a developer of interactive entertainment
software, performed well because of improved earnings from the company's
proprietary software releases. Priority Healthcare, a specialty pharmaceutical
distributor, also contributed positively to performance during the reporting
period, advancing on an acquisition bid from a rival company.
WHICH STOCKS UNDERPERFORMED?
As mentioned, Graftech International, a manufacturer of graphite electrodes sold
to the steel industry, was a significant detractor during the 12-month reporting
period. The company's share price plunged on dis-appointing volume and earnings
guidance for 2005. Because we believe the company's long-term fundamentals
remain positive, we used the sell-off as an opportunity to add to the Fund's
position.
Cost Plus, a specialty retailer of casual home furnishings and entertaining
products, declined during the 12-month reporting period, but we initiated the
Fund's position in May 2005 to take advantage of weak sales trends and a
management transition. We believe that the company may benefit from several
potentially positive catalysts, including a new management, easier same-store
sales comparisons, and high unit-volume growth.
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 devel- opments than mid- or large-capitalization
companies.
1. See footnote on page 5 for more information on the Russell 2000(R) Index.
8 MainStay Small Cap Value Fund
Hooper Holmes, which provides risk assessment services primarily to the life
insurance industry, was down during the reporting period. The company suffered
from weakness in the life insurance market and from the board's decision to
replace both the CEO and CFO after several years of poor results.
Jo-Ann Stores, a fabric and craft materials retailer, fell during the reporting
period, on weaker-than-expected same-store sales and general concerns about
consumer spending. We took advantage of the weakness to add to the Fund's
position because we believe the stock represents a good long-term investment.
Hancock Fabrics, a fabric retailer, also declined during the reporting period,
although the Fund sold its position in June 2005.
WERE THERE ANY SIGNIFICANT EQUITY PURCHASES DURING THE REPORTING PERIOD?
In addition to Graftech International, Cost Plus, and Jo-Ann Stores, which we
previously discussed, the Fund initiated a position in Zoran in March 2005. The
company sells semiconductor chips for DVDs, digital phones, high-definition
digital televisions, and other growing end markets. We believe Zoran is
successfully diversifying its revenue stream away from just DVDs, a move that
could fuel significant earnings growth over the next several years.
Carmike Cinemas, which owns and operates theaters in small- and mid-sized
markets, was a new holding added to the Fund in July 2005. While the stock was
weak from our purchase through the end of the reporting period because of
lower-than-expected earnings and a weak box office, we believe that management
is focused on cutting costs and increasing cash flows.
In December 2004, we initiated a position in Kadant, a company that manufactures
and markets equipment and accessories for paper production. We believe that the
company's earnings may improve as a result a recent divestiture, efforts to
restructure the company's European manufacturing plant, and improving end-market
demand.
WHAT SECURITIES DID YOU SELL DURING THE REPORTING PERIOD?
During the reporting period, we eliminated several stocks, including Wabtec,
Post Properties, Pharmaceutical Product Development, and Steiner Leisure. Each
of these holdings reached the predetermined price targets we had set for the
stock.
Wabtec benefited from internal cost cutting and a recovery in demand and was
eliminated in October 2005. Multifamily apartment company Post Properties was
sold in June 2005, while recovering demand and a restructured property portfolio
helped push the company's stock price higher. Pharmaceutical Product
Development, a drug-discovery and services company, was eliminated from the Fund
in March 2005. The company had posted several quarters of better-than-expected
earnings growth, and the stock's valuation had become very expensive relative to
other investment opportunities. In June 2005, we sold the Fund's holdings in
Steiner Leisure, a company that manages spas for cruise ships and resorts.
Steiner Leisure had successfully increased earnings and market share and had
used free cash flow to improve the company's balance sheet and initiate a share
buyback program.
DID THE FUND'S WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
The Fund's sector weightings result primarily from our bottom-up security
selection process, which focuses on attractive valuations. Industry and security
movements may also affect weightings. During the 12-month period, the Fund's
exposure to the health care sector declined. This drop reflected profit-taking
in certain stocks, as well as takeovers in Priority Healthcare and Renal Care
Group. The Fund's health care holdings made a positive contribution to the
Fund's returns during reporting period.
The Fund's weighting in the consumer discretionary sector rose substantially.
The increase reflected the sector's underperformance and our subsequent ability
to find long-term investment opportunities within the sector. Adding to the
consumer discretionary weighting hurt the Fund's relative return during the
reporting period. As long-term investors, however, we believe the sector may
offer significant opportunities over the long term.
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 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (99.1%)+
- -----------------------------------------------------------------------------
AEROSPACE & DEFENSE (1.0%)
Herley Industries, Inc. (a) 84,400 $ 1,427,204
------------
AUTO COMPONENTS (1.3%)
American Axle & Manufacturing Holdings, Inc. 84,500 1,842,100
------------
BIOTECHNOLOGY (1.4%)
Angiotech Pharmaceuticals, Inc. (a) 25,200 337,680
Cambrex Corp. 89,801 1,713,403
------------
2,051,083
------------
BUILDING PRODUCTS (1.0%)
Apogee Enterprises, Inc. 85,535 1,401,063
------------
CAPITAL MARKETS (1.3%)
Waddell & Reed Financial, Inc. Class A 94,900 1,820,182
------------
CHEMICALS (2.5%)
Omnova Solutions, Inc. (a) 537,400 2,418,300
Spartech Corp. 65,000 1,233,050
------------
3,651,350
------------
COMMERCIAL BANKS (6.1%)
Chittenden Corp. 72,268 2,079,150
Cullen/Frost Bankers, Inc. 44,700 2,361,054
Irwin Financial Corp. 27,600 576,012
Mercantile Bank Corp. 45,620 1,740,403
S&T Bancorp, Inc. 31,642 1,177,399
Sandy Spring Bancorp, Inc. 26,100 920,025
------------
8,854,043
------------
COMMERCIAL SERVICES & SUPPLIES (2.4%)
V Banta Corp. 54,500 2,743,530
Learning Tree International, Inc. (a) 55,255 749,258
------------
3,492,788
------------
COMMUNICATIONS EQUIPMENT (3.5%)
Belden CDT, Inc. (b) 107,300 2,138,489
SafeNet, Inc. (a) 68,100 2,258,877
Seachange International, Inc. (a) 108,700 680,462
------------
5,077,828
------------
COMPUTERS & PERIPHERALS (1.5%)
Advanced Digital Information Corp. (a) 231,000 2,111,340
------------
CONSTRUCTION & ENGINEERING (1.3%)
Insituform Technologies, Inc. Class A (a)(b) 102,521 1,841,277
------------
</Table>
<Table>
<Caption>
SHARES VALUE
CONTAINERS & PACKAGING (0.5%)
Packaging Dynamics Corp. 66,500 $ 676,970
------------
DIVERSIFIED CONSUMER SERVICES (0.5%)
Stewart Enterprises, Inc. Class A 137,500 701,250
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.3%)
Iowa Telecommunications Services, Inc. 37,200 613,800
V Premiere Global Services, Inc. (a) 325,400 2,759,392
------------
3,373,192
------------
ELECTRIC UTILITIES (2.3%)
Cleco Corp. 70,300 1,490,360
Sierra Pacific Resources (a) 137,000 1,774,150
------------
3,264,510
------------
ELECTRICAL EQUIPMENT (3.7%)
Global Power Equipment Group, Inc. (a) 340,300 2,133,681
V GrafTech International Ltd. (a) 652,643 3,197,951
------------
5,331,632
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (1.9%)
Applied Films Corp. (a) 61,000 1,184,620
Benchmark Electronics, Inc. (a) 57,000 1,601,130
------------
2,785,750
------------
ENERGY EQUIPMENT & SERVICES (5.4%)
V Global Industries Ltd. (a) 197,534 2,510,657
Hanover Compressor Co. (a) 175,814 2,260,968
Parker Drilling Co. (a) 124,800 1,103,232
Pride International, Inc. (a) 69,000 1,936,830
------------
7,811,687
------------
FOOD & STAPLES RETAILING (1.4%)
Ingles Markets, Inc. Class A 32,600 525,512
Performance Food Group Co. (a)(b) 34,900 962,891
Smart & Final, Inc. (a) 40,000 502,000
------------
1,990,403
------------
GAS UTILITIES (2.3%)
SEMCO Energy, Inc. (a) 167,200 1,003,200
UGI Corp. 96,000 2,265,600
------------
3,268,800
------------
HEALTH CARE EQUIPMENT & SUPPLIES (0.8%)
Viasys Healthcare, Inc. (a) 46,800 1,118,052
------------
</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.
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.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES (0.9%)
Hooper Holmes, Inc. 436,475 $ 1,261,413
------------
HOTELS, RESTAURANTS & LEISURE (3.5%)
Bob Evans Farms, Inc. 88,900 1,992,249
La Quinta Corp. Paired-shares (a)(c) 279,100 2,330,485
Navigant International, Inc. (a)(b) 67,700 787,012
------------
5,109,746
------------
HOUSEHOLD DURABLES (1.8%)
V La-Z-Boy, Inc. (b) 216,648 2,565,112
------------
INSURANCE (3.1%)
Direct General Corp. 52,900 1,024,144
Reinsurance Group of America, Inc. (b) 27,000 1,235,250
Scottish Re Group Ltd. (b) 88,100 2,162,855
------------
4,422,249
------------
IT SERVICES (2.1%)
eFunds Corp. (a) 90,363 1,864,189
Keane, Inc. (a) 106,572 1,204,264
------------
3,068,453
------------
LEISURE EQUIPMENT & PRODUCTS (2.0%)
Arctic Cat, Inc. 99,800 1,869,254
Callaway Golf Co. 73,374 1,045,579
------------
2,914,833
------------
MACHINERY (2.8%)
Kadant, Inc. (a) 132,400 2,224,320
Lydall, Inc. (a) 194,700 1,744,512
------------
3,968,832
------------
MEDIA (6.9%)
Carmike Cinemas, Inc. 106,700 2,355,936
V Journal Register Co. 160,400 2,571,212
Navarre Corp. (a)(b) 135,000 598,050
Nexstar Broadcasting Group, Inc. Class A (a)(b) 450,100 2,083,963
ProQuest Co. (a) 77,824 2,307,482
------------
9,916,643
------------
METALS & MINING (0.9%)
Allegheny Technologies, Inc. 45,300 1,300,563
------------
OIL, GAS & CONSUMABLE FUELS (2.0%)
Cimarex Energy Co. (a)(b) 41,925 1,645,976
Houston Exploration Co. (a) 23,018 1,186,578
------------
2,832,554
------------
PAPER & FOREST PRODUCTS (1.4%)
Wausau Paper Corp. 183,067 2,004,584
------------
</Table>
<Table>
<Caption>
SHARES VALUE
REAL ESTATE (2.6%)
Aames Investment Corp. 223,300 $ 1,337,567
Trammell Crow Co. (a) 94,800 2,424,036
------------
3,761,603
------------
ROAD & RAIL (2.2%)
Quality Distribution, Inc. (a) 312,400 2,380,488
US Xpress Enterprises, Inc. Class A (a) 67,000 817,400
------------
3,197,888
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (7.4%)
V Actel Corp. (a) 183,921 2,565,698
Catalyst Semiconductor, Inc. (a) 100,000 483,000
Mattson Technology, Inc. (a) 220,000 1,735,800
MKS Instruments, Inc. (a) 75,500 1,424,685
Sigmatel, Inc. (a) 118,000 1,605,980
V Zoran Corp. (a) 197,700 2,902,236
------------
10,717,399
------------
SOFTWARE (1.9%)
Magma Design Automation, Inc. (a)(b) 110,000 954,800
Mentor Graphics Corp. (a) 207,700 1,717,679
------------
2,672,479
------------
SPECIALTY RETAIL (7.9%)
Christopher & Banks Corp. 163,663 2,188,174
V Cost Plus, Inc. (a) 278,500 4,277,760
CSK Auto Corp. (a) 67,473 1,020,866
V Jo-Ann Stores, Inc. (a) 173,500 2,534,835
Too, Inc. (a) 45,413 1,290,183
------------
11,311,818
------------
TEXTILES, APPAREL & LUXURY GOODS (1.2%)
Kellwood Co. 40,900 896,119
Russell Corp. 56,628 766,177
------------
1,662,296
------------
THRIFTS & MORTGAGE FINANCE (4.1%)
Brookline Bancorp, Inc. 100,200 1,407,810
First Niagara Financial Group, Inc. 70,900 1,044,357
Provident Financial Services, Inc. 76,500 1,346,400
W Holding Co., Inc. 279,300 2,153,403
------------
5,951,970
------------
Total Common Stocks
(Cost $137,581,800) 142,532,939
------------
</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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (8.5%)
- -----------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.3%)
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (d)(e) $453,329 $ 453,329
------------
Total Certificate of Deposit
(Cost $453,329) 453,329
------------
COMMERCIAL PAPER (0.5%)
Compass Securitization
3.993%, due 11/22/05 (d) 323,807 323,807
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (d) 194,280 194,280
Silver Tower U.S. Funding
3.932%, due 11/15/05 (d) 192,239 192,239
------------
Total Commercial Paper
(Cost $710,326) 710,326
------------
<Caption>
SHARES VALUE
INVESTMENT COMPANY (2.0%)
BGI Institutional Money Market Fund (d) 2,953,221 2,953,221
------------
Total Investment Company
(Cost $2,953,221) 2,953,221
------------
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (5.7%)
Bank of the West (The)
4.02%, due 12/8/05 (d) $1,230,465 $ 1,230,465
Barclays
3.92%, due 12/5/05 (d) 518,091 518,091
3.94%, due 11/28/05 (d) 582,852 582,852
Credit Suisse First Boston Corp.
3.74%, due 11/1/05 (d) 453,329 453,329
Deutsche Bank
3.95%, due 12/2/05 (d) 518,091 518,091
First Tennessee National Corp.
3.88%, due 11/14/05 (d) 518,091 518,091
Fortis Bank
4.00%, due 12/12/05 (d) 582,852 582,852
Halifax Bank of Scotland
3.75%, due 11/1/05 (d) 518,091 518,091
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Keybank
4.00%, due 11/1/05 (d) $579,329 $ 579,329
Marshall & Ilsley Bank
3.97%, due 12/29/05 (d) 518,091 518,091
Societe Generale
3.77%, due 11/1/05 (d) 1,100,942 1,100,942
UBS AG
4.01%, due 12/13/05 (d) 518,091 518,091
Wells Fargo & Co.
4.00%, due 11/25/05 (d) 518,091 518,091
------------
Total Time Deposits
(Cost $8,156,406) 8,156,406
------------
Total Short-Term Investments
(Cost $12,273,282) 12,273,282
------------
Total Investments
(Cost $149,855,082) (f) 107.6% 154,806,221(g)
Liabilities in Excess of Cash and Other Assets (7.6) (10,953,705)
---------- ------------
Net Assets 100.0% $143,852,516
========== ============
</Table>
<Table>
(a) Non-income producing security.
(b) Represents security, or a portion thereof, which is out on loan.
(c) Paired-share security represents equal ownership of La Quinta Properties,
Inc. Class B and La Quinta Corp.
(d) Represents security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(e) Floating rate. Rate shown is the rate in effect at October 31, 2005.
(f) The cost for federal income tax purposes is $150,561,899.
(g) At October 31, 2005 net unrealized appreciation was $4,244,322, 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 $16,764,389 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $12,520,067.
</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.
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 ASSETS AND LIABILITIES AS OF OCTOBER 31, 2005
<Table>
ASSETS:
Investment in securities, at value (identified
cost $149,855,082)
including $11,659,502 market value of securities
loaned $ 154,806,221
Cash 33,625
Receivables:
Investment securities sold 2,011,933
Dividends and interest 207,985
Fund shares sold 130,728
Other assets 24,626
-------------------
Total assets 157,215,118
-------------------
LIABILITIES:
Securities lending collateral 12,273,282
Payables:
Fund shares redeemed 368,987
Investment securities purchased 299,893
Transfer agent 172,902
NYLIFE Distributors 76,479
Manager 75,343
Shareholder communication 51,187
Professional 26,078
Custodian 3,719
Accrued expenses 14,732
-------------------
Total liabilities 13,362,602
-------------------
Net assets $ 143,852,516
===================
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.01 per share) unlimited
number of shares authorized:
Class A $ 35,728
Class B 50,975
Class C 9,674
Class I 15,121
Additional paid-in capital 129,307,743
Accumulated net realized gain on investments 9,482,136
Net unrealized appreciation on investments 4,951,139
-------------------
Net assets $ 143,852,516
===================
CLASS A
Net assets applicable to outstanding shares $ 47,848,916
===================
Shares of beneficial interest outstanding 3,572,753
===================
Net asset value per share outstanding $ 13.39
Maximum sales charge (5.50% of offering price) 0.78
-------------------
Maximum offering price per share outstanding $ 14.17
===================
CLASS B
Net assets applicable to outstanding shares $ 63,610,948
===================
Shares of beneficial interest outstanding 5,097,518
===================
Net asset value and offering price per share
outstanding $ 12.48
===================
CLASS C
Net assets applicable to outstanding shares $ 12,070,386
===================
Shares of beneficial interest outstanding 967,417
===================
Net asset value and offering price per share
outstanding $ 12.48
===================
CLASS I
Net assets applicable to outstanding shares $ 20,322,266
===================
Shares of beneficial interest outstanding 1,512,051
===================
Net asset value and offering price per share
outstanding $ 13.44
===================
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 1,601,900
Interest 130,345
Income from securities loaned--net 17,304
------------
Total income 1,749,549
------------
EXPENSES:
Manager 1,287,432
Transfer agent -- Classes A, B and C 602,386
Transfer agent -- Class I 31,306
Distribution -- Class B 521,165
Distribution -- Class C 89,043
Distribution/Service -- Class A 142,788
Service -- Class B 173,722
Service -- Class C 29,681
Professional 71,034
Shareholder communication 65,121
Registration 54,433
Recordkeeping 41,813
Custodian 29,860
Trustees 13,510
Miscellaneous 11,215
-----------
Total expenses before reimbursement 3,164,509
Expense reimbursement from Manager (378,656)
------------
Net expenses 2,785,853
------------
Net investment loss (1,036,304)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 10,789,577
Net change in unrealized appreciation on
investments (6,250,635)
------------
Net realized and unrealized gain on investments 4,538,942
------------
Net increase in net assets resulting from
operations $ 3,502,638
============
</Table>
<Table>
(a) Dividends recorded net of foreign witholding taxes in the amount of $817.
</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.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
INCREASE IN NET ASSETS:
Operations:
Net investment loss $ (1,036,304) $ (1,345,694)
Net realized gain on investments 10,789,577 25,852,119
Net change in unrealized
appreciation on investments (6,250,635) (8,311,430)
---------------------------
Net increase in net assets
resulting from operations 3,502,638 16,194,995
---------------------------
Distributions to shareholders:
From net realized gain on
investments:
Class A (10,051.244) (1,583,448)
Class B (12,713,000) (2,228,626)
Class C (1,876,623) (345,457)
---------------------------
Total distributions to
shareholders (24,640,867) (4,157,531)
---------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 38,889,055 20,813,873
Class B 10,484,181 7,854,307
Class C 6,421,148 1,374,069
Class I 23,599,634 --
Net asset value of shares issued
to shareholders in reinvestment
of distributions:
Class A 7,791,228 1,183,620
Class B 11,787,756 2,052,279
Class C 1,441,315 227,162
---------------------------
100,414,317 33,505,310
Cost of shares redeemed:
Class A (46,831,991) (16,089,539)
Class B (14,302,649) (9,833,069)
Class C (4,143,783) (1,951,429)
Class I (2,194,635) --
---------------------------
(67,473,058) (27,874,037)
Increase in net assets derived
from capital share
transactions 32,941,259 5,631,273
---------------------------
Net increase in net assets 11,803,030 17,668,737
</Table>
<Table>
<Caption>
2005 2004
NET ASSETS:
Beginning of year 132,049,486 114,380,749
---------------------------
End of year $143,852,516 $132,049,486
===========================
</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>
CLASS A
----------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 15.59 $ 14.09 $ 11.10 $ 12.84 $ 11.30 $ 9.56
------- ------- ----------- ------- ------- -------
Net investment income (loss)
(a) (0.05) (0.09) (0.08) (0.09) (0.05) 0.00(d)
Net realized and unrealized
gain (loss) on investments 0.68 2.09 3.07 (1.47) 1.79 2.80
------- ------- ----------- ------- ------- -------
Total from investment
operations 0.63 2.00 2.99 (1.56) 1.74 2.80
------- ------- ----------- ------- ------- -------
Less distributions:
From net realized gain on
investments (2.83) (0.50) -- (0.18) (0.20) (1.06)
------- ------- ----------- ------- ------- -------
Net asset value at end of
period $ 13.39 $ 15.59 $ 14.09 $ 11.10 $ 12.84 $ 11.30
======= ======= =========== ======= ======= =======
Total investment return (b) 3.41% 14.46% 26.94%(c) (12.16)% 15.43% 30.04%
Ratios (to average net
assets)/Supplemental Data:
Net investment income
(loss) (0.32)% (0.62)% (0.78)+ (0.74)% (0.41)% 0.08%
Net expenses 1.47% 1.70% 1.90%+ 1.87% 1.88% 1.90%
Expenses (before
reimbursement) 1.72% 1.78% 1.94%+ 1.87% 1.88% 2.07%
Portfolio turnover rate 75% 103% 41% 46% 46% 69%
Net assets at end of period
(in 000's) $47,849 $55,640 $44,496 $35,197 $43,761 $27,610
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 14.80 $ 13.49 $10.70 $12.48 $ 11.07 $ 9.46
------- ------- ----------- ------ ------- ------
Net investment income (loss)
(a) (0.15) (0.20) (0.15) (0.18) (0.13) (0.07)
Net realized and unrealized
gain (loss) on investments 0.66 2.01 2.94 (1.42) 1.74 2.74
------- ------- ----------- ------ ------- ------
Total from investment
operations 0.51 1.81 2.79 (1.60) 1.61 2.67
------- ------- ----------- ------ ------- ------
Less distributions:
From net realized gain on
investments (2.83) (0.50) -- (0.18) (0.20) (1.06)
------- ------- ----------- ------ ------- ------
Net asset value at end of
period $ 12.48 $ 14.80 $13.49 $10.70 $ 12.48 $11.07
======= ======= =========== ====== ======= ======
Total investment return (b) 2.65% 13.67% 26.07%(c) (12.83)% 14.57% 28.97%
Ratios (to average net
assets)/Supplemental Data:
Net investment income
(loss) (1.07)% (1.37)% (1.53)+ (1.49)% (1.16)% (0.67)%
Net expenses 2.22% 2.45% 2.65% + 2.62% 2.63% 2.65%
Expenses (before
reimbursement) 2.47% 2.53% 2.69% + 2.62% 2.63% 2.82%
Portfolio turnover rate 75% 103% 41% 46% 46% 69%
Net assets at end of period
(in 000's) $12,070 $10,054 $9,501 $9,403 $12,250 $2,090
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period. Class I is not
subject to sales charges.
(b) Total return is calculated exclusive of sales charges.
(c) Total return is not annualized.
(d) Less than one cent per share.
</Table>
16 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
<Table>
<Caption>
CLASS B
- ----------------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 14.80 $ 13.50 $ 10.70 $ 12.48 $ 11.07 $ 9.46
----------- ----------- ----------- ------- ------- -------
(0.14) (0.20) (0.15) (0.18) (0.13) (0.07)
0.65 2.00 2.95 (1.42) 1.74 2.74
----------- ----------- ----------- ------- ------- -------
0.51 1.80 2.80 (1.60) 1.61 2.67
----------- ----------- ----------- ------- ------- -------
(2.83) (0.50) -- (0.18) (0.20) (1.06)
----------- ----------- ----------- ------- ------- -------
$ 12.48 $ 14.80 $ 13.50 $ 10.70 $ 12.48 $ 11.07
=========== =========== =========== ======= ======= =======
2.67% 13.59% 26.17%(c) (12.83)% 14.57% 28.97%
(1.07)% (1.37)% (1.53)+ (1.49)% (1.16)% (0.67)%
2.22% 2.45% 2.65%+ 2.62% 2.63% 2.65%
2.47% 2.53% 2.69%+ 2.62% 2.63% 2.82%
75% 103% 41% 46% 46% 69%
$63,611 $66,355 $60,384 $53,819 $67,377 $32,777
</Table>
<Table>
<Caption>
CLASS I
------------
FEBRUARY 16,
2005**
THROUGH
OCTOBER 31,
2005
$ 14.01
------------
0.02
(0.59)
------------
(0.57)
------------
--
------------
$ 13.44
============
(4.07)%(c)
0.25%+
0.96%+
1.21%+
75%
$20,322
</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 nineteen 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 Fund currently offers four 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. Distribution of Class I shares commenced on
February 16, 2005. 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. Distribution of Class I shares commenced on January
1, 2004. Class A, Class B, Class C 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 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 accounting
principles generally accepted in the United States of America 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 normally taken from the principal 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 in good faith by 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 principal
market is temporarily closed at a time when under normal conditions it would be
open. The Fund did not hold securities at October 31, 2005, 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 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 accounting principles generally accepted in
the United States of America. 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
18 MainStay Small Cap Value Fund
treatment; temporary differences do not require reclassification.
The following table discloses the current year reclassifications 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, 2005, are not affected.
<Table>
<Caption>
ACCUMULATED NET
ACCUMULATED NET REALIZED GAIN ON ADDITIONAL
INVESTMENT LOSS INVESTMENTS PAID-IN-CAPITAL
$1,036,304 $(925,790) $(110,514)
- --------------------------------------------------------------
</Table>
The reclassification for the Fund is primarily attributable 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.
(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 transfer agent expenses and 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.
(H) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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 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 percentage of the Fund's
average daily net assets as follows: 0.85% on assets up to $1.0 billion and
0.80% on assets in excess of $1.0 billion. Effective August 1, 2005, the Manager
has entered into a written expense limitation agreement, under which the Manager
has agreed to reimburse the expenses of the Fund so that the total operating
expenses (excluding taxes, interest, litigation, extraordinary expenses, and
brokerage and other transaction expenses relating to the purchase or sale of
portfolio investments) do not exceed, on an annualized basis, 1.90% of the
average daily net assets of the Class A shares. An equivalent reimbursement, in
an equal amount of basis points, will be applied to the other share classes. The
Manager, within three years of incurring such expenses, may recoup the amount of
any management fee waiver or expense reimbursement from the Fund pursuant to
this agreement if such recoupment does not cause the Fund to exceed the expense
limitations. This expense limitation may be modified or terminated only with the
approval of the Board of Trustees. Prior to August 1, 2005 and after July 1,
2004, NYLIM voluntarily agreed to waive a portion of its management fee in
excess of 0.60% of the Fund's average daily net assets. The Manager also agreed
to voluntarily reimburse the expenses of the Fund so that the total operating
expenses would not exceed on an annualized basis 1.90 of the average daily net
assets of the Class A shares, and such that there would be an equivalent
reduction for the other classes of shares. For the year ended October 31, 2005,
the manager earned
www.MAINSTAYfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
fees from the Fund in the amount of $1,287,432 and waived its fees and/or
reimbursed expenses in the amount of $378,656.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager pays the Subadvisor a monthly fee of one-half of the
management fee, net of management fee waivers, expense limitations and
reimbursements.. 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 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 $34,828 for the year ended
October 31, 2005. 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 $918, $62,234 and $2,222, respectively, for the year ended October 31,
2005.
(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 incurred by the Fund, for the year ended
October 31, 2005, amounted to $633,692.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(F) OTHER. Pursuant to the Management Agreement, fees for the cost of legal
services, included in Professional fees as shown on the Statement of Operations,
provided to the Fund by the Office of the General Counsel of NYLIM amounted to
$4,094 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $41,813 for the year ended
October 31, 2005.
NOTE 4 -- CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, The Bank of New York acted as custodian for the Fund.
20 MainStay Small Cap Value Fund
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED CAPITAL TOTAL
ORDINARY AND OTHER UNREALIZED ACCUMULATED
INCOME GAINS APPRECIATION GAIN
$4,264,885 $ 5,924,068 $ 4,244,322 $14,433,275
- ---------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale loss deferrals.
The tax character of distributions paid during the years ended October 31, 2005
and 2004 shown in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2005 2004
Distributions paid from:
Long-term Capital Gains $24,640,867 $4,157,531
- ----------------------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $132,514 and $110,098, respectively.
NOTE 7 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $11,659,502. The Fund received $12,273,282 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, 2005.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C CLASS I*
Shares sold 2,764 790 485 1,933
- --------------------------------------------------------------------------------
Shares issued in reinvestment of
distributions 562 907 111 --
- --------------------------------------------------------------------------------
3,326 1,697 596 1,933
- --------------------------------------------------------------------------------
Shares redeemed (3,323) (1,084) (309) (421)
- --------------------------------------------------------------------------------
Net increase 3 613 287 1,512
- --------------------------------------------------------------------------------
</Table>
<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>
* Commenced operations on February 16, 2005.
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review in December 2005, NYLIM made payments totaling
$5.9 million to nine MainStay funds. No payment was made with respect to the
MainStay Small Cap Value Fund. NYLIM has also agreed to reimburse or pay all
expenses relating to the Board of Trustees' review of this matter and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
www.MAINSTAYfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
22 MainStay Small 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 Small Cap Value ("the Fund"), one
of the funds constituting The MainStay Funds, as of October 31, 2005, and the
related statement of operations for the year then ended, and the statements of
changes in net assets and financial highlights for each of the years in the
two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the
results of its operations for the year then ended, and the changes in its net
assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
24 MainStay Small Cap Value Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 25
<Table>
<Caption>
NUMBER OF FUNDS
POSITION(S) HELD WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
26 MainStay Small Cap Value Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared to multiple comparison groups, including with reference to
information provided by outside data providers and analyzed with the assistance
of a third party consultant. The Trustees referred to discussions held during
periodic meetings of the Performance Committee of the Board to discuss
investment performance-related matters with the Manager. In reviewing the Fund's
performance, the Board recognized the underperformance of the Fund over various
time periods relative to funds concluded by Trustees to be peers of the Fund but
acknowledged its recent approval of the selection of the Subadvisor as a new
subadviser for the Fund. The Trustees noted that, as the Subadvisor had not yet
provided subadvisory services to the Fund for a meaningful period of time, they
would monitor and evaluate such services over time.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund with the expectation that the Manager intended, over time, to implement
measures designed to reduce the Trust's transfer agency fees. The Trustees
considered certain benefits expected for, and risks borne by, the Manager and
its affiliates, including benefits from soft dollar arrangements. The Trustees
considered the services provided to the Fund by affiliates of the Manager,
NYLIFE Distributors and NYLIM Service, under other agreements, and the benefits
to the Manager and its affiliates from those relationships. The information
provided to the Trustees indicated that the profitability to the Manager and its
affiliates arising directly from those other agreements was not excessive. The
Trustees acknowledged certain benefits to the reputation of the Manager and its
affiliates, as well to that of the Trust, from their association with each
other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in
www.MAINSTAYfunds.com 27
particular the Manager's plans for marketing and distributing shares of various
series of the Trust. They noted the Manager's willingness to implement
contractual breakpoints, and that the contractual breakpoints in place for the
management fee were intended to provide that the Fund's shareholders would share
in benefits from economies of scale arising from the growth of Fund assets. The
Trustees acknowledged that the Fund had not yet reached the asset level at which
breakpoints would reduce the contractual management fee to which the Fund is
subject. Acknowledging the difficulty of forecasting economies of scale, the
Trustees generally expressed an intention to monitor the Manager's profitability
and consider the application of fee breakpoints or other appropriate measures as
the Board may determine from time to time. The Trustees reviewed historical
information about changes in the Fund's expense and asset levels over time, as
well as information about certain Fund expenses that would remain fixed even as
Fund assets increase and, therefore, provide the Fund with benefits from
economies of scale as the Fund grows. The Trustees noted that, to the extent the
Fund's gross expenses currently are higher than its net expenses, economies of
scale achieved through an increase in the Fund's assets might not directly
benefit the Fund through lower net expenses. The Trustees considered various
information about transfer agency expenses, including information showing that
transfer agency fees of the Fund and a significant number of series of the Trust
(although not every such series or with respect to every share class of each
series) tended to be high, when aggregated and expressed as a percentage of the
assets of certain series, compared to the mutual fund industry average according
to certain studies reviewed by the Board and, therefore, adversely affected
gross expense ratios. The Board received information about potential effects on
the Manager were it to subsidize certain portions of the Trust's transfer agency
fees. The Trustees noted that a significant number of shareholders of the
Trust's series had small amounts invested in the series, and have considered
measures intended to increase average shareholder account size and/or otherwise
reduce the Trust's transfer agency fees and expenses, including steps that the
Manager has taken to encourage shareholders to consolidate or close small
accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated gross and net expense ratios, and various components of that expense
ratio, in comparison to other funds in comparison groupings prepared by outside
data providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
28 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, 2005) 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 24,643,513 on December 3,
2004.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
30 MainStay Small Cap Value Fund
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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A08063 (RECYCLE LOGO) MS475-05 MSSV11-12/05
25
(MAINSTAY LOGO)
MAINSTAY
EQUITY INDEX FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay Equity Index Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/s/ Christopher O. Blunt
Christopher O. Blunt
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 18
- ----------------------------------------------------
Notes to Financial Statements 22
- ----------------------------------------------------
Report of Independent Registered Public
Accounting Firm 27
Trustees and Officers 28
- ----------------------------------------------------
Board Consideration and Approval of Management
and Subadvisory Agreements 31
- ----------------------------------------------------
Federal Income Tax Information 33
- ----------------------------------------------------
Proxy Voting Policies and Procedures 33
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 33
- ----------------------------------------------------
MainStay Funds 34
</Table>
www.MAINSTAYfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 3% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 4.73% -3.12% 8.13%
Excluding sales charges 7.97 -2.53 8.46
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY EQUITY INDEX FUND S&P 500 INDEX
-------------------------- -------------
10/31/95 9700 10000
10/31/96 11937 12410
10/31/97 15647 16394
10/31/98 18911 20000
10/31/99 23594 25134
10/31/00 24831 26665
10/31/01 18513 20024
10/31/02 15599 16999
10/31/03 18663 20535
10/31/04 20233 22470
10/31/05 21847 24429
</Table>
BENCHMARK PERFORMANCE
- --------------------------------------------------------------------------------
<Table>
<Caption>
ONE FIVE TEN
YEAR YEARS YEARS
- -------------------------------------------------------------------------------------
S&P 500(R) Index(1) 8.72% -1.74% 9.34%
Average Lipper S&P 500 Index objective fund (2) 8.14 -2.28 8.88
</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%. 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 contractual and may be modified or terminated
only with the approval of the Board of Trustees.
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) 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 Equity Index Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY EQUITY INDEX FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
VALUE
ENDING ACCOUNT (BASED ON
VALUE (BASED HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% RETURN EXPENSES
ACCOUNT RETURNS AND PAID AND ACTUAL PAID
VALUE EXPENSES) DURING EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,049.20 $3.82 $1,021.30 $3.77
- --------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of 0.74% multiplied
by the average account value over the period, divided by 365, multiplied by
184 (to reflect the one-half year period).
www.MAINSTAYfunds.com 5
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-TERM INVESTMENTS (COLLATERAL FROM LIABILITIES IN EXCESS OF CASH AND
COMMON STOCKS SECURITIES LENDING IS 8.2%) OTHER ASSETS
- ------------- --------------------------------------- ----------------------------------
96.8% 11.4% -8.2%
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. General Electric Co.
2. ExxonMobil Corp.
3. Microsoft Corp.
4. Citigroup, Inc.
5. Procter & Gamble Co. (The)
6. Johnson & Johnson
7. Bank of America Corp.
8. American International Group, Inc.
9. Pfizer, Inc.
10. Altria Group, Inc.
</Table>
6 MainStay Equity Index Fund
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. The Fund's investments
also include S&P 500(R) Index futures, which are used for cash management
purposes.
WHAT WERE THE MAJOR FACTORS THAT AFFECTED THE STOCK MARKET DURING THE 12 MONTHS
ENDED OCTOBER 31, 2005?
For the 12 months ended October 31, 2005, all broadly watched equity indices
provided positive performance. Mid- and small-capitalization stocks generally
outperformed their large-cap counterparts. The market favored value stocks over
growth stocks at all capitalization levels. Despite wide fluctuations in
crude-oil prices, instability in many regions of the world, and the devastation
caused by hurricanes Katrina and Rita, the U.S. stock market posted significant
gains during the 12-month period ended October 31, 2005.
The Federal Open Market Committee continued to raise its target for the federal
funds rate, with eight 25-basis-point increases during the reporting period. (A
basis point is one-hundredth of a percentage point.) At the end of October 2005,
the federal funds target rate stood at 3.75%, its highest level in more than
four years. Among the considerations that influenced the gradual tightening
policy were mounting inflationary pressures, low unemployment, an upward path of
record energy prices, and growing labor costs.
WHAT WERE THE BEST-PERFORMING INDUSTRIES IN THE S&P 500(R) INDEX DURING THE
REPORTING PERIOD?
From a total-return perspective, tobacco was the best-performing industry for
the 12 months ended October 31, 2005. Other top-performing industries from a
total-return perspective included health care providers & services, energy
equipment & services, construction & engineering, and independent power
producers & energy traders.
On the basis of impact, which takes weightings and total returns both into
account, the industry that made the strongest contribution to the performance of
the Index was oil, gas & consumable fuels. The second-strongest contributor was
health care providers & services, followed by insurance, capital markets, and
tobacco.
WHICH INDUSTRIES WERE THE WORST PERFORMERS?
On the basis of total returns alone, the worst-performing industry in the Index
for the 12-month reporting period was automobiles. The second-worst total return
came from Internet & catalog retail, followed by leisure equipment & products,
auto components, and thrifts & mortgage finance.
For the 12 months ended October 31, 2005, media was the industry with the
greatest negative impact on Index performance when weightings and total returns
were both considered. Pharmaceuticals was next, followed by thrifts & mortgage
finance, automobiles, and Internet & catalog retail.
WHICH INDIVIDUAL STOCKS WERE THE BEST PERFORMERS DURING THE REPORTING PERIOD?
For the 12 months ended October 31, 2005, the S&P 500(R) Index stock with the
highest total return was Valero Energy. Express Scripts had the second-best
total return, followed by NVIDIA, Humana, and Apple Computer. Each of these top
performers more than doubled in price during the reporting period.
The five stocks with the greatest positive impact on 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
reporting period was Altria Group. The second-best contributor was ExxonMobil,
followed by ConocoPhillips, UnitedHealth Group, and Hewlett-Packard.
WHICH STOCKS WERE THE WEAKEST PERFORMERS DURING THE REPORTING PERIOD?
For the 12-months ended October 31, 2005, the S&P 500(R) Index stock with the
worst total return was Sanmina-SCI. Other particularly weak performers
This Fund was closed to new purchases as of January 1, 2002.
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.
www.MAINSTAYfunds.com 7
included Unisys, Gateway, Lexmark International, and Dana.
On the basis of impact, which takes weightings and total returns both into
account, Pfizer made the greatest negative contribution to the performance of
the Index for the 12-month reporting period. Wal-Mart Stores was next, followed
by Fannie Mae, Verizon Communications, and International Business Machines.
WERE ANY CHANGES MADE TO THE FUND OR TO THE INDEX DURING THE PERIOD?
The Fund seeks to track the performance and weightings 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 the U.S. economy. During the 12 months ended October 31, 2005, there
were 20 additions to the Index and 20 deletions from it.
Among the additions were well-known companies such as Compass Bancshares,
Vornado Realty Trust, Tyson Foods, Public Storage, and Lennar. Among the
deletions were familiar names such as Deluxe, Winn-Dixie Stores, Delta Air
Lines, Unocal, and Delphi. When Sears, Roebuck merged with Kmart, the stock was
deleted from the Index but simultaneously reappeared as Sears Holdings. Adolf
Coors merged with Molson and was deleted when Molson Coors Brewing was added to
the Index. Peoplesoft was deleted from the Index because the company was
acquired by Oracle; Nextel Communications was deleted when the company was
acquired by Sprint; and Wellpoint Health Networks was deleted when it was
acquired by Anthem.
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 Equity Index Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (96.8%)+
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.1%)
Boeing Co. (The) 40,071 $ 2,590,189
General Dynamics Corp. 9,785 1,137,995
Goodrich Corp. 5,827 210,180
Honeywell International, Inc. 41,796 1,429,423
L-3 Communications Holdings, Inc. 5,830 453,691
Lockheed Martin Corp. 17,743 1,074,516
Northrop Grumman Corp. 17,434 935,334
Raytheon Co. 21,831 806,655
Rockwell Collins, Inc. 8,588 393,502
United Technologies Corp. 50,049 2,566,513
------------
11,597,998
------------
AIR FREIGHT & LOGISTICS (1.0%)
FedEx Corp. 14,780 1,358,725
Ryder System, Inc. 3,066 121,628
United Parcel Service, Inc. Class B 54,076 3,944,303
------------
5,424,656
------------
AIRLINES (0.1%)
Southwest Airlines Co. 33,844 541,842
------------
AUTO COMPONENTS (0.2%)
Cooper Tire & Rubber Co. 3,055 41,731
Dana Corp. 7,183 53,944
Goodyear Tire & Rubber Co. (The) (a)(b) 8,461 132,330
Johnson Controls, Inc. 9,414 640,623
Visteon Corp. (a) 6,243 52,004
------------
920,632
------------
AUTOMOBILES (0.4%)
Ford Motor Co. 90,506 753,010
General Motors Corp. (b) 27,640 757,336
Harley-Davidson, Inc. (b) 13,371 662,266
------------
2,172,612
------------
BEVERAGES (2.1%)
Anheuser-Busch Cos., Inc. 37,932 1,565,074
Brown-Forman Corp. Class B 4,060 257,160
Coca-Cola Co. (The) (c) 101,433 4,339,304
Coca-Cola Enterprises, Inc. 14,779 279,323
Constellation Brands, Inc. Class A (a) 9,364 220,429
Molson Coors Brewing Co. Class B 2,822 174,117
Pepsi Bottling Group, Inc. (The) 6,806 193,495
PepsiCo, Inc. 81,565 4,818,860
------------
11,847,762
------------
</Table>
<Table>
<Caption>
SHARES VALUE
BIOTECHNOLOGY (1.5%)
Amgen, Inc. (a) 60,381 $ 4,574,465
Applera Corp.-Applied BioSystems Group 9,426 228,769
Biogen Idec, Inc. (a)(b) 16,656 676,733
Chiron Corp. (a) 5,345 235,928
Genzyme Corp. (a) 12,592 910,402
Gilead Sciences, Inc. (a) 22,266 1,052,068
MedImmune, Inc. (a) 11,964 418,501
------------
8,096,866
------------
BUILDING PRODUCTS (0.2%)
American Standard Cos., Inc. 8,642 328,742
Masco Corp. 20,988 598,158
------------
926,900
------------
CAPITAL MARKETS (3.1%)
Ameriprise Financial, Inc. (a) 12,132 451,553
Bank of New York Co., Inc. (The) 38,013 1,189,427
Bear Stearns Cos., Inc. (The) 5,442 575,764
Charles Schwab Corp. (The) 50,782 771,886
E*TRADE Financial Corp. (a) 17,700 328,335
Federated Investors, Inc. Class B 4,153 145,397
Franklin Resources, Inc. 7,282 643,510
Goldman Sachs Group, Inc. (The) (b) 22,643 2,861,396
Janus Capital Group, Inc. 11,419 200,403
Lehman Brothers Holdings, Inc. 13,334 1,595,680
Mellon Financial Corp. (b) 20,424 647,237
Merrill Lynch & Co., Inc. 45,456 2,942,821
Morgan Stanley 53,056 2,886,777
Northern Trust Corp. 9,063 485,777
State Street Corp. 16,035 885,613
T. Rowe Price Group, Inc. 6,330 414,742
------------
17,026,318
------------
CHEMICALS (1.5%)
Air Products & Chemicals, Inc. 10,847 620,882
Ashland, Inc. 3,591 192,154
Dow Chemical Co. (The) 47,151 2,162,345
E.I. du Pont de Nemours & Co. 48,637 2,027,677
Eastman Chemical Co. 3,751 197,903
Ecolab, Inc. (b) 8,973 296,827
Engelhard Corp. 5,911 160,779
Hercules, Inc. (a) 5,417 60,345
International Flavors & Fragrances, Inc. 4,260 140,537
Monsanto Co. 13,112 826,187
PPG Industries, Inc. 8,314 498,591
</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, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
CHEMICALS (CONTINUED)
Praxair, Inc. 15,833 $ 782,309
Rohm & Haas Co. 7,076 308,018
Sigma-Aldrich Corp. 3,285 209,254
------------
8,483,808
------------
COMMERCIAL BANKS (5.6%)
AmSouth Bancorporation 17,152 432,745
V Bank of America Corp. 196,321 8,587,081
BB&T Corp. (b) 26,708 1,130,817
Comerica, Inc. 8,220 474,952
Compass Bancshares, Inc. 5,879 286,660
Fifth Third Bancorp 27,199 1,092,584
First Horizon National Corp. 5,900 228,212
Huntington Bancshares, Inc. (b) 11,062 257,302
KeyCorp 20,043 646,186
M&T Bank Corp. 3,928 422,574
Marshall & Ilsley Corp. 9,974 428,483
National City Corp. (b) 27,751 894,415
North Fork Bancorp., Inc. 23,425 593,589
PNC Financial Services Group, Inc. 14,186 861,232
Regions Financial Corp. 22,325 726,679
SunTrust Banks, Inc. 17,678 1,281,301
Synovus Financial Corp. 14,877 408,671
U.S. Bancorp 89,325 2,642,234
Wachovia Corp. 76,984 3,889,232
Wells Fargo & Co. 82,466 4,964,453
Zions Bancorporation 4,313 316,876
------------
30,566,278
------------
COMMERCIAL SERVICES & SUPPLIES (0.7%)
Allied Waste Industries, Inc. (a)(b) 10,706 87,147
Avery Dennison Corp. (b) 5,394 305,570
Cendant Corp. 50,827 885,406
Cintas Corp. (b) 6,763 274,375
Equifax, Inc. 6,518 224,675
Monster Worldwide, Inc. (a)(b) 5,756 188,854
Pitney Bowes, Inc. 11,066 465,657
R.R. Donnelley & Sons Co. 10,344 362,247
Robert Half International, Inc. 8,298 306,030
Waste Management, Inc. 27,346 806,980
------------
3,906,941
------------
COMMUNICATIONS EQUIPMENT (2.7%)
ADC Telecommunications, Inc. (a) 5,555 96,935
Andrew Corp. (a) 7,704 81,816
Avaya, Inc. (a) 20,755 239,098
CIENA Corp. (a) 27,398 64,933
Cisco Systems, Inc. (a) 312,306 5,449,740
Comverse Technology, Inc. (a) 9,463 237,521
Corning, Inc. (a) 71,936 1,445,194
</Table>
<Table>
<Caption>
SHARES VALUE
COMMUNICATIONS EQUIPMENT (CONTINUED)
JDS Uniphase Corp. (a) 80,489 $ 169,027
Lucent Technologies, Inc. (a) 213,001 607,053
Motorola, Inc. 120,659 2,673,803
QUALCOMM, Inc. 79,573 3,163,822
Scientific-Atlanta, Inc. 7,330 259,775
Tellabs, Inc. (a) 22,166 211,907
------------
14,700,624
------------
COMPUTERS & PERIPHERALS (3.6%)
Apple Computer, Inc. (a) 40,577 2,336,829
Dell, Inc. (a) 117,100 3,733,148
EMC Corp. (a) 117,809 1,644,614
Gateway, Inc. (a) 14,502 41,331
Hewlett-Packard Co. 140,041 3,926,750
International Business Machines Corp. 77,957 6,383,119
Lexmark International, Inc. (a) 5,765 239,363
NCR Corp. (a) 8,981 271,406
Network Appliance, Inc. (a) 17,650 482,904
QLogic Corp. (a) 4,418 133,247
Sun Microsystems, Inc. (a) 166,669 666,676
------------
19,859,387
------------
CONSTRUCTION & ENGINEERING (0.0%) ++
Fluor Corp. (b) 4,064 258,470
------------
CONSTRUCTION MATERIALS (0.1%)
Vulcan Materials Co. (b) 5,032 327,080
------------
CONSUMER FINANCE (1.2%)
American Express Co. 60,660 3,019,048
Capital One Financial Corp. 14,107 1,077,069
MBNA Corp. 61,537 1,573,501
SLM Corp. 20,397 1,132,645
------------
6,802,263
------------
CONTAINERS & PACKAGING (0.2%)
Ball Corp. 5,310 209,055
Bemis Co., Inc. (b) 5,130 135,535
Pactiv Corp. (a) 7,163 141,111
Sealed Air Corp. (a)(b) 4,048 203,655
Temple-Inland, Inc. 5,566 204,996
------------
894,352
------------
DISTRIBUTORS (0.1%)
Genuine Parts Co. 8,363 371,066
------------
DIVERSIFIED CONSUMER SERVICES (0.1%)
Apollo Group, Inc. Class A (a)(b) 7,119 448,639
H&R Block, Inc. 15,922 395,821
------------
844,460
------------
</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)
- ------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (3.6%)
CIT Group, Inc. 10,097 $ 461,736
V Citigroup, Inc. 252,665 11,567,004
JPMorgan Chase & Co. 171,697 6,287,544
Moody's Corp. 12,385 659,625
Principal Financial Group, Inc. 13,685 679,187
------------
19,655,096
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (2.2%)
AT&T Corp. 39,108 773,556
BellSouth Corp. (b) 89,492 2,328,582
CenturyTel, Inc. 6,463 211,534
Citizens Communications Co. (b) 16,128 197,407
Qwest Communications International, Inc. (a)(b) 74,471 324,693
SBC Communications, Inc. (b) 161,487 3,851,465
Verizon Communications, Inc. 135,118 4,257,568
------------
11,944,805
------------
ELECTRIC UTILITIES (1.6%)
Allegheny Energy, Inc. (a)(b) 7,848 221,784
American Electric Power Co., Inc. 19,167 727,579
Cinergy Corp. 9,672 385,913
Edison International 15,695 686,813
Entergy Corp. 10,222 722,900
Exelon Corp. 32,762 1,704,607
FirstEnergy Corp. 15,907 755,583
FPL Group, Inc. 19,262 829,422
Pinnacle West Capital Corp. 4,611 192,555
PPL Corp. 18,478 579,101
Progress Energy, Inc. 12,230 533,106
Southern Co. (The) 36,525 1,278,010
------------
8,617,373
------------
ELECTRICAL EQUIPMENT (0.4%)
American Power Conversion Corp. 8,690 185,879
Cooper Industries Ltd. Class A 4,412 312,767
Emerson Electric Co. 20,224 1,406,579
Rockwell Automation, Inc. 8,826 469,102
------------
2,374,327
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.3%)
Agilent Technologies, Inc. (a) 24,161 773,394
Jabil Circuit, Inc. (a) 8,843 263,964
Molex, Inc. 7,106 179,853
Sanmina-SCI Corp. (a) 25,197 91,969
Solectron Corp. (a)(b) 46,653 164,685
Symbol Technologies, Inc. 12,889 106,979
Tektronix, Inc. 4,278 98,308
------------
1,679,152
------------
</Table>
<Table>
<Caption>
SHARES VALUE
ENERGY EQUIPMENT & SERVICES (1.5%)
Baker Hughes, Inc. 16,649 $ 915,029
BJ Services Co. 15,579 541,370
Halliburton Co. 25,023 1,478,859
Nabors Industries Ltd. (a) 7,705 528,794
National-Oilwell Varco, Inc. (a) 8,478 529,621
Noble Corp. 6,632 426,968
Rowan Cos., Inc. 5,064 167,061
Schlumberger Ltd. 28,717 2,606,642
Transocean, Inc. (a) 16,103 925,761
Weatherford International Ltd. (a) 6,742 422,049
------------
8,542,154
------------
FOOD & STAPLES RETAILING (1.3%)
Albertson's, Inc. (b) 17,634 442,790
Costco Wholesale Corp. 23,378 1,130,560
CVS Corp. 39,719 969,541
Kroger Co. (The) (a) 35,248 701,435
Safeway, Inc. (b) 21,547 501,183
SUPERVALU, Inc. 6,484 203,792
Sysco Corp. 30,598 976,382
Walgreen Co. 49,910 2,267,411
------------
7,193,094
------------
FOOD PRODUCTS (1.1%)
Archer-Daniels-Midland Co. 31,818 775,405
Campbell Soup Co. 9,044 263,180
ConAgra Foods, Inc. 24,819 577,538
General Mills, Inc. (b) 17,556 847,253
H.J. Heinz Co. 16,833 597,571
Hershey Co. (The) 8,959 509,140
Kellogg Co. 12,564 554,952
McCormick & Co., Inc. 6,543 198,187
Sara Lee Corp. 37,910 676,693
Tyson Foods, Inc. Class A 12,040 214,312
Wm. Wrigley Jr. Co. 8,780 610,210
------------
5,824,441
------------
GAS UTILITIES (0.0%) ++
Nicor, Inc. 2,117 82,986
Peoples Energy Corp. 1,829 68,039
------------
151,025
------------
HEALTH CARE EQUIPMENT & SUPPLIES (2.1%)
Bausch & Lomb, Inc. 2,556 189,630
Baxter International, Inc. 30,377 1,161,313
Becton, Dickinson & Co. 12,137 615,953
Biomet, Inc. 12,181 424,264
Boston Scientific Corp. (a) 28,879 725,440
C.R. Bard, Inc. 5,079 316,828
Fisher Scientific International, Inc. (a) 5,938 335,497
Guidant Corp. 16,108 1,014,804
Hospira, Inc. (a) 7,477 297,958
</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, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES (CONTINUED)
Medtronic, Inc. (b) 59,142 $ 3,350,986
Millipore Corp. (a) 2,345 143,561
PerkinElmer, Inc. 6,205 136,944
St. Jude Medical, Inc. (a) 17,810 856,127
Stryker Corp. 14,182 582,455
Thermo Electron Corp. (a)(b) 7,696 232,342
Waters Corp. (a) 5,806 210,177
Zimmer Holdings, Inc. (a) 12,118 772,765
------------
11,367,044
------------
HEALTH CARE PROVIDERS & SERVICES (3.0%)
Aetna, Inc. 14,179 1,255,692
AmerisourceBergen Corp. 5,040 384,401
Cardinal Health, Inc. 20,876 1,304,959
Caremark Rx, Inc. (a) 21,988 1,152,171
CIGNA Corp. 6,356 736,470
Coventry Health Care, Inc. (a) 7,744 418,099
Express Scripts, Inc. (a)(b) 9,400 708,854
HCA, Inc. (b) 22,050 1,062,589
Health Management Associates, Inc. Class A (b) 11,649 249,405
Humana, Inc. (a) 7,783 345,487
IMS Health, Inc. 11,169 259,456
Laboratory Corp. of America Holdings (a) 6,466 311,984
Manor Care, Inc. 4,188 156,003
McKesson Corp. 15,054 683,903
Medco Health Solutions, Inc. (a) 14,909 842,359
Patterson Cos., Inc. (a) 6,700 277,246
Quest Diagnostics, Inc. 8,133 379,892
Tenet Healthcare Corp. (a) 22,432 188,877
UnitedHealth Group, Inc. 61,612 3,566,719
WellPoint, Inc. (a) 29,932 2,235,322
------------
16,519,888
------------
HOTELS, RESTAURANTS & LEISURE (1.4%)
Carnival Corp. 21,058 1,045,951
Darden Restaurants, Inc. 6,524 211,508
Harrah's Entertainment, Inc. 9,014 545,167
Hilton Hotels Corp. 15,973 310,675
International Game Technology (b) 16,545 438,277
Marriott International, Inc. Class A 8,414 501,643
McDonald's Corp. 61,172 1,933,035
Starbucks Corp. (a) 37,494 1,060,330
Starwood Hotels & Resorts Worldwide, Inc. 10,607 619,767
</Table>
<Table>
<Caption>
SHARES VALUE
HOTELS, RESTAURANTS & LEISURE (CONTINUED)
Wendy's International, Inc. 5,486 $ 256,306
Yum! Brands, Inc. 14,017 713,045
------------
7,635,704
------------
HOUSEHOLD DURABLES (0.7%)
Black & Decker Corp. (The) 3,926 322,442
Centex Corp. 6,290 404,761
D.R. Horton, Inc. 13,093 401,824
Fortune Brands, Inc. 7,155 543,565
KB HOME (b) 3,811 249,049
Leggett & Platt, Inc. 9,193 184,228
Lennar Corp. Class A 6,500 361,270
Maytag Corp. 3,812 65,643
Newell Rubbermaid, Inc. 13,199 303,445
Pulte Homes, Inc. (b) 10,527 397,815
Snap-on, Inc. (b) 2,779 100,100
Stanley Works (The) 3,659 175,376
Whirlpool Corp. (b) 3,242 254,497
------------
3,764,015
------------
HOUSEHOLD PRODUCTS (2.3%)
Clorox Co. (The) 7,428 402,003
Colgate-Palmolive Co. 25,286 1,339,147
Kimberly-Clark Corp. 23,291 1,323,860
V Procter & Gamble Co. (The) 167,643 9,386,332
------------
12,451,342
------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.6%)
AES Corp. (The) (a) 31,141 494,830
Calpine Corp. (a)(b) 25,513 60,721
Constellation Energy Group, Inc. 8,657 474,404
Duke Energy Corp. (b) 45,167 1,196,022
Dynegy, Inc. Class A (a) 16,044 71,235
TXU Corp. 11,762 1,185,021
------------
3,482,233
------------
INDUSTRIAL CONGLOMERATES (4.3%)
3M Co. 37,337 2,836,865
V General Electric Co. (c) 517,285 17,541,134
Textron, Inc. 6,547 471,646
Tyco International Ltd. 98,918 2,610,446
------------
23,460,091
------------
INSURANCE (4.6%)
ACE Ltd. 15,426 803,695
AFLAC, Inc. 24,542 1,172,617
Allstate Corp. (The) 32,119 1,695,562
Ambac Financial Group, Inc. 5,225 370,400
V American International Group, Inc. 126,836 8,218,973
Aon Corp. 15,146 512,692
Chubb Corp. (The) 9,681 900,043
Cincinnati Financial Corp. 8,565 364,441
</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)
- ------------------------------------------------------------------------------
INSURANCE (CONTINUED)
Hartford Financial Services Group, Inc. (The) 14,593 $ 1,163,792
Jefferson-Pilot Corp. 6,569 360,507
Lincoln National Corp. 8,436 426,946
Loews Corp. 6,620 615,528
Marsh & McLennan Cos., Inc. (b) 26,109 761,077
MBIA, Inc. (b) 6,509 379,084
MetLife, Inc. 36,994 1,827,874
Progressive Corp. (The) 9,514 1,101,816
Prudential Financial, Inc. 25,293 1,841,077
SAFECO Corp. 6,174 343,892
St. Paul Travelers Cos., Inc. (The) 32,993 1,485,675
Torchmark Corp. 5,216 275,561
UnumProvident Corp. (b) 14,269 289,518
XL Capital Ltd. Class A 6,875 440,412
------------
25,351,182
------------
INTERNET & CATALOG RETAIL (0.4%)
eBay, Inc. (a) 54,213 2,146,835
------------
INTERNET SOFTWARE & SERVICES (0.4%)
Yahoo!, Inc. (a) 61,607 2,277,611
------------
IT SERVICES (1.0%)
Affiliated Computer Services, Inc. Class A (a) 6,143 332,398
Automatic Data Processing, Inc. 28,399 1,325,097
Computer Sciences Corp. (a) 9,128 467,810
Convergys Corp. (a) 6,836 111,085
Electronic Data Systems Corp. 24,761 577,179
First Data Corp. (b) 37,517 1,517,563
Fiserv, Inc. (a) 9,311 406,704
Paychex, Inc. 16,262 630,315
Sabre Holdings Corp. Class A 6,354 124,094
Unisys Corp. (a) 16,211 82,838
------------
5,575,083
------------
LEISURE EQUIPMENT & PRODUCTS (0.2%)
Brunswick Corp. 4,649 177,266
Eastman Kodak Co. (b) 13,763 301,410
Hasbro, Inc. 8,711 164,115
Mattel, Inc. 19,946 294,203
------------
936,994
------------
MACHINERY (1.3%)
Caterpillar, Inc. 32,993 1,735,102
Cummins, Inc. (b) 2,303 196,607
Danaher Corp. 11,628 605,819
Deere & Co. (b) 11,891 721,546
Dover Corp. 9,747 379,938
</Table>
<Table>
<Caption>
SHARES VALUE
MACHINERY (CONTINUED)
Eaton Corp. 7,360 $ 432,989
Illinois Tool Works, Inc. 10,196 864,213
Ingersoll-Rand Co. Class A 16,675 630,148
ITT Industries, Inc. 4,512 458,419
Navistar International Corp. (a) 3,185 87,651
PACCAR, Inc. 8,339 583,897
Pall Corp. 5,966 156,071
Parker-Hannifin Corp. 5,760 361,037
------------
7,213,437
------------
MEDIA (3.3%)
Clear Channel Communications, Inc. 26,544 807,468
Comcast Corp. Class A (a) 107,215 2,983,794
Dow Jones & Co., Inc. (b) 2,920 99,017
Gannett Co., Inc. 12,064 755,930
Interpublic Group of Cos., Inc. (The) (a) 20,240 209,079
Knight-Ridder, Inc. (b) 3,378 180,318
McGraw-Hill Cos., Inc. (The) 18,336 897,364
Meredith Corp. 2,218 110,678
New York Times Co. (The) Class A (b) 7,008 190,898
News Corp. Class A 119,710 1,705,868
Omnicom Group, Inc. (b) 8,986 745,479
Time Warner, Inc. 229,373 4,089,721
Tribune Co. (b) 12,930 407,424
Univision Communications, Inc. Class A (a) 11,276 294,755
Viacom, Inc. Class B 77,486 2,399,742
Walt Disney Co. (The) 98,559 2,401,883
------------
18,279,418
------------
METALS & MINING (0.7%)
Alcoa, Inc. 42,648 1,035,920
Allegheny Technologies, Inc. 4,287 123,080
Freeport-McMoRan Copper & Gold, Inc. Class B 8,560 423,035
Newmont Mining Corp. 21,849 930,767
Nucor Corp. 7,674 459,289
Phelps Dodge Corp. 4,699 566,089
United States Steel Corp. (b) 5,450 199,089
------------
3,737,269
------------
MULTILINE RETAIL (1.1%)
Big Lots, Inc. (a) 5,393 62,397
Dillard's, Inc. Class A 3,445 71,346
Dollar General Corp. 15,728 305,752
Family Dollar Stores, Inc. (b) 8,042 178,050
Federated Department Stores, Inc. 12,944 794,373
J.C. Penney Co., Inc. 12,190 624,128
</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, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
MULTILINE RETAIL (CONTINUED)
Kohl's Corp. (a) 16,806 $ 808,873
Nordstrom, Inc. 10,806 374,428
Sears Holdings Corp. (a)(b) 5,007 602,092
Target Corp. 43,260 2,409,149
------------
6,230,588
------------
MULTI-UTILITIES (1.1%)
Ameren Corp. (b) 9,950 523,370
Centerpoint Energy, Inc. (b) 15,152 200,612
CMS Energy Corp. (a)(b) 10,329 154,005
Consolidated Edison, Inc. (b) 11,931 542,861
Dominion Resources, Inc. 16,622 1,264,602
DTE Energy Co. 8,708 376,186
KeySpan Corp. 8,359 288,971
NiSource, Inc. 13,050 308,633
PG&E Corp. 18,183 661,498
Public Service Enterprise Group, Inc. 11,648 732,543
Sempra Energy 12,274 543,738
TECO Energy, Inc. 9,974 172,550
Xcel Energy, Inc. (b) 19,191 351,771
------------
6,121,340
------------
OFFICE ELECTRONICS (0.1%)
Xerox Corp. (a) 46,028 624,600
------------
OIL, GAS & CONSUMABLE FUELS (7.6%)
Amerada Hess Corp. 3,902 488,140
Anadarko Petroleum Corp. 11,500 1,043,165
Apache Corp. 16,094 1,027,280
Burlington Resources, Inc. 18,608 1,343,870
Chevron Corp. 109,875 6,270,566
ConocoPhillips 68,016 4,446,886
Devon Energy Corp. 22,164 1,338,262
El Paso Corp. 32,193 381,809
EOG Resources, Inc. 11,759 797,025
V ExxonMobil Corp. 307,647 17,271,303
Kerr-McGee Corp. 5,570 473,673
Kinder Morgan, Inc. (b) 4,683 425,685
Marathon Oil Corp. 17,887 1,076,082
Murphy Oil Corp. 8,035 376,440
Occidental Petroleum Corp. 19,511 1,539,028
Sunoco, Inc. 6,661 496,245
Valero Energy Corp. 14,856 1,563,445
Williams Cos., Inc. (The) 27,362 610,173
XTO Energy, Inc. 17,434 757,682
------------
41,726,759
------------
</Table>
<Table>
<Caption>
SHARES VALUE
PAPER & FOREST PRODUCTS (0.4%)
Georgia-Pacific Corp. 12,516 $ 407,145
International Paper Co. 23,976 699,620
Louisiana-Pacific Corp. 5,264 131,232
MeadWestvaco Corp. 8,874 232,676
Weyerhaeuser Co. 11,928 755,520
------------
2,226,193
------------
PERSONAL PRODUCTS (0.1%)
Alberto-Culver Co. 3,639 157,969
Avon Products, Inc. 22,715 613,078
------------
771,047
------------
PHARMACEUTICALS (6.2%)
Abbott Laboratories 75,910 3,267,926
Allergan, Inc. 6,291 561,786
Bristol-Myers Squibb Co. 95,603 2,023,916
Eli Lilly & Co. (b) 55,367 2,756,723
Forest Laboratories, Inc. (a) 16,398 621,648
V Johnson & Johnson 145,385 9,104,009
King Pharmaceuticals, Inc. (a) 11,583 178,726
Merck & Co., Inc. 107,126 3,023,096
Mylan Laboratories, Inc. 10,501 201,724
V Pfizer, Inc. 360,226 7,831,313
Schering-Plough Corp. (b) 72,107 1,466,656
Watson Pharmaceuticals, Inc. (a) 5,239 181,060
Wyeth 65,552 2,920,997
------------
34,139,580
------------
REAL ESTATE (0.7%)
Apartment Investment & Management Co. Class A 4,600 176,640
Archstone-Smith Trust 10,361 420,346
Equity Office Properties Trust 20,087 618,680
Equity Residential (b) 14,069 552,208
Plum Creek Timber Co., Inc. (b) 8,839 343,837
ProLogis (b) 12,110 520,730
Public Storage, Inc. (b) 4,066 269,169
Simon Property Group, Inc. (b) 8,899 637,346
Vornado Realty Trust 5,738 464,778
------------
4,003,734
------------
ROAD & RAIL (0.6%)
Burlington Northern Santa Fe Corp. 18,255 1,132,905
CSX Corp. 10,325 472,988
Norfolk Southern Corp. 19,761 794,392
Union Pacific Corp. 12,870 890,347
------------
3,290,632
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (3.0%)
Advanced Micro Devices, Inc. (a) 18,970 440,483
Altera Corp. (a)(b) 17,947 298,818
Analog Devices, Inc. 18,196 632,857
</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)
- ------------------------------------------------------------------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (CONTINUED)
Applied Materials, Inc. 79,268 $ 1,298,410
Applied Micro Circuits Corp. (a) 14,798 36,107
Broadcom Corp. Class A (a) 13,973 593,294
Freescale Semiconductor, Inc. Class B (a) 19,340 461,839
Intel Corp. 297,704 6,996,044
KLA-Tencor Corp. 9,418 435,959
Linear Technology Corp. 14,771 490,545
LSI Logic Corp. (a) 18,377 149,037
Maxim Integrated Products, Inc. 16,015 555,400
Micron Technology, Inc. (a) 29,368 381,490
National Semiconductor Corp. 17,084 386,611
Novellus Systems, Inc. 6,772 148,036
NVIDIA Corp. (a)(b) 8,001 268,434
PMC-Sierra, Inc. (a) 8,663 61,507
Teradyne, Inc. (a)(b) 9,207 124,663
Texas Instruments, Inc. 79,308 2,264,243
Xilinx, Inc. 16,676 399,390
------------
16,423,167
------------
SOFTWARE (3.6%)
Adobe Systems, Inc. (b) 24,004 774,129
Autodesk, Inc. 10,969 495,031
BMC Software, Inc. (a) 10,667 208,967
Citrix Systems, Inc. (a) 8,058 222,159
Computer Associates International, Inc. 22,988 642,974
Compuware Corp. (a) 18,538 149,972
Electronic Arts, Inc. (a) 14,784 840,914
Intuit, Inc. (a) 8,905 409,007
Mercury Interactive Corp. (a) 4,040 140,552
V Microsoft Corp. 450,180 11,569,626
Novell, Inc. (a) 18,204 138,714
Oracle Corp. (a)(b) 184,253 2,336,328
Parametric Technology Corp. (a) 12,982 84,513
Siebel Systems, Inc. 24,733 255,987
Symantec Corp. (a)(b) 58,573 1,396,966
------------
19,665,839
------------
SPECIALTY RETAIL (3.2%)
AutoNation, Inc. (a) 8,796 174,864
AutoZone, Inc. (a) 2,754 222,799
Bed Bath & Beyond, Inc. (a) 14,538 589,080
Best Buy Co., Inc. 19,801 876,392
Circuit City Stores, Inc. 8,077 143,690
Gap, Inc. (The) 28,360 490,061
Home Depot, Inc. (The) 104,629 4,293,974
</Table>
<Table>
<Caption>
SHARES VALUE
SPECIALTY RETAIL (CONTINUED)
Limited Brands, Inc. 17,080 $ 341,771
Lowe's Cos., Inc. 38,107 2,315,762
Office Depot, Inc. (a) 15,452 425,394
OfficeMax, Inc. 3,335 93,447
RadioShack Corp. 6,612 146,125
Sherwin-Williams Co. (The) 5,542 235,812
Staples, Inc. 35,756 812,734
Tiffany & Co. (b) 6,951 273,869
TJX Cos., Inc. (The) 23,166 498,764
Wal-Mart Stores, Inc. (b) 122,053 5,774,327
------------
17,708,865
------------
TEXTILES, APPAREL & LUXURY GOODS (0.4%)
Coach, Inc. (a) 18,395 591,951
Jones Apparel Group, Inc. 5,902 161,007
Liz Claiborne, Inc. (b) 5,229 184,061
NIKE, Inc. Class B 9,364 787,044
Reebok International Ltd. 2,681 152,951
VF Corp. 4,352 227,392
------------
2,104,406
------------
THRIFTS & MORTGAGE FINANCE (1.6%)
Countrywide Financial Corp. 29,032 922,347
Fannie Mae 47,328 2,249,027
Freddie Mac 33,716 2,068,477
Golden West Financial Corp. (b) 12,461 731,835
MGIC Investment Corp. (b) 4,653 275,644
Sovereign Bancorp, Inc. 18,082 390,029
Washington Mutual, Inc. 48,609 1,924,916
------------
8,562,275
------------
TOBACCO (1.5%)
V Altria Group, Inc. 101,393 7,609,545
Reynolds American, Inc. (b) 4,140 351,900
UST, Inc. 7,979 330,251
------------
8,291,696
------------
TRADING COMPANIES & DISTRIBUTORS (0.0%) ++
Grainger (W.W.), Inc. 3,740 250,505
------------
WIRELESS TELECOMMUNICATION SERVICES (0.8%)
Alltel Corp. 18,685 1,155,854
Sprint Nextel Corp. 143,354 3,341,581
------------
4,497,435
------------
Total Common Stocks
(Cost $353,893,466) 532,388,589(g)
------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (11.4%)
- ------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.3%)
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (d)(e) $ 1,661,830 $ 1,661,830
------------
Total Certificate of Deposit
(Cost $1,661,830) 1,661,830
------------
COMMERCIAL PAPER (1.8%)
AIG Funding, Inc.
3.85%, due 11/10/05 (c) 7,800,000 7,792,493
Compass Securitization
3.993%, due 11/22/05 (d) 1,187,022 1,187,022
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (d) 712,213 712,213
Silver Tower U.S. Funding
3.932%, due 11/15/05 (d) 704,716 704,716
------------
Total Commercial Paper
(Cost $10,396,444) 10,396,444
------------
<Caption>
SHARES
INVESTMENT COMPANY (2.0%)
BGI Institutional Money
Market Fund (d) 10,826,022 10,826,022
------------
Total Investment Company
(Cost $10,826,022) 10,826,022
------------
<Caption>
PRINCIPAL
AMOUNT
TIME DEPOSITS (5.4%)
Bank of the West (The)
4.02%, due 12/8/05 (d) $ 4,510,682 4,510,682
Barclays
3.92%, due 12/5/05 (d) 1,899,235 1,899,235
3.94%, due 11/28/05 (d) 2,136,639 2,136,639
Credit Suisse First Boston Corp.
3.74%, due 11/1/05 (d) 1,661,830 1,661,830
Deutsche Bank
3.95%, due 12/2/05 (d) 1,899,235 1,899,235
First Tennessee National Corp.
3.88%, due 11/14/05 (d) 1,899,235 1,899,235
Fortis Bank
4.00%, due 12/12/05 (d) 2,136,639 2,136,639
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Halifax Bank of Scotland
3.75%, due 11/1/05 (d) $ 1,899,235 $ 1,899,235
Keybank
4.00%, due 11/1/05 (d) 2,123,723 2,123,723
Marshall & Ilsley Bank
3.97%, due 12/29/05 (d) 1,899,235 1,899,235
Societe Generale
3.77%, due 11/1/05 (d) 4,035,874 4,035,874
UBS AG
4.01%, due 12/13/05 (d) 1,899,235 1,899,235
Wells Fargo & Co.
4.00%, due 11/25/05 (d) 1,899,235 1,899,235
------------
Total Time Deposits
(Cost $29,900,032) 29,900,032
------------
U.S. GOVERNMENT (1.9%)
United States Treasury Bills
3.63%, due 2/16/06 (c) 1,700,000 1,681,981
3.67%, due 2/9/06 (c) 1,300,000 1,286,747
3.776%, due 2/9/06 (c) 100,000 98,951
3.845%, due 2/9/06 (c) 7,400,000 7,320,964
------------
Total U.S. Government
(Cost $10,388,643) 10,388,643
------------
Total Short-Term Investments
(Cost $63,172,971) 63,172,971
------------
Total Investments
(Cost $417,066,437) (h) 108.2% 595,561,560(i)
Liabilities in Excess of
Cash and Other Assets (8.2) (45,254,996)
----------- ------------
Net Assets 100.0% $550,306,564
=========== ============
</Table>
<Table>
<Caption>
UNREALIZED
CONTRACTS APPRECIATION/
LONG (DEPRECIATION) (F)
FUTURES CONTRACT (-0.1%)
- -----------------------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX
Mini December 2005 4 $ 1,411
December 2005 60 (348,310)
-------------------
Total Futures Contract
(Settlement Value $18,388,960) (g) $ (346,899)
===================
</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.
<Table>
++ Less than one tenth of a percent.
(a) Non-income producing security.
(b) Represents security, or a portion thereof, which is out
on loan.
(c) Segregated as collateral for futures contracts.
(d) Represents security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(e) Floating rate. Rate shown is the rate in effect at
October 31, 2005.
(f) Represents the difference between the value of the
contracts at the time they were opened and the value at
October 31, 2005.
(g) The combined market value of common stocks and
settlement value of Standard & Poor's 500 Index futures
contracts represents 100.1% of net assets.
(h) The cost for federal income tax purposes is
$427,466,487.
(i) At October 31, 2005 net unrealized appreciation was
$168,095,073, 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 $203,913,263 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $35,818,190.
</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 ASSETS AND LIABILITIES AS OF OCTOBER 31, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $417,066,437) including
$43,491,422 market value of securities
loaned $ 595,561,560
Cash 100,143
Receivables:
Dividends and interest 469,950
Variation margin on futures contracts 157,724
Receivable from Manager 92,493
Other assets 23,807
-------------
Total assets 596,405,677
-------------
LIABILITIES:
Securities lending collateral 44,991,834
Payables:
Fund shares redeemed 579,543
Transfer agent 246,050
Shareholder communication 116,783
NYLIFE Distributors 116,691
Custodian 9,012
Accrued expenses 39,200
-------------
Total liabilities 46,099,113
-------------
Net assets $ 550,306,564
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number
of shares authorized: $ 133,792
Additional paid-in capital 489,964,625
Accumulated undistributed net investment
income 5,809,391
Accumulated net realized loss on investments
and futures contracts (123,749,468)
Net unrealized appreciation on investments
and futures contracts 178,148,224
-------------
Net assets applicable to outstanding shares $ 550,306,564
=============
Shares of beneficial interest outstanding (a) 13,379,169
=============
Net asset value per share outstanding (a) $ 41.13
Maximum sales charge (3.00% of offering
price) (a) 1.27
-------------
Maximum offering price per share outstanding
(a) $ 42.40
=============
</Table>
(a) Adjusted to reflect the effects of the reverse stock split on December 21,
2005. (See Notes 2(E) and 12)
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 OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $12,077,045
Interest 637,581
Income from securities loaned - net 24,280
------------
Total income 12,738,906
------------
EXPENSES:
Manager 2,974,068
Distribution/Service 1,487,034
Transfer agent 1,045,865
Shareholder communication 182,382
Professional 179,776
Recordkeeping 86,148
Custodian 70,606
Trustees 43,467
Registration 20,592
Miscellaneous 37,528
------------
Total expenses before waiver/reimbursement 6,127,466
Expense waiver/reimbursement from Manager (1,696,218)
------------
Net expenses 4,431,248
------------
Net investment income 8,307,658
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from:
Security transactions 5,764,838
Futures transactions 3,445,511
------------
Net realized gain on investments 9,210,349
------------
Net change in unrealized appreciation on:
Security transactions 30,367,021
Futures transactions (726,933)
------------
Net unrealized gain on investments 29,640,088
------------
Net realized and unrealized gain on investments 38,850,437
------------
Net increase in net assets resulting from
operations $47,158,095
============
</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
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 8,307,658 $ 4,683,643
Net realized gain (loss) on
investments and futures
transactions 9,210,349 (10,485,667)
Net change in unrealized
appreciation on investments and
futures transactions 29,640,088 58,413,948
-----------------------------
Net increase in net assets
resulting from operations 47,158,095 52,611,924
-----------------------------
Dividends to shareholders:
From net investment income (6,540,173) (2,344,657)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares 423,785 221,843
Net asset value of shares issued
to shareholders in reinvestment
of dividends 6,540,173 2,276,990
-----------------------------
6,963,958 2,498,833
Cost of shares redeemed (104,817,109) (91,674,408)
-----------------------------
Decrease in net assets derived
from capital share
transactions (97,853,151) (89,175,575)
-----------------------------
Net decrease in net assets (57,235,229) (38,908,308)
NET ASSETS:
Beginning of year 607,541,793 646,450,101
-----------------------------
End of year $ 550,306,564 $ 607,541,793
=============================
Accumulated undistributed net
investment income at end of year $ 5,809,391 $ 4,054,812
=============================
</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.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 38.47 $ 35.61 $ 29.62 $ 40.29 $ 47.85 $ 55.03
----------- ----------- ----------- -------- -------- ----------
Net investment income (c) 0.60(d) 0.28 0.19 0.23 0.18 0.14
Net realized and unrealized
gain (loss) on investments
(c) 2.47 2.71 5.80 (9.39) (6.24) (5.51)
----------- ----------- ----------- -------- -------- ----------
Total from investment
operations (c) 3.07 2.99 5.99 (9.16) (6.06) (5.37)
----------- ----------- ----------- -------- -------- ----------
Less dividends and
distributions:
From net investment income
(c) (0.41) (0.13) -- (0.31) (0.18) (0.14)
From net realized gain on
investments -- -- -- (1.20) (1.32) (1.67)
----------- ----------- ----------- -------- -------- ----------
Total dividends and
distributions (c) (0.41) (0.13) -- (1.51) (1.50) (1.81)
----------- ----------- ----------- -------- -------- ----------
Net asset value at end of
period (c) $ 41.13 $ 38.47 $ 35.61 $ 29.62 $ 40.29 $ 47.85
=========== =========== =========== ======== ======== ==========
Total investment return (a) 7.97% 8.42% 20.23%(b) (22.70%) (12.65%) (9.71%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 1.40%(d) 0.73% 0.72%+ 0.59% 0.38% 0.26%
Net expenses 0.74% 0.96% 1.04%+ 1.02% 0.97% 0.92%
Expenses (before
waiver/reimbursement) 1.03% 1.02% 1.04%+ 1.02% 0.97% 0.92%
Portfolio turnover rate 6% 3% 2% 4% 4% 9%
Net assets at end of period
(in 000's) $550,307 $607,542 $646,450 $589,034 $951,662 $1,136,628
</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.
(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, 2005. (See Note 2(E) and 12)
(d) Net investment income and the ratio of net investment income includes $0.12 per share and
0.29%, respectively as a result of a special one time dividend from Microsoft Corp.
</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 nineteen 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 10).
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. The 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 accounting
principles generally accepted in the United States of America 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 normally are taken from the principal 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.
Futures contracts are valued at the last posted settlement price on the market
where such futures are principally traded. Securities for which market
quotations are not readily available are valued by methods deemed in good faith
by 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 principal market is temporarily closed at a
time when under normal conditions it would be open. The Fund did not hold
securities at October 31, 2005, 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) SECURITIES LENDING. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are collateralized by cash or securities at
least equal at all times to the market value of the securities loaned. The Fund
may bear the risk of delay in recovery of, or loss of rights in, the securities
loaned should the borrower of the securities experience financial difficulty.
The Fund receives compensation for lending its securities in the form of fees or
it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
(D) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of
22 MainStay Equity Index Fund
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
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 accounting principles generally accepted in
the United States of America. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current period reclassification between
accumulated undistributed net investment income, accumulated net realized loss
on investments and additional paid-in-capital arising from permanent
differences; net assets at October 31, 2005, are not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT LOSS ON ADDITIONAL
INCOME INVESTMENTS PAID-IN-CAPITAL
$ (12,906) $ 12,907 $ (1)
</Table>
The reclassification for the Fund is due to real estate investment trust
distributions.
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 Financial Highlights and Notes to Financial Statements
(see Note 9) 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 in December 2005. (See Note 12)
(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.
(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 transfer agent expenses and 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.
(I) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the Fund.
NOTE 3 -- FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER. New York Life Investment Management LLC ("NYLIM" or the
"Manager"), an indirect wholly-owned subsidiary of New York Life, serves as the
Fund's Manager. The Manager provides offices, conducts clerical, recordkeeping
and bookkeeping services, and keeps the financial and accounting records
required for the Fund. The Manager also pays the salaries and expenses of all
personnel affiliated with the Fund and all the operational expenses that are not
the responsibility of the Fund. The Fund is advised by the Manager directly,
without a Subadvisor.
The Trust, on behalf of the Fund, paid the Manager a monthly fee for services
performed and the facilities furnished at an annual percentage of the Fund's
average daily net assets. Effective as of August 1, 2004, NYLIM had voluntarily
agreed to waive its management fee by 0.25% to 0.25% of the Fund's average net
assets. Effective August 1, 2005, the contractual management fee for the Fund
was reduced to 0.25% of assets up to $1.0 billion; 0.225% from $1.0 billion to
$3.0 billion; and 0.20% in excess of $3.0 billion. In addition, effective August
1, 2005, the Manager has entered into a written expense limitation agreement,
under which the Manager has agreed to reimburse the expenses of the Fund so that
the total operating expenses (excluding taxes, interest, litigation,
extraordinary expenses, and brokerage and other transaction expenses relating to
the purchase or sale of portfolio investments) do not exceed, on an annualized
basis, 0.65% of the average daily net assets of the Fund. The Manager,
www.MAINSTAYfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
within three years of incurring such expenses, may recoup the amount of any
management fee waiver or expense reimbursement from the Fund pursuant to this
agreement if such recoupment does not cause the Fund to exceed the expense
limitations. At October 31, 2005, the Fund had $209,184 of recoupment available.
This amount is available until October 31, 2008. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. Prior to
August 1, 2005, NYLIM agreed to voluntarily reimburse the expenses of the Fund
so that the total operating expenses would not exceed on an annualized basis
0.80% of the average daily net assets of the Fund. For the year ended October
31, 2005, the Manager earned fees from the Fund in the amount of $2,974,068 and
waived and/or reimbursed expenses in the amount of $1,696,218.
(B) DISTRIBUTION FEES. The Trust, on behalf of the Fund, has a Distribution
Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect
wholly-owned subsidiary of New York Life. The Fund has adopted a distribution
plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Plan, the Distributor receives payments from the Fund at an
annual rate of 0.25% of the Fund's average daily net assets, which is an expense
of the Fund for distribution or service activities as designated by the
Distributor.
The Plan provides that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder 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 incurred by the Fund for the year ended
October 31, 2005, amounted to $1,045,865.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(E) OTHER. Pursuant to the Management Agreement, 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
$15,300 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $86,148 for the year ended
October 31, 2005.
NOTE 4 -- CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, The Bank of New York acted as custodian for the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
At November 30, 2004, the Fund's year end for federal income tax purposes, the
components of accumulated gain/(loss) on a tax basis were as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED TOTAL
ORDINARY CAPITAL UNREALIZED ACCUMULATED
INCOME LOSSES APPRECIATION GAIN
$ 6,496,775 $(122,345,938) $159,582,678 $43,733,515
</Table>
The difference between book-basis and tax-basis unrealized depreciation is due
to wash sale deferrals, and mark-to-market of futures contracts.
At November 30, 2004, for federal income tax purposes, capital loss
carryforwards of $122,345,938 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
24 MainStay Equity Index Fund
probable that the capital gains so offset will not be distributed to
shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2010........ $ 89,854
2011........ 29,198
2012........ 3,294
-------------------------------------------
$122,346
-------------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2005
and October 31, 2004, shown in the Statement of Changes in Net Assets, were as
follows:
<Table>
<Caption>
2005 2004
Distributions paid from: Ordinary
Income $6,540,173 $2,344,657
- ----------------------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $31,642, and $108,074, respectively.
NOTE 7 -- PORTFOLIO SECURITIES LOANED:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $43,491,422. The Fund received $44,991,834 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, 2005.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
2005 2004
Shares sold(a) 175 6
- ----------------------------------------------------------
Shares issued in reinvestment
of distributions(a) --(b) 61
- ----------------------------------------------------------
175 67
- ----------------------------------------------------------
Shares redeemed(a) (2,583) (2,427)
- ----------------------------------------------------------
Net decrease(a) (2,408) (2,360)
- ----------------------------------------------------------
</Table>
(a) Adjusted to reflect the cumulative effects of the reverse stock split in
the period, as well as the reverse stock split on December 21, 2005. (See
Note 2(E) and 12)
(b) Less than 1,000 shares.
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 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 Guaranteed Share outstanding and held by
shareholders as of share and the net asset value of each such 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 Note 3.)
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
www.MAINSTAYfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review in December 2005, NYLIM made payments totaling
$5.9 million to nine MainStay funds. The amount paid to the MainStay Equity
Index Fund was $516,000. NYLIM has also agreed to reimburse or pay all expenses
relating to the Board of Trustees' review of this matter and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC has raised concerns relating to a guarantee
provided to shareholders of the Fund and the fees and expenses of the 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. There
can be no assurance of the outcome of these efforts.
NOTE 12 -- SUBSEQUENT EVENT:
Subsequent to October 31, 2005, the Fund declared a dividend of 0.5112 per share
which was paid on December 21, 2005, and also underwent a reverse share split on
that day. The reverse share split rate was 0.9880 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 9) have been adjusted to
reflect the effects of this subsequent reverse stock split.
26 MainStay Equity Index 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 Equity Index Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2005, and
the related statement of operations for the year then ended, and the statements
of changes in net assets and financial highlights for each of the years in the
two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the
results of its operations for the year then ended, and the changes in its net
assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
28 MainStay Equity Index Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 29
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
30 MainStay Equity Index Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement, the Board of
Trustees requested and received from the Manager, and reviewed, a wide variety
of information. The Trustees also requested and received information from
outside data providers and information and analysis from a third party
consultant. The Trustees considered various industry and regulatory trends in
their deliberations. In considering approval of the Agreement, and in evaluating
the fairness of the compensation to be paid by the Fund, the Trustees met a
number of times as a full Board and in executive sessions of only the Non-
Interested Trustees to discuss the Board's consideration of the approval of the
Agreement, and took into account a number of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager. The Trustees reviewed the services that the Manager has
provided historically to the Fund, and also generally to other series of the
Trust. The Manager's services to the Trust have included investment management
services, including the day-to-day management of the portfolio and the selection
and supervision of portfolio managers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, managing reverse stock splits, performing
clerical and bookkeeping services for the Fund, preparing Fund filings, and
other administrative services. The Trustees considered, among other things, the
Manager's management, personnel, resources, operations and portfolio management
capabilities. In considering the Manager's practices relating to best execution
of portfolio trades, the Board reviewed reports of the Fund's Brokerage
Committee including with respect to analysis prepared by Plexus Group. The
Trustees considered the Manager's supervision of the Fund's service providers
and its attention to the compliance program of the Trust, the Manager and
certain other service providers. The Trustees noted the generally favorable
conclusions of financial services research firm DALBAR Inc. of the services,
investor complaint levels, and communications that NYLIM Service Company LLC
("NYLIM Service"), an affiliate of the Manager, has provided to Trust
shareholders. The Trustees acknowledged the guarantee feature and the role of an
affiliate of the Manager with regard to the guarantee. A majority of the
Trustees, including a majority of the Non-Interested Trustees, concluded that,
overall, the nature, extent and quality of the services expected to be provided
by the Manager were such that, in the context of the Board's overall review of
various factors, the Management Agreement should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's success in providing investment
results that corresponded to the total return performance of stocks representing
the S&P 500 Index.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to reduce the Fund's management fee and limit the Fund's net expenses
to a certain level with respect to the Fund. The Trustees considered certain
benefits expected for, and risks borne by, the Manager and its affiliates,
including benefits from soft dollar arrangements. The Trustees considered the
services provided to the Fund by affiliates of the Manager, NYLIFE Distributors
and NYLIM Service, under other agreements, and the benefits to the Manager and
its affiliates from those relationships. The information provided to the
Trustees indicated that the profitability to the Manager and its affiliates
arising directly from those other agreements was not excessive. The Trustees
acknowledged certain benefits to the reputation of the Manager and its
affiliates, as well to that of the Trust, from their association with each
other.
The Trustees, in considering economies of scale, noted that the Fund is closed
to new share purchases and, for that reason, can increase its asset size only
through capital appreciation. The Trustees discussed the extent to which
economies of scale were projected by the Manager to be realized as the Trust
grows overall, noting in particular the Manager's plans for marketing and
distributing shares of various series of the Trust. Acknowledging the difficulty
of forecasting economies of scale, the Trustees generally expressed an intention
to monitor the Manager's profitability and consider the application of fee
breakpoints or other appropriate measures as the Board may determine from
www.MAINSTAYfunds.com 31
time to time. They noted the implementation of a contractual management fee
breakpoint that would reduce the contractual management fee to which the Fund is
subject were the Fund to reach the applicable asset level. The Trustees noted
that, to the extent the Fund's gross expenses currently are higher than its net
expenses, economies of scale achieved through an increase in the Fund's assets
might not directly benefit the Fund through lower net expenses. The Trustees
considered various information about transfer agency expenses, including
information showing that transfer agency fees of a significant number of series
of the Trust (although not every such series or with respect to every share
class of each series) tended to be high, when aggregated and expressed as a
percentage of the assets of certain series, compared to the mutual fund industry
average according to certain studies reviewed by the Board and, therefore,
adversely affected gross expense ratios. The Board received information about
potential effects on the Manager were it to subsidize certain portions of the
Trust's transfer agency fees.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager, including other registered funds and separate
institutional accounts, that had investment objectives similar to that of the
Fund. The Trustees took into account information provided by the Manager about
the relative scope of services provided to the Fund and to those accounts or
explanations about the accounts' histories. In considering the extent of the
fees received by the Manager for providing services to the Fund, the Trustees
evaluated factors such as the fees and expenses borne by other registered funds
in the market pursuing strategies generally similar to those followed by the
Fund. The Trustees considered the Fund's historical and proposed contractual and
net management fees, its anticipated gross and net expense ratios, and various
components of that expense ratio, in comparison to other funds in comparison
groupings prepared by outside data providers using objective methodologies.
The Trustees acknowledged the historical relationship between the Manager and
the Trust and the likely difficulties in implementing an alternative to the
investment management arrangement between them. The Trustees also took account
of the results of their various discussions with the Manager concerning the
levels of the Fund's contractual and net management fees and the Fund's
anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreement. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreement.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreement, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of this Agreement was in the best
interests of the Fund and its shareholders.
32 MainStay Equity Index Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2005,
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 2006, 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 2005. 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, 2005.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
www.MAINSTAYfunds.com 33
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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
34 MainStay Equity Index Fund
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) 2005 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A08048 (RECYCLE LOGO) MS475-05 MSEI11-12/05
06
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MAP FUND
The MainStay Funds
Annual Report
October 31, 2005
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
/s/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 2
- --------------------------------------------------------------------------------
Investment and Performance Comparison 3
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 7
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 17
- --------------------------------------------------------------------------------
Notes to Financial Statements 23
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 28
- --------------------------------------------------------------------------------
Trustees and Officers 29
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 32
- --------------------------------------------------------------------------------
Federal Income Tax Information 34
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures 34
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 34
- --------------------------------------------------------------------------------
MainStay Funds 35
</Table>
2 MainStay MAP Fund
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 7.26% 6.23% 7.68%
Excluding sales charges 13.51 7.44 8.63
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MAP FUND RUSSELL MIDCAP INDEX S&P 500 INDEX
----------------- -------------------- -------------
6/8/99 9450 10000 10000
9407 9791 10395
11215 12115 11028
10959 9932 8282
9538 9135 7031
12364 12412 8493
14145 14285 9293
10/31/05 16056 16869 10104
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 7.64% 6.32% 7.83%
Excluding sales charges 12.64 6.63 7.83
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MAP FUND RUSSELL MIDCAP INDEX S&P 500 INDEX
----------------- -------------------- -------------
6/8/99 10000 10000 10000
9929 9791 10395
11757 12115 11028
11395 9932 8282
9840 9135 7031
12667 12412 8493
14386 14285 9293
10/31/05 16205 16869 10104
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
With sales charges 11.64% 6.63% 7.83%
Excluding sales charges 12.64 6.63 7.83
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MAP FUND RUSSELL MIDCAP INDEX S&P 500 INDEX
----------------- -------------------- -------------
6/8/99 10000 10000 10000
9929 9791 10395
11757 12115 11028
11395 9932 8282
9840 9135 7031
12667 12412 8493
14386 14285 9293
10/31/05 16205 16869 10104
</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 contractual and may be modified or terminated only with the
approval of the Board of Trustees. 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
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.MAINSTAYfunds.com 3
CLASS I SHARES--(MAXIMUM 4.75% INITIAL SALES CHARGE THROUGH 6/8/99)
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
13.96% 7.76% 14.35%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP FUND RUSSELL MIDCAP INDEX S&P 500 INDEX
----------------- -------------------- -------------
10/31/95 9525 10000 10000
12266 11965 12410
16402 15408 16394
19013 16095 20000
22012 18851 25134
26316 23323 26665
25775 19121 20024
22486 17586 16999
29224 23897 20535
33557 27502 22470
10/31/05 38240 32476 24429
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
13.84% 7.63% 8.82%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP FUND RUSSELL MIDCAP INDEX S&P 500 INDEX
----------------- -------------------- -------------
6/8/99 10000 10000 10000
9963 9791 10395
11896 12115 11028
11638 9932 8282
10146 9135 7031
13170 12412 8493
15096 14285 9293
10/31/05 17185 16869 10104
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE SINCE
TOTAL RETURNS YEAR YEARS INCEPTION
- --------------------------------------------------
13.54% 7.37% 8.55%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP FUND RUSSELL MIDCAP INDEX S&P 500 INDEX
----------------- -------------------- -------------
6/8/99 10000 10000 10000
9950 9791 10395
11851 12115 11028
11566 9932 8282
10057 9135 7031
13022 12412 8493
14894 14285 9293
10/31/05 16911 16869 10104
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -------------------------------------------------------------------------------
Russell Midcap(R) Index(1) 18.09% 6.85% 12.50%
S&P 500(R) Index(2) 8.72 -1.74 9.34
Average Lipper multicap core fund(3) 10.50 -0.11 8.95
</Table>
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.
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 THE
TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay MAP Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MAP FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT ENDING ACCOUNT
VALUE (BASED VALUE (BASED
BEGINNING ON ACTUAL EXPENSES ON HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,083.45 $ 7.09 $1,018.25 $ 6.87
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,079.80 $11.01 $1,014.50 $10.66
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,079.80 $11.01 $1,014.50 $10.66
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,085.55 $ 4.99 $1,020.25 $ 4.84
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,085.05 $ 5.52 $1,019.75 $ 5.35
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,084.20 $ 6.83 $1,018.50 $ 6.61
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.35% for Class A, 2.10% for Class B and Class C, 0.95% for Class I, 1.05%
for Class R1, and 1.30% for Class R2) multiplied by the average account value
over the period, divided by 365, multiplied by 184 (to reflect the one-half
year period).
www.MAINSTAYfunds.com 5
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-TERM
INVESTMENTS LIABILITIES IN
(COLLATERAL FROM EXCESS OF CASH
SECURITIES CONVERTIBLE AND OTHER
COMMON STOCKS LENDING IS 11.1%) BONDS CORPORATE BOND WARRANTS ASSETS
- ------------- ----------------- ----------- -------------- -------- --------------
93.2% 17.6% 0.1% 0.1% 0.1% -11.1%
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. E.I. du Pont de Nemours & Co.
2. Duke Energy Corp.
3. Genentech, Inc.
4. MetLife, Inc.
5. Monsanto Co.
6. Harris Corp.
7. American Express Co.
8. Morgan Stanley
9. Tyco International Ltd.
10. Devon Energy Corp.
</Table>
6 MainStay MAP Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Michael J. Mullarkey, Roger Lob, and
Christopher 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 MONTHS ENDED
OCTOBER 31, 2005?
Markston International:
There were several economic crosscurrents during the 12 months ending October
31, 2005. Higher energy prices were among the most notable. Markston's share of
the Fund was overweighted in energy.
Jennison Associates:
Mixed economic data left the equity markets unsettled during the reporting
period. Equities started with strength, but began to retrace their gains as oil
prices climbed to record highs. Elevated energy prices, higher inflation, and
rising interest rates were among investors' chief concerns. Even so, equity
indices moved higher across the board during the 12 months ended October 31,
2005. From a sector perspective, utilities and energy led the S&P 500(R)
Index,(1) while more economically sensitive sectors trailed.
WHAT FACTORS MOST SIGNIFICANTLY AFFECTED FUND PERFORMANCE DURING THE REPORTING
PERIOD?
Markston International:
We believe that our time and labor intensive approach, which attempts to find
what we term "alpha generators"(2) in the securities we consider for investment,
helped the portion of the Fund we manage to more than double the performance of
the S&P 500(R) Index for the reporting period. We typically look for the
presence of three of the following six "alpha generators": insider buying, stock
repurchase by the company, meaningful restructuring, new management, companies
that operate in consolidating industries, and the presence of tax loss
carryforwards.
Jennison Associates:
Our portion of the Fund's portfolio outperformed the S&P 500(R) Index during the
reporting period. Energy sector holdings made the greatest positive contribution
to performance in our portion of the Fund's portfolio. Our weighting and
stock-selection decisions helped energy holdings in our portion of the Fund
outpace related stocks in the S&P 500(R) Index. With growth in global demand,
difficulties in reserve-replacement, and setbacks in production growth, oil
services companies were able to raise prices as equipment and crews approached
full utilization. Integrated oil companies and larger exploration & production
companies actually became less price-sensitive and more willing to pay high
prices to secure crews and equipment for longer periods.
Effective stock selection in the financials, information technology, and health
care sectors also bolstered both absolute and relative results in our portion of
the Fund's portfolio. Significant exposure to the materials sector added to
absolute returns, but individual stock disappointments led our materials
holdings to lag the broad equity market. Modest exposure to utilities detracted
from relative performance as well. Only the telecommunications services sector
hurt our portion of the Fund's performance on both an absolute and relative
basis.
WHAT WERE SOME OF THE FUND'S STRONG PERFORMERS DURING THE REPORTING PERIOD?
Markston International:
Our portion of the Fund benefited from its position in Genentech, a leading
biotechnology firm. Genen-tech's stock appreciated substantially after the
company reported that its primary cancer drug, Avastin, was effective in
fighting small-cell lung cancer. Genentech developed Avastin without a partner,
so it has maintained the bulk of the profits from the drug.
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. Issuers of
convertible securities may not be as financially strong as those issuing
securities with higher credit ratings and may be more vulnerable to changes in
the economy. If an issuer stops making interest payments, principal payments, or
both on its convertible securities, these securities may become worthless and
the Fund could lose its entire investment in them.
1. See footnote on page 4 for more information about the S&P 500(R) Index.
2. Alpha is a measure of excess return adjusted for volatility.
www.MAINSTAYfunds.com 7
Devon Energy appreciated during the reporting period as the price of oil
increased. Devon Energy is a frugally run oil and gas independent that has
consistently increased reserves per share, has insider buying by management, a
substantial stock-repurchase program, and a policy of restructuring periodically
to upgrade the company's properties. Part of our position came from other stocks
we owned that were acquired by Devon Energy.
Another strong performer for our portion of the Fund was Cerner, a software and
systems provider to the hospital industry. The company initially attracted us
because of insider buying, management changes, and restructuring activity.
Cerner has shown strong execution, posting above-average growth while
successfully furthering its penetration into the U.K. and French markets.
American Commercial Lines is one of the larger commercial barge operators in the
United States. The stock advanced dramatically when low-cost barge
transportation came into demand as oil prices rose and the number of coal
shipments by barge increased. During the reporting period, American Commercial
Lines emerged from a substantial reorganization under the leadership of new
management.
Chesapeake Energy, the second-largest independent producer of natural gas in the
United States, saw its stock appreciate during the reporting period because of
the enormous rise in natural gas prices. Since Chesapeake Energy has no assets
in the Gulf of Mexico, the company was not affected by hurricanes Katrina and
Rita.
Jennison Associates:
Our holdings in oil services companies performed particularly well, including
Todco, National Oilwell Varco, and BJ Services. These stocks benefited from
oil-related trends that we've previously discussed.
Pharmacy benefits manager Medco Health Solutions was also among the strongest
contributors to performance in our portion of the Fund's portfolio. The company
performed well on better-than-expected new-business sign-ups and positive
prospects for administering Medicare drug programs in 2006. We reduced our
position in the stock, however, when it approached our target valuation.
Health management organization Cigna's shares rose when investors gained
confidence in the company's ongoing restructuring efforts. We sold our position
in Cigna toward the end of the reporting period, taking profits. UnumProvident,
a leading provider of disability and specialty risk insurance, also strengthened
results in our portion of the Fund's portfolio. The company continued to execute
its disability-business turnaround successfully by focusing on the strong middle
market and completing the repricing of UnumProvident's unprofitable
national-account business. We trimmed the Fund's position in the stock, even
though we continued to feel that it was attractively valued.
WHAT STOCKS UNDERPERFORMED DURING THE REPORTING PERIOD?
Markston International:
The Fund's position in Eyetech Pharmaceuticals, an emerging biotech company that
pursues unmet eye-related medical needs, detracted from results. Eyetech
developed an FDA-approved drug, Macugen, to treat wet macular degeneration. The
company's stock declined after interim data from Genentech suggested that a
competing Genentech compound, if approved, could give Macugen serious
competition. Eyetech was recently acquired by OSI Pharmaceuticals.
Another poor performer for our portion of the Fund was Gemstar-TV Guide
International. The company completed several deals that gave customers access to
the company's intellectual property in return for cash and various industrial
arrangements. Unfortunately, the company has faced more challenges than it has
managed to meet. We reduced the Fund's stake in the holding.
S1, a small software supplier to companies offering financial services, saw its
shares decline when the company had trouble meeting its growth projections.
During the reporting period, S1's Board of Directors changed CEOs, a
nonstrategic asset was sold, and the company materially cut costs. At current
prices, we think S1 represents value.
Symbol Technologies, a major participant in the bar code and emerging
radio-frequency ID industry, detracted from results. The company has put
allegations of a previous management team's misconduct to rest. Current
management has cut costs to improve profitability, and we think the company is
on the mend.
Our position in Boston Scientific, a medical-device company, underperformed when
competitor Johnson & Johnson gained market share in the drug-eluting coronary
stent market. Boston Scientific appears to have stabilized at a price/earnings
multiple that is at a discount to most other medical-device suppliers.
Jennison Associates:
Generic drug manufacturer Andrx detracted from results in our portion of the
Fund's portfolio. The company was set back when the Food and Drug Administration
placed the company on "official action indicated" status, which effectively put
all of
8 MainStay MAP Fund
the com-pany's new drug applications on hold. Andrx also lost its chief
financial officer and general counsel. We trimmed the Fund's position in Andrx,
and have continued to monitor the company's situation closely.
GrafTech International, which makes graphite and carbon products used in steel
and aluminum production, lost volume when the company decided to raise prices to
reflect higher costs for raw materials. We eliminated the stock from our portion
of the Fund on concerns about steel prices and GrafTech's financial leverage.
We sold electronic-equipment company Symbol Technologies at a loss, when the
closely timed departures of the CEO and the CFO raised the company's risk
profile.
Shares of aluminum giant Alcoa slipped when the company announced layoffs, plant
closings, and consolidations scheduled during the next several months. Aluminum
stocks also came under pressure from concerns that Chinese production growth and
export potential might upset an otherwise healthy global supply-and-demand
balance.
Radio One, a media company, saw its share price decline when the company's
revenue trends came in, below the market's expectations. Investments in
improving content have also added to expenses, but we remain optimistic about
pricing potential later in the year.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
Markston International:
We either established new positions or added to the Fund's existing positions in
several companies. American Express appears to be in a higher-growth mode.
Morgan Stanley has new management, which we believe will benefit the company.
Amgen appears to be on the verge of some new drug approvals. Union Pacific is
getting a new CEO, is enjoying improved pricing, and appears to have enhanced
productivity. Pogo Producing restructured to move its operations to North
America. W.R. Berkley's exploitation of market niches has helped it post a
return-on-equity ratio of more than 20%. Covanta Holding, formerly Danielson
Holding, has emerged as the market leader in waste-to-electricity generation.
The company has a large tax loss carryforward and generates substantial cash
flow. On balance, these holdings helped relative performance in our portion of
the Fund's portfolio during the reporting period.
Jennison Associates:
We continue to build our portion of the Fund's portfolio one stock at a time,
using a bottom-up, research-intensive process. During the reporting period, we
established and then added to a position in insurance company American
International Group because of the stock's attractive valuation. We also
initiated a position in Royal Bank of Scotland, a top-10 global bank with its
several well-known retail franchises, including Citizen's Bank and Charter One
Financial in the United States and Nat West and Royal Bank of Scotland in the
U.K. Greenwich Capital Markets gives Royal Bank of Scotland a strong
capital-markets franchise in the United States. We established a position in BJ
Services, a global oil service company that specializes in pressure pumping and
is particularly exposed to the North American natural gas market. We believe the
company should continue to benefit from the supply-and-demand imbalance in oil
and natural gas. We established a position in capital markets firm Charles
Schwab early in the Fund's fiscal year and have increased the position
throughout the reporting period. We also increased our position in Kroger, the
largest pure grocery chain in the United States.
WHAT SECURITIES DID YOUR PORTION OF THE FUND'S PORTFOLIO SELL DURING THE
REPORTING PERIOD?
Markston International:
We can and do sell stocks for a variety of reasons, including controlling
portfolio volatility. During the reporting period, we reduced our positions in
Tyco International and Cell Therapeutics, among others, at attractive prices.
Jennison Associates:
On the basis of our stringent risk/reward criteria, we eliminated our position
in Companhia Vale do Rio Doce, one of the world's largest iron-ore producers. We
also exited our position in Cigna. We eliminated our position in Great Lakes
Chemical when the company's share price rose on news of a friendly acquisition
by Crompton Corporation. In our portion of the Fund, we also sold positions in
Cooper Cameron, a leading subsea equipment manufacturer, and in National Oilwell
Varco, an oil rig equipment manufacturer. In each of these cases, we were able
to take profits for the Fund.
DID THE FUND CHANGE ITS INDUSTRY GROUP WEIGHTINGS?
Markston International:
Our portion of the Fund began the reporting period with overweighted positions
relative to the S&P 500(R) Index in energy, financials, industrials, materials,
and utilities and with underweighted positions in consumer discretionary,
consumer staples, information
www.MAINSTAYfunds.com 9
technology, and telecommunications services. We had a relatively equal weighting
to the Index in health care. During the reporting period, we slightly increased
the Fund's exposure to the financials sector and modestly decreased the Fund's
allocation to information technology.
Jennison Associates:
Any weighting changes in our portion of the Fund's portfolio 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, increase our weightings in health care and
utilities, and decrease our weightings in basic materials and energy. We trimmed
the Fund's exposure to materials, because of inventory increases that resulted
from slower economic growth during the first half of 2005. In the energy sector,
we continued to hold oil services companies, where earnings continued to
accelerate, and we eliminated positions in the oil & gas exploration &
production and integrated oil & gas subindustries. We continued to limit
exposure to banks in our portion of the Fund's portfolio in an attempt to remain
insulated from the effects of a flattening yield curve.
HOW DO THE FUND'S WEIGHTINGS DIFFER FROM THOSE OF ITS BENCHMARK?
Markston International:
As of October 31, 2005, the portion of the Fund we manage was underweighted
relative to the S&P 500(R) Index in the consumer discretionary, consumer
staples, information technology, and telecommunications services sectors. At the
same time, the Fund held overweighted positions relative to the Index in the
utilities, materials, industrials, financials, and energy sectors and a
relatively neutral position in health care. Our portion of the Fund's portfolio
also held a sizable position in cash.
Jennison Associates:
As of October 31, 2005, our portion of the Fund's portfolio was overweighted
relative to the S&P 500(R) Index in the consumer discretionary and materials
sectors and underweighted relative to the Index in the consumer staples,
information technology, and industrials sectors.
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, 2005
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (93.2%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (3.0%)
Boeing Co. (The) 77,800 $ 5,028,992
Empresa Brasileira de Aeronautica S.A., ADR (a)(b) 196,200 7,610,598
GenCorp, Inc. (b)(c) 27,000 495,180
Honeywell International, Inc. 34,100 1,166,220
Lockheed Martin Corp. 25,300 1,532,168
Northrop Grumman Corp. 194,328 10,425,697
Orbital Sciences Corp. (b)(c) 119,800 1,393,274
Raytheon Co. 173,600 6,414,520
Teledyne Technologies, Inc. (c) 96,150 3,390,249
--------------
37,456,898
--------------
AIRLINES (0.4%)
Southwest Airlines Co. 349,100 5,589,091
--------------
AUTO COMPONENTS (0.1%)
Goodyear Tire &
Rubber Co. (The) (b)(c) 95,650 1,495,966
--------------
BEVERAGES (0.2%)
Coca-Cola Co. (The) 30,000 1,283,400
PepsiCo, Inc. 29,341 1,733,466
--------------
3,016,866
--------------
BIOTECHNOLOGY (4.6%)
Amgen, Inc. (c) 188,800 14,303,488
Amylin Pharmaceuticals, Inc. (b)(c) 36,598 1,229,693
Chiron Corp. (c) 80,000 3,531,200
Cubist Pharmaceuticals, Inc. (c) 43,806 885,319
Enzo Biochem, Inc. (c) 17,430 237,745
Enzon Pharmaceuticals, Inc. (c) 36,725 257,442
Eyetech
Pharmaceuticals, Inc. (b)(c) 69,828 1,231,766
V Genentech, Inc. (c) 258,700 23,438,220
MedImmune, Inc. (c) 317,300 11,099,154
Millennium
Pharmaceuticals, Inc. (c) 61,600 561,792
OSI Pharmaceuticals, Inc. (b)(c) 40,150 935,495
XOMA Ltd. (b)(c) 50,564 85,959
--------------
57,797,273
--------------
CAPITAL MARKETS (6.6%)
Ameriprise Financial, Inc. (c) 73,560 2,737,903
Bank of New York
Co., Inc. (The) (b) 168,600 5,275,494
Charles Schwab Corp. (The) 829,200 12,603,840
Jefferies Group, Inc. 68,800 2,921,248
Knight Capital Group, Inc. Class A (c) 24,432 233,814
Lazard Ltd. Class A (b) 441,600 11,415,360
Merrill Lynch & Co., Inc. 158,600 10,267,764
</Table>
<Table>
<Caption>
SHARES VALUE
CAPITAL MARKETS (CONTINUED)
V Morgan Stanley 321,400 $ 17,487,374
Northern Trust Corp. 25,955 1,391,188
Nuveen Investments, Inc. Class A (b) 333,100 13,480,557
State Street Corp. 73,200 4,042,836
Waddell & Reed Financial, Inc. Class A 90,300 1,731,954
--------------
83,589,332
--------------
CHEMICALS (5.7%)
V E.I. du Pont de Nemours & Co. 676,100 28,186,609
Eastman Chemical Co. 13,250 699,070
Huntsman Corp. (c) 310,000 6,162,800
Lyondell Chemical Co. 103,800 2,781,840
V Monsanto Co. 301,707 19,010,558
Mosaic Co. (The) (c) 13,250 174,900
Nalco Holding Co. (c) 518,600 8,816,200
Rockwood Holdings, Inc. (b)(c) 311,700 6,255,819
--------------
72,087,796
--------------
COMMERCIAL BANKS (1.6%)
Popular, Inc. (b) 399,656 8,097,031
Royal Bank of Scotland
Group PLC 309,303 8,562,373
Wachovia Corp. (b) 79,200 4,001,184
--------------
20,660,588
--------------
COMMERCIAL SERVICES & SUPPLIES (2.5%)
Adesa, Inc. 39,800 851,720
Aramark Corp.-Class B 246,800 6,273,656
Brink's Co. (The) 21,200 832,524
Cendant Corp. 125,400 2,184,468
Coinstar, Inc. (b)(c) 26,887 682,392
Korn/Ferry International (c) 24,600 423,612
Manpower, Inc. 278,900 12,628,592
Navigant Consulting, Inc. (c) 224,800 4,714,056
On Assignment, Inc. (c) 19,300 164,243
PHH Corp. (c) 47,620 1,339,551
Waste Management, Inc. 38,000 1,121,380
--------------
31,216,194
--------------
COMMUNICATIONS EQUIPMENT (2.9%)
ADC
Telecommunications, Inc. (c) 53,968 941,742
CommScope, Inc. (c) 40,659 793,664
Enterasys Networks, Inc. (c) 12,406 123,690
Finisar Corp. (c) 421,389 636,297
V Harris Corp. 455,000 18,700,500
</Table>
+ Percentages indicated are based on Fund net assets.
++ Less than one tenth of a percent.
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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT (CONTINUED)
NETGEAR, Inc. (c) 16,368 $ 319,994
NMS Communications Corp. (c) 167,936 587,776
Nokia OYJ ADR (a)(b) 791,700 13,316,394
Nortel Networks Corp. (c) 5,472 17,784
Polycom, Inc. (c) 13,998 214,169
Stratex Networks, Inc. (c) 163,297 418,040
UTStarcom, Inc. (b)(c) 67,500 372,600
--------------
36,442,650
--------------
COMPUTERS & PERIPHERALS (0.3%)
ActivCard Corp. (c) 52,567 177,151
Advanced Digital
Information Corp. (c) 58,549 535,138
Avid Technology, Inc. (c) 6,557 322,801
Innovex, Inc., MN (c) 31,000 98,890
Lexmark International, Inc. (c) 13,800 572,976
McData Corp. Class A (c) 65,100 313,131
Sun Microsystems, Inc. (c) 561,797 2,247,188
--------------
4,267,275
--------------
CONSTRUCTION & ENGINEERING (0.3%)
Chicago Bridge & Iron Co. NV 28,400 633,320
Foster Wheeler, Ltd. (b)(c) 26,436 747,610
Jacobs Engineering
Group, Inc. (c) 30,400 1,938,000
--------------
3,318,930
--------------
CONSTRUCTION MATERIALS (0.3%)
Vulcan Materials Co. 53,389 3,470,285
--------------
CONSUMER FINANCE (1.5%)
V American Express Co. 367,800 18,305,406
MBNA Corp. 27,400 700,618
Rewards Network, Inc. (c) 12,600 67,914
--------------
19,073,938
--------------
CONTAINERS & PACKAGING (0.0%)++
Smurfit-Stone
Container Corp. (c) 8,050 85,008
--------------
DIVERSIFIED CONSUMER SERVICES (0.9%)
DeVry, Inc. (b)(c) 201,200 4,547,120
Education
Management Corp. (c) 195,000 6,013,800
Vertrue, Inc. (b)(c) 5,800 218,370
--------------
10,779,290
--------------
DIVERSIFIED FINANCIAL SERVICES (2.3%)
Capitalsource, Inc. (b)(c) 26,400 580,800
CIT Group, Inc. 26,600 1,216,418
Citigroup, Inc. 256,300 11,733,414
</Table>
<Table>
<Caption>
SHARES VALUE
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
Instinet Group, Inc. 422,583 $ 2,087,560
JPMorgan Chase & Co. 265,480 9,721,878
Principal Financial Group, Inc. 65,700 3,260,691
--------------
28,600,761
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES (1.3%)
Cincinnati Bell, Inc. (c) 236,350 935,946
Global Crossing Ltd. (b)(c) 38,365 499,896
IDT Corp. Class B (c) 546,200 6,521,628
SBC Communications, Inc. 15,500 369,675
Verizon Communications, Inc. 278,100 8,762,931
--------------
17,090,076
--------------
ELECTRIC UTILITIES (0.5%)
ALLETE, Inc. 5,900 259,659
American Electric
Power Co., Inc. 60,000 2,277,600
Duquesne Light
Holdings, Inc. (b) 61,800 1,031,442
Westar Energy, Inc. 126,700 2,800,070
--------------
6,368,771
--------------
ELECTRICAL EQUIPMENT (0.1%)
Rockwell Automation, Inc. 25,800 1,371,270
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (1.0%)
Agilent Technologies, Inc. (c) 249,800 7,996,098
Frequency Electronics, Inc. 4,000 43,600
Itron, Inc. (c) 4,346 188,877
Sanmina-SCI Corp. (c) 384,039 1,401,742
Solectron Corp. (b)(c) 186,100 656,933
Symbol Technologies, Inc. 271,656 2,254,745
--------------
12,541,995
--------------
ENERGY EQUIPMENT & SERVICES (2.9%)
BJ Services Co. 188,900 6,564,275
ENSCO International, Inc. 11,600 528,844
Key Energy Services, Inc. (c) 70,200 952,000
Newpark Resources, Inc. (c) 159,750 1,293,975
Parker Drilling Co. (c) 71,600 632,944
Rowan Cos., Inc. 189,600 6,254,904
Schlumberger Ltd. 108,825 9,878,045
Tidewater, Inc. 76,100 3,497,556
Weatherford
International Ltd. (b)(c) 103,000 6,447,800
--------------
36,050,343
--------------
FOOD & STAPLES RETAILING (2.1%)
Costco Wholesale Corp. 10,037 485,389
CVS Corp. 130,476 3,184,919
Kroger Co. (The) (c) 702,900 13,987,710
Longs Drug Stores Corp. 21,200 884,252
Pathmark Stores, Inc. (c) 92,017 897,166
</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)
- --------------------------------------------------------------------------------
FOOD & STAPLES RETAILING (CONTINUED)
Performance Food
Group Co. (b)(c) 236,100 $ 6,513,999
Rite Aid Corp. (c) 83,850 293,475
--------------
26,246,910
--------------
FOOD PRODUCTS (1.2%)
Archer-Daniels-Midland Co. 233,340 5,686,496
Bunge Ltd. (b) 38,600 2,004,884
Cadbury Schweppes PLC 634,100 6,240,305
Hormel Foods Corp. 30,300 963,540
--------------
14,895,225
--------------
GAS UTILITIES (0.2%)
Nicor, Inc. (b) 21,050 825,160
Peoples Energy Corp. 49,200 1,830,240
--------------
2,655,400
--------------
HEALTH CARE EQUIPMENT & SUPPLIES (1.2%)
ArthroCare Corp. (c) 19,910 731,294
Baxter International, Inc. 30,000 1,146,900
Boston Scientific Corp. (c) 440,350 11,061,592
Gen-Probe, Inc. (c) 25,068 1,023,777
Hospira, Inc. (c) 26,500 1,056,025
Regeneration
Technologies, Inc. (c) 8,596 62,149
SurModics, Inc. (b)(c) 13,792 545,060
--------------
15,626,797
--------------
HEALTH CARE PROVIDERS & SERVICES (2.6%)
Cerner Corp. (b)(c) 126,442 10,678,027
Community Health
Systems, Inc. (b)(c) 182,000 6,754,020
Emdeon Corp. (c) 352,754 3,245,337
Humana, Inc. (c) 29,200 1,296,188
IMS Health, Inc. 11,215 260,524
Medco Health Solutions, Inc. (c) 172,000 9,718,000
SunLink Health
Systems, Inc. (c) 42,000 395,220
Tenet Healthcare Corp. (c) 118,300 996,086
Universal Health Services, Inc. Class B 3,000 141,420
--------------
33,484,822
--------------
HOTELS, RESTAURANTS & LEISURE (2.1%)
Alliance Gaming Corp. (b)(c) 231,300 2,500,353
GTECH Holdings Corp. 292,000 9,297,280
Hilton Hotels Corp. 133,300 2,592,685
McDonald's Corp. (b) 139,000 4,392,400
Pinnacle Entertainment, Inc. (c) 414,800 7,860,460
--------------
26,643,178
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
HOUSEHOLD DURABLES (0.0%)++
Newell Rubbermaid, Inc. 9,500 $ 218,405
--------------
HOUSEHOLD PRODUCTS (0.3%)
Kimberly-Clark Corp. 64,800 3,683,232
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (3.1%)
AES Corp. (The) (c) 174,357 2,770,533
Black Hills Corp. 14,150 588,216
V Duke Energy Corp. 1,047,600 27,740,448
Dynegy, Inc. Class A (b)(c) 220,500 979,020
TXU Corp. 69,800 7,032,350
--------------
39,110,567
--------------
INDUSTRIAL CONGLOMERATES (1.5%)
3M Co. 16,390 1,245,312
V Tyco International Ltd. (b) 650,758 17,173,504
--------------
18,418,816
--------------
INSURANCE (6.9%)
Allstate Corp. (The) 123,400 6,514,286
American International
Group, Inc. 246,700 15,986,160
Aspen Insurance Holdings, Ltd. 78,400 1,896,496
Axis Capital Holdings Ltd. 371,200 9,625,216
Benfield Group, Ltd. 919,000 5,205,216
Covanta Holding Corp. (c) 261,073 3,025,836
Genworth Financial, Inc. Class A 21,800 690,842
Marsh & McLennan
Cos., Inc. (b) 14,700 428,505
V MetLife, Inc. 402,400 19,882,584
Ohio Casualty Corp. 120,173 3,278,319
Phoenix Cos., Inc. (The) (b) 11,700 151,515
St. Paul Travelers
Cos., Inc. (The) 105,110 4,733,103
UnumProvident Corp. (b) 498,000 10,104,420
USI Holdings Corp. (c) 48,271 634,764
W.R. Berkley Corp. 123,000 5,375,100
--------------
87,532,362
--------------
INTERNET & CATALOG RETAIL (1.5%)
Expedia, Inc. (b)(c) 271,950 5,109,941
IAC/InterActiveCorp. (c) 413,550 10,586,880
Priceline.com, Inc. (b)(c) 126,352 2,396,897
Stamps.com, Inc. (c) 38,674 779,668
--------------
18,873,386
--------------
INTERNET SOFTWARE & SERVICES (0.7%)
Blue Coat Systems, Inc. (c) 30,163 1,417,359
Internet Capital Group, Inc. (c) 18,400 157,136
S1 Corp. (c) 328,587 1,442,497
</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, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES (CONTINUED)
Vignette Corp. (c) 24,210 $ 402,128
Yahoo!, Inc. (c) 131,554 4,863,551
--------------
8,282,671
--------------
IT SERVICES (0.9%)
BISYS Group, Inc. (The) (c) 17,400 220,632
CheckFree Corp. (b)(c) 9,300 395,250
Computer Sciences Corp. (c) 32,100 1,645,125
eFunds Corp. (c) 255,294 5,266,715
Electronic Data Systems Corp. 38,000 885,780
First Data Corp. (b) 8,226 332,742
Hewitt Associates, Inc. Class A (b)(c) 82,900 2,212,601
--------------
10,958,845
--------------
MACHINERY (0.9%)
Dover Corp. 285,100 11,113,198
--------------
MEDIA (6.0%)
Cablevision Systems Corp. New York Group Class A
(c) 83,800 2,078,240
Comcast Corp. Class A (b)(c) 64,800 1,803,384
DIRECTV Group, Inc. (The) (c) 46,800 665,496
Discovery Holding Co. Class A (c) 607,730 8,562,916
Gemstar-TV Guide
International, Inc. (c) 2,828,938 7,355,239
Liberty Global, Inc. Class A (c) 55,178 1,366,759
Liberty Global, Inc. Class C (c) 55,178 1,308,822
Liberty Media Corp. Class A (c) 641,300 5,111,161
Pearson PLC,
Sponsored ADR (a)(b) 915,600 10,291,344
PRIMEDIA, Inc. (c) 122,378 256,994
Radio One, Inc. Class D (c) 572,400 6,754,320
Time Warner, Inc. 90,700 1,617,181
Viacom, Inc. Class B 424,016 13,131,776
VNU NV (b) 293,400 9,328,617
Westwood One, Inc. 317,900 5,881,150
--------------
75,513,399
--------------
METALS & MINING (0.6%)
Harmony Gold Mining Co. Ltd. Sponsored ADR
(a)(b)(c) 604,500 6,317,025
United States Steel Corp. (b) 40,800 1,490,424
--------------
7,807,449
--------------
MULTILINE RETAIL (0.1%)
Big Lots, Inc. (c) 97,400 1,126,918
--------------
MULTI-UTILITIES (1.4%)
Aquila, Inc. (c) 933,500 3,304,590
CMS Energy Corp. (b)(c) 73,000 1,088,430
</Table>
<Table>
<Caption>
SHARES VALUE
MULTI-UTILITIES (CONTINUED)
DTE Energy Co. 52,300 $ 2,259,360
Sempra Energy 241,600 10,702,880
--------------
17,355,260
--------------
OFFICE ELECTRONICS (0.0%)++
Xerox Corp. (c) 25,100 340,607
--------------
OIL, GAS & CONSUMABLE FUELS (4.6%)
Amerada Hess Corp. 17,500 2,189,250
Anadarko Petroleum Corp. 75,900 6,884,889
Chesapeake Energy Corp. 70,500 2,263,050
Chevron Corp. (b) 97,363 5,556,506
ConocoPhillips 30,278 1,979,576
V Devon Energy Corp. (b) 269,742 16,287,022
Foundation Coal Holdings, Inc. 12,900 483,750
James River Coal Co. (b)(c) 13,574 580,424
Kerr-McGee Corp. 10,975 933,314
Kinder Morgan, Inc. (b) 54,450 4,949,505
Marathon Oil Corp. 43,400 2,610,944
Massey Energy Co. (b) 7,550 302,529
Murphy Oil Corp. 38,400 1,799,040
Noble Energy, Inc. 59,200 2,370,960
Pogo Producing Co. (b) 163,500 8,256,750
Williams Cos., Inc. (The) 55,300 1,233,190
--------------
58,680,699
--------------
PAPER & FOREST PRODUCTS (1.4%)
International Paper Co. 87,400 2,550,332
MeadWestvaco Corp. 505,349 13,250,251
Weyerhaeuser Co. 38,600 2,444,924
--------------
18,245,507
--------------
PHARMACEUTICALS (5.1%)
Abbott Laboratories 158,000 6,801,900
Andrx Corp. (c) 449,000 6,946,030
Eli Lilly & Co. (b) 109,000 5,427,110
IVAX Corp. (b)(c) 378,875 10,816,881
Merck & Co., Inc. 217,200 6,129,384
Pfizer, Inc. 429,100 9,328,634
Sanofi-Aventis, ADR (a) 188,700 7,570,644
Watson
Pharmaceuticals, Inc. (c) 313,800 10,844,928
--------------
63,865,511
--------------
REAL ESTATE (1.0%)
Boykin Lodging Co. (c) 103,400 1,140,502
Crescent Real Estate
Equities Co. 20,100 400,995
Friedman, Billings, Ramsey Group, Inc. Class A (b) 23,100 204,897
Health Care Property
Investors, Inc. (b) 142,746 3,632,886
</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)
- --------------------------------------------------------------------------------
REAL ESTATE (CONTINUED)
St. Joe Co. (The) (b) 36,500 $ 2,407,175
Trizec Properties, Inc. 26,500 589,625
United Dominion Realty
Trust, Inc. (b) 169,270 3,745,945
--------------
12,122,025
--------------
ROAD & RAIL (2.5%)
Celadon Group, Inc. (c) 69,626 1,612,538
CSX Corp. 263,800 12,084,678
Norfolk Southern Corp. 46,550 1,871,310
Swift Transportation
Co., Inc. (b)(c) 80,163 1,462,975
Union Pacific Corp. 201,300 13,925,934
Werner Enterprises, Inc. 39,895 714,918
--------------
31,672,353
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.9%)
Applied Micro Circuits Corp. (c) 317,050 773,602
MEMC Electronic
Materials, Inc. (c) 337,500 6,054,750
NVIDIA Corp. (c) 64,365 2,159,446
ON Semiconductor Corp. (c) 49,489 229,629
PMC-Sierra, Inc. (b)(c) 7,900 56,090
Skyworks Solutions, Inc. (c) 83,278 446,370
Three-Five Systems, Inc. (c) 91,500 12,810
Vitesse Semiconductor Corp. (c) 626,552 1,033,811
Zoran Corp. (c) 15,200 223,136
--------------
10,989,644
--------------
SOFTWARE (4.1%)
BEA Systems, Inc. (b)(c) 905,200 7,983,864
Blackboard, Inc. (c) 25,339 712,026
Computer Associates International, Inc. (b) 221,000 6,181,370
Compuware Corp. (c) 374,872 3,032,714
Liberate Technologies 112,900 21,733
Manhattan Associates, Inc. (c) 355,200 7,888,992
Microsoft Corp. 545,000 14,006,500
MSC.Software Corp. (b)(c) 41,800 611,325
NetIQ Corp. (c) 215,181 2,580,020
Novell, Inc. (c) 183,046 1,394,811
TIBCO Software, Inc. (c) 931,000 7,066,290
Visual Networks, Inc. (c) 37,612 47,015
WatchGuard
Technologies, Inc. (c) 49,750 173,130
Wind River Systems, Inc. (c) 45,199 592,107
--------------
52,291,897
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
SPECIALTY RETAIL (0.2%)
Blockbuster, Inc.-Class A (b) 543,800 $ 2,479,728
Circuit City Stores, Inc. 17,400 309,546
Restoration Hardware, Inc. (c) 55,174 327,182
--------------
3,116,456
--------------
THRIFTS & MORTGAGE FINANCE (0.2%)
E-Loan, Inc. (c) 27,053 114,975
New York Community
Bancorp, Inc. (b) 12,900 208,593
Washington Mutual, Inc. 51,225 2,028,510
--------------
2,352,078
--------------
TRANSPORTATION (0.7%)
American Commercial
Lines, Inc. (b)(c) 301,388 8,475,031
--------------
WIRELESS TELECOMMUNICATION SERVICES (0.2%)
Sprint Nextel Corp. 135,708 3,163,354
--------------
Total Common Stocks
(Cost $1,001,966,171) 1,177,232,598
--------------
<Caption>
NUMBER OF
WARRANTS
WARRANT (0.1%)
- --------------------------------------------------------------------------------
TRANSPORTATION (0.1%)
American Commercial Lines, Inc.
Strike Price $12.00
Expire 1/12/09 (c) 6,765 660,264
--------------
Total Warrant
(Cost $3,173,826) 660,264
--------------
<Caption>
PRINCIPAL
AMOUNT
LONG-TERM BONDS (0.2%)
CONVERTIBLE BONDS (0.1%)
- --------------------------------------------------------------------------------
INTERNET (0.1%)
i2 Technologies, Inc.
5.25%, due 12/15/06 $1,025,000 1,013,469
--------------
PHARMACEUTICALS (0.0%)++
NPS Pharmaceuticals, Inc.
3.00%, due 6/15/08 583,000 505,024
--------------
Total Convertible Bonds
(Cost $1,486,578) 1,518,493
--------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BOND (0.1%)
- --------------------------------------------------------------------------------
TRANSPORTATION (0.1%)
American Commercial
Lines LLC
11.25%, due 1/1/08 (c)(f) $5,511,870 $ 1,267,730
--------------
Total Corporate Bond
(Cost $168,790) 1,267,730
--------------
Total Long-Term Bonds
(Cost $1,655,368) 2,786,223
--------------
SHORT-TERM INVESTMENTS (17.6%)
- --------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.4%)
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (d)(e) 5,184,317 5,184,317
--------------
Total Certificate of Deposit
(Cost $5,184,317) 5,184,317
--------------
COMMERCIAL PAPER (4.0%)
American Express Credit Corp.
4.02%, due 11/1/05 13,787,000 13,787,000
Citigroup Funding, Inc.
3.97%, due 11/1/05 28,772,000 28,772,000
Compass Securitization
3.993%, due 11/22/05 (e) 3,703,083 3,703,083
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (e) 2,221,850 2,221,850
Silver Tower U.S. Funding
3.932%, due 11/15/05 (e) 2,198,463 2,198,463
--------------
Total Commercial Paper
(Cost $50,682,396) 50,682,396
--------------
<Caption>
SHARES
INVESTMENT COMPANY (2.7%)
BGI Institutional Money
Market Fund (e) 33,773,322 33,773,322
--------------
Total Investment Company
(Cost $33,773,322) 33,773,322
--------------
<Caption>
PRINCIPAL
AMOUNT
TIME DEPOSITS (10.5%)
Bank of the West (The)
4.02%, due 12/8/05 (e) $14,071,717 14,071,717
Barclays
3.92%, due 12/5/05 (e) 5,924,933 5,924,933
3.94%, due 11/28/05 (e) 6,665,550 6,665,550
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Credit Suisse First Boston, Inc.
3.74%, due 11/1/05 (e) $5,184,317 $ 5,184,317
Deutsche Bank
3.95%, due 12/2/05 (e) 5,924,933 5,924,933
First Tennessee National Corp.
3.88%, due 11/14/05 (e) 5,924,933 5,924,933
Fortis Bank
4.00%, due 12/12/05 (e) 6,665,550 6,665,550
Halifax Bank of Scotland
3.75%, due 11/1/05 (e) 5,924,933 5,924,933
Investors Bank & Trust Depository Receipt
2.60%, due 11/1/05 39,554,747 39,554,747
Keybank
4.00%, due 11/1/05 (e) 6,625,258 6,625,258
Marshall & Ilsley Bank
3.97%, due 12/29/05 (e) 5,924,933 5,924,933
Societe Generale
3.77%, due 11/1/05 (e) 12,590,483 12,590,483
UBS AG
4.01%, due 12/13/05 (e) 5,924,933 5,924,933
Wells Fargo & Co.
4.00%, due 11/25/05 (e) 5,924,933 5,924,933
--------------
Total Time Deposits
(Cost $132,832,153) 132,832,153
--------------
Total Short-Term Investments
(Cost $222,472,188) 222,472,188
--------------
Total Investments
(Cost $1,229,267,553) (g) 111.1% 1,403,151,273(h)
Liabilities in Excess of
Cash and Other Assets (11.1) (140,166,870)
----------- --------------
Net Assets 100.0% $1,262,984,403
=========== ==============
</Table>
<Table>
++ Less than one tenth of a percent.
(a) ADR -- American Depositary Receipt.
(b) Represents security, or a portion thereof, which is out
on loan.
(c) Non-income producing security.
(d) Floating rate. Rate shown is the rate in effect at
October 31, 2005.
(e) Represents security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(f) Escrow reserve-reserve account for disputed claims.
(g) The cost for federal income tax purposes is
$1,232,959,501.
(h) At October 31, 2005 net unrealized appreciation was
$170,191,772, 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 $222,934,883 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $52,743,111.
</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, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $1,229,267,553) including
$134,984,542 market value of securities
loaned $1,403,151,273
Cash denominated in foreign currencies (cost
$36,333) 36,055
Cash 64,684
Receivables:
Investment securities sold 29,041,696
Fund shares sold 2,930,605
Dividends and interest 600,837
Other assets 64,533
--------------
Total assets 1,435,889,683
--------------
LIABILITIES:
Securities lending collateral 140,358,441
Payables:
Investment securities purchased 29,415,567
Fund shares redeemed 963,203
Transfer agent 748,024
NYLIFE Distributors 553,040
Manager 546,437
Shareholder communication 170,650
Custodian 14,445
Accrued expenses 135,473
--------------
Total liabilities 172,905,280
--------------
Net assets $1,262,984,403
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding
(par value of $.010 per share) unlimited
number of shares authorized:
Class A $ 102,270
Class B 115,765
Class C 54,153
Class I 90,165
Class R1 3,802
Class R2 606
Additional paid-in capital 1,012,782,148
Accumulated undistributed net investment
income 671,475
Accumulated net realized gain on investments 75,280,589
Net unrealized appreciation on investments 173,883,720
Net unrealized depreciation on translation
of other assets and liabilities in foreign
currencies and foreign currency forward
contracts (290)
--------------
Net assets $1,262,984,403
==============
CLASS A
Net assets applicable to outstanding shares $ 358,214,161
==============
Shares of beneficial interest outstanding 10,226,970
==============
Net asset value per share outstanding $ 35.03
Maximum sales charge (5.50% of offering
price) 2.04
--------------
Maximum offering price per share outstanding $ 37.07
==============
CLASS B
Net assets applicable to outstanding shares $ 387,771,998
==============
Shares of beneficial interest outstanding 11,576,455
==============
Net asset value and offering price per share
outstanding $ 33.50
==============
CLASS C
Net assets applicable to outstanding shares $ 181,398,260
==============
Shares of beneficial interest outstanding 5,415,308
==============
Net asset value and offering price per share
outstanding $ 33.50
==============
CLASS I
Net assets applicable to outstanding shares $ 320,099,412
==============
Shares of beneficial interest outstanding 9,016,549
==============
Net asset value and offering price per share
outstanding $ 35.50
==============
CLASS R1
Net assets applicable to outstanding shares $ 13,378,616
==============
Shares of beneficial interest outstanding 380,200
==============
Net asset value and offering price per share
outstanding $ 35.19
==============
CLASS R2
Net assets applicable to outstanding shares $ 2,121,956
==============
Shares of beneficial interest outstanding 60,583
==============
Net asset value and offering price per share
outstanding $ 35.03
==============
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 15,965,115
Interest 2,954,615
Income from securities loaned -- net 235,802
-------------
Total income 19,155,532
-------------
EXPENSES:
Manager 8,674,774
Distribution -- Class B 2,749,568
Distribution -- Class C 1,204,928
Transfer agent -- Classes A, B and C 2,478,880
Transfer agent -- Classes I, R1 and R2 459,316
Distribution/Service -- Class A 807,031
Service -- Class B 916,523
Service -- Class C 401,643
Distribution/Service -- Class R2 3,316
Shareholder communication 269,988
Professional 244,503
Recordkeeping 143,449
Registration 117,094
Trustees 82,036
Custodian 81,210
Shareholder service -- Class R1 10,445
Shareholder service -- Class R2 1,327
Miscellaneous 53,921
-------------
Total expenses before reimbursement 18,699,952
Expense reimbursement from Manager (237,690)
-------------
Net expenses 18,462,262
-------------
Net investment income 693,270
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY:
Net realized gain (loss) on:
Security transactions 79,096,057
Foreign currency transactions (10,684)
-------------
Net realized gain on investment and foreign
currency transactions 79,085,373
-------------
Net change in unrealized appreciation
(depreciation) on:
Security transactions 57,297,345
Translation of other assets and liabilities
in foreign currencies and foreign currency
forward contracts (290)
-------------
Net change in unrealized appreciation
(depreciation) on investments and foreign
currency transactions 57,297,055
-------------
Net realized and unrealized gain on
investments and foreign currency
transactions 136,382,428
-------------
Net increase in net assets resulting from
operations $137,075,698
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$164,459.
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 YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
INCREASE IN NET ASSETS:
Operations:
Net investment income (loss) $ 693,270 $ (2,536,653)
Net realized gain on
investment and foreign
currency transactions 79,085,373 83,446,525
Net change in unrealized
appreciation (depreciation)
on investments and foreign
currency transactions 57,297,055 21,503,347
------------------------------
Net increase in net assets
resulting from operations 137,075,698 102,413,219
------------------------------
Distributions to shareholders:
From net realized gain on investments:
Class A (11,258,532) --
Class B (13,518,830) --
Class C (6,021,722) --
Class I (11,235,228) --
Class R1 (2,567) --
Class R2 (156) --
------------------------------
Total distributions to
shareholders (42,037,035) --
------------------------------
Capital share transactions:
Net proceeds from sale of
shares:
Class A 123,387,655 117,277,801
Class B 82,339,822 92,818,123
Class C 53,745,766 44,672,357
Class I 76,879,879 128,176,243
Class R1 15,708,676 62,122
Class R2 4,110,453 3,733
Net asset value of shares issued to
shareholders in reinvestment of
distributions:
Class A 9,720,883 --
Class B 12,315,724 --
Class C 4,699,860 --
Class I 11,074,218 --
Class R1 2,567 --
Class R2 156 --
------------------------------
393,985,659 383,010,379
</Table>
<Table>
<Caption>
2005 2004
Cost of shares redeemed:
Class A $ (70,533,864) $ (53,650,958)
Class B (48,504,915) (31,920,068)
Class C (27,109,580) (15,543,242)
Class I (70,141,243) (65,096,353)
Class R1 (3,013,804) (29,064)
Class R2 (2,071,751) --
------------------------------
(221,375,157) (166,239,685)
Increase in net assets
derived from capital
share transactions 172,610,502 216,770,694
------------------------------
Net increase in net assets 267,649,165 319,183,913
NET ASSETS:
Beginning of year 995,335,238 676,151,325
------------------------------
End of year $1,262,984,403 $ 995,335,238
==============================
Accumulated undistributed net
investment income at end of
year $ 671,475 $ --
==============================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
--------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning of period $ 32.08 $ 28.04 $ 21.95 $ 27.66 $ 27.25 $ 26.22
----------- ----------- ----------- -------- -------- -------
Net investment income (loss) 0.10(a)(e) (0.01)(a) (0.04) 0.15 0.03 0.02
Net realized and unrealized gain (loss) on
investments 4.16 4.05 6.13 (5.69) 0.55 4.17
----------- ----------- ----------- -------- -------- -------
Total from investment operations 4.26 4.04 6.09 (5.54) 0.58 4.19
----------- ----------- ----------- -------- -------- -------
Less dividends and distributions:
From net investment income -- -- -- (0.11) (0.03) --
From net realized gain on investments (1.31) -- -- (0.06) (0.14) (3.16)
----------- ----------- ----------- -------- -------- -------
Total dividends and distributions (1.31) -- -- (0.17) (0.17) (3.16)
----------- ----------- ----------- -------- -------- -------
Net asset value at end of period $ 35.03 $ 32.08 $ 28.04 $ 21.95 $ 27.66 $ 27.25
=========== =========== =========== ======== ======== =======
Total investment return (b) 13.51% 14.41% 27.74%(c) (20.04%) 2.11% 16.67%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.29%(e) (0.05%) (0.17%)+ 0.63% 0.37% 0.12%
Net expenses 1.35% 1.35% 1.35%+ 1.33% 1.25% 1.25%
Expenses (before reimbursement) 1.37% 1.38% 1.45%+ 1.44% 1.43% 1.44%
Portfolio turnover rate 56% 64% 61% 77% 19% 40%
Net assets at end of period (in 000's) $358,214 $268,513 $176,932 $123,461 $103,402 $22,048
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning of period $ 30.96 $ 27.26 $ 21.47 $ 27.13 $ 26.92 $26.15
----------- ----------- ----------- ------- ------- ------
Net investment income (loss) (0.15)(a)(e) (0.24)(a) (0.16) (0.03) (0.06) (0.11)
Net realized and unrealized gain (loss) on
investments 4.00 3.94 5.95 (5.57) 0.41 4.04
----------- ----------- ----------- ------- ------- ------
Total from investment operations 3.85 3.70 5.79 (5.60) 0.35 3.93
----------- ----------- ----------- ------- ------- ------
Less distributions:
From net investment income -- -- -- -- -- --
From net realized gain on investments (1.31) -- -- (0.06) (0.14) (3.16)
----------- ----------- ----------- ------- ------- ------
Total dividends and distributions -- -- -- -- -- --
----------- ----------- ----------- ------- ------- ------
Net asset value at end of period $ 33.50 $ 30.96 $ 27.26 $ 21.47 $ 27.13 $26.92
=========== =========== =========== ======= ======= ======
Total investment return (b) 12.64% 13.57% 26.97%(c) (20.63%) 1.29% 15.72%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) (0.46%)(e) (0.80%) (0.92%)+ (0.12%) (0.38%) (0.63%)
Net expenses 2.10% 2.10% 2.10%+ 2.08% 2.00% 2.00%
Expenses (before reimbursement) 2.12% 2.13% 2.20%+ 2.19% 2.18% 2.19%
Portfolio turnover rate 56% 64% 61% 77% 19% 40%
Net assets at end of period (in 000's) $181,398 $138,044 $95,004 $69,077 $51,234 $6,546
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ 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.
(e) Net investment income (loss) and the ratio of net investment income (loss) includes $0.04
per share and 0.11%, respectively as a result of a special one time dividend from
Microsoft Corp.
</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>
CLASS B
---------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 30.96 $ 27.26 $ 21.47 $ 27.13 $ 26.92 $ 26.15
------------ ----------- ----------- -------- -------- -------
(0.15)(a)(e) (0.24)(a) (0.16) (0.03) (0.06) (0.11)
4.00 3.94 5.95 (5.57) 0.41 4.04
------------ ----------- ----------- -------- -------- -------
3.85 3.70 5.79 (5.60) 0.35 3.93
------------ ----------- ----------- -------- -------- -------
-- -- -- -- -- --
(1.31) -- -- (0.06) (0.14) (3.16)
------------ ----------- ----------- -------- -------- -------
-- -- -- -- -- --
------------ ----------- ----------- -------- -------- -------
$ 33.50 $ 30.96 $ 27.26 $ 21.47 $ 27.13 $ 26.92
============ =========== =========== ======== ======== =======
12.64% 13.57% 26.97%(c) (20.63%) 1.29% 15.72%
(0.46%)(e) (0.80%) (0.92%)+ (0.12%) (0.38%) (0.63%)
2.10% 2.10% 2.10%+ 2.08% 2.00% 2.00%
2.12% 2.13% 2.20%+ 2.19% 2.18% 2.19%
56% 64% 61% 77% 19% 40%
$387,772 $313,765 $220,932 $153,581 $134,883 $40,078
</Table>
<Table>
<Caption>
CLASS I
-------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 32.37 $ 28.19 $ 22.03 $ 27.75 $ 27.31 $ 26.25
----------- ----------- ----------- -------- ------- -------
0.24(a)(e) 0.09(a) 0.00(a)(d) 0.19 0.07 0.12
4.20 4.09 6.16 (5.69) 0.58 4.13
----------- ----------- ----------- -------- ------- -------
4.44 4.18 6.16 (5.50) 0.65 4.25
----------- ----------- ----------- -------- ------- -------
-- -- -- (0.16) (0.07) (0.03)
(1.31) -- -- (0.06) (0.14) (3.16)
----------- ----------- ----------- -------- ------- -------
(1.31) -- -- (0.22) (0.21) (3.19)
----------- ----------- ----------- -------- ------- -------
$ 35.50 $ 32.37 $ 28.19 $ 22.03 $ 27.75 $ 27.31
=========== =========== =========== ======== ======= =======
13.96% 14.83% 27.96%(c) (19.81%) 2.36% 16.88%
0.69%(e) 0.31% 0.08%+ 0.88% 0.62% 0.37%
0.95% 0.99% 1.10%+ 1.08% 1.00% 1.00%
0.97% 1.02% 1.20%+ 1.19% 1.18% 1.19%
56% 64% 61% 77% 19% 40%
$320,099 $274,975 $183,283 $115,186 $96,726 $69,434
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1 CLASS R2
---------------------------- ----------------------------
JANUARY 2** JANUARY 2**
YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2005 2004
Net asset value at beginning of period $ 32.13 $30.38 $32.07 $30.38
----------- ----------- ----------- -----------
Net investment income (loss) 0.16(a)(d) 0.05(a) 0.07(a)(d) (0.01)(a)
Net realized and unrealized gain on
investments 4.21 1.70 4.20 1.70
----------- ----------- ----------- -----------
Total from investment operations 4.37 1.75 4.27 1.69
----------- ----------- ----------- -----------
Less distributions:
From net realized gain on investments (1.31) -- (1.31) --
----------- ----------- ----------- -----------
Net asset value at end of period $ 35.19 $32.13 $35.03 $32.07
=========== =========== =========== ===========
Total investment return (b) 13.84% 5.76%(c) 13.54% 5.56%(c)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) 0.59%(d) 0.21%+ 0.34%(d) (0.04%)+
Net expenses 1.05% 1.09%+ 1.30% 1.34%+
Expenses (before reimbursement) 1.07% 1.12%+ 1.32% 1.37%+
Portfolio turnover rate 56% 64% 56% 64%
Net assets at end of period (in 000's) $13,379 $ 34 $2,122 $ 4
</Table>
<Table>
** Commencement of operations.
+ 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) Net investment income (loss) and the ratio of net investment income (loss) includes $0.04
per share and 0.11%, respectively as a result of a special one time dividend from
Microsoft Corp.
</Table>
22 MainStay MAP 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 nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay MAP 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, 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, Class R1 and Class R2 shares are not subject to a
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, its affiliates, or 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. 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 accounting
principles generally accepted in the United States of America 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 normally are taken from the principal market in which each
security trades. Debt securities are valued at prices supplied by a pricing
agent or brokers selected by the Fund's Manager, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques, if
such prices are deemed by the Fund's Manager to be representative of market
values, at the regular close of business of the 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 in good faith by 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 principal
market is temporarily closed at a time when under normal conditions it would be
open. At October 31, 2005, the Fund did not hold securities that were valued in
such a 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) 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
www.MAINSTAYfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 accounting principles generally accepted in
the United States of America. These "book/tax differences" are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require
reclassification.
The following table discloses the current period reclassification between
undistributed net investment income, accumulated net realized gain on
investments and additional paid-in capital arising from permanent differences;
net assets at October 31, 2005, are not affected.
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN ON ADDITIONAL
INCOME INVESTMENTS PAID-IN-CAPITAL
$ (21,795) $ 55,322 $ (33,527)
</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.
(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 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.
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) 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 such foreign currency
denominated assets and liabilities, other than investments, are reflected in
unrealized foreign exchange gains or losses at period end exchange rates.
(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 transfer agent expenses and 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.
24 MainStay MAP Fund
(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.
(I) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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. Markston
International LLC and Jennison Associates LLC (the "Subadvisors") will each
manage a portion of the Fund's assets, as designated by NYLIM from time to time,
subject to the oversight of NYLIM. Each Subadvisor is responsible for the
day-to-day portfolio management of the Fund with respect to its allocated
portion of the Fund's assets.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual percentage of the Fund's
average daily net assets as follows: 0.75% on assets up to $1.0 billion and
0.70% on assets in excess of $1.0 billion. Effective August 1, 2005, the Manager
has entered into a written expense limitation agreement, under which the Manager
has agreed to reimburse the expenses of the Fund so that the total operating
expenses (excluding taxes, interest, litigation, extraordinary expenses, and
brokerage and other transaction expenses relating to the purchase or sale of
portfolio investments) do not exceed, on an annualized basis, 1.35% of the
average daily net assets of the Class A shares. An equivalent reimbursement, in
an equal amount of basis points, will be applied to the other share classes. The
Manager, within three years of incurring such expenses, may recoup the amount of
any management fee waiver or expense reimbursement from the Fund pursuant to
this agreement if such recoupment does not cause the Fund to exceed the expense
limitations. At October 31, 2005, the Fund had $222,593 of recoupment available.
This amount is available until October 31, 2008. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. Prior to
August 1, 2005, the Manager had agreed to voluntarily reimburse the expenses of
the Fund so that total annual fund operating expenses do not exceed on an
annualized basis 1.35% of the average daily net assets of the Class A shares,
and such that there would be an equivalent reduction for the other classes of
shares. For the year ended October 31, 2005, the Manager earned fees from the
Fund in the amount of $8,674,774 and waived its fees and/or reimbursed expenses
in the amount of $237,690.
Pursuant to the terms of a Sub-Advisory Agreement 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 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 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
www.MAINSTAYfunds.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $267,758 for the year
ended October 31, 2005. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $3,715, $459,520 and $19,712, respectively, for the year ended October
31, 2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $2,938,196.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(F) OTHER. Pursuant to the Management Agreement, fees for the cost of legal
services, included in Professional fees as shown on the Statement of Operations,
provided to the Fund by the Office of the General Counsel of NYLIM amounted to
$31,351 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $143,449 for the year ended
October 31, 2005.
NOTE 4 -- CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, The Bank of New York acted as custodian for the Fund.
NOTE 5 -- FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED ACCUMULATED
NET CAPITAL AND OTHER TOTAL
INVESTMENT CAPITAL TEMPORARY UNREALIZED ACCUMULATED
INCOME GAINS DIFFERENCES APPRECIATION GAIN
$34,640,508 $45,003,214 290 $170,191,482 $249,835,494
</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 tax character of distributions paid during the years ended October 31, 2005
and October 31, 2004, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2005 2004
Distributions paid from:
Long-term Capital Gains $42,037,035 --
- -----------------------------------------------------------
$42,037,035 $ --
- -----------------------------------------------------------
</Table>
NOTE 6 -- PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $758,008 and $612,818, respectively.
NOTE 7 -- PORTFOLIO SECURITIES LOANED AND FOREIGN CURRENCY:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $134,984,542. The Fund received $140,358,441 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 held at October 31, 2005:
<Table>
<Caption>
CURRRENCY COST MARKET VALUE
Pound Sterling L20,370 $36,333 $36,055
- ----------------------------------------------------------
</Table>
26 MainStay MAP Fund
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, 2005.
NOTE 9 -- CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C
Shares sold 3,639 2,542 1,643
- -------------------------------------------------------------
Shares issued in reinvestment of
dividend and distributions 294 387 148
- -------------------------------------------------------------
3,933 2,929 1,791
- -------------------------------------------------------------
Shares redeemed (2,076) (1,489) (836)
- -------------------------------------------------------------
Net increase 1,857 1,440 955
- -------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS I CLASS R1 CLASS R2
Shares sold 2,229 467 122
- -------------------------------------------------------------
Shares issued in reinvestment
of dividend and
distributions 332 --(a) --(a)
- -------------------------------------------------------------
2,561 467 122
- -------------------------------------------------------------
Shares redeemed (2,037) (88) (61)
- -------------------------------------------------------------
Net increase 524 379 61
- -------------------------------------------------------------
</Table>
<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
dividend 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 dividend
and distributions -- -- --
- -------------------------------------------------------------
4,078 2 --(a)
- -------------------------------------------------------------
Shares redeemed (2,086) (1) --
- -------------------------------------------------------------
Net increase 1,992 1 --(a)
- -------------------------------------------------------------
</Table>
<Table>
* Commenced operations on January 2, 2004.
(a) Less than one-thousand.
</Table>
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review in December 2005, NYLIM made payments totaling
$5.9 million to nine MainStay funds. No payment was made with respect to the
MainStay MAP Fund. NYLIM has also agreed to reimburse or pay all expenses
relating to the 'Board of Trustees' review of this matter, and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
www.MAINSTAYfunds.com 27
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, 2005, and the related
statement of operations for the year then ended, and the statements of changes
in net assets and financial highlights for each of the years in the two-year
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
audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the results of
its operations for the year then ended, and the changes in its net assets and
financial highlights for each of the years in the two-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
28 MainStay MAP 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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
www.MAINSTAYfunds.com 29
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
30 MainStay MAP Fund
<Table>
<Caption>
NUMBER OF FUNDS
POSITION(S) HELD WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 31
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreements, the Trustees requested and received from the Manager and
Subadvisors, and reviewed, a wide variety of information. The Trustees also
requested and received information from outside data providers and information
and analysis from a third party consultant. The Trustees considered various
industry and regulatory trends in their deliberations. In considering approval
of these Agreements, and in evaluating the fairness of the compensation to be
paid by the Fund, the Trustees met a number of times as a full Board and in
executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisors. The Trustees reviewed the services
that the Manager and Subadvisors have provided historically to the Fund, and
also generally to other series of the Trust. The Manager's services to the Trust
have included investment management services, including the selection and
supervision of portfolio managers or subadvisers, and administrative services,
including interacting with other service providers to the Trust, maintaining
certain Fund records, providing office space, performing clerical and
bookkeeping services for the Fund, preparing Fund filings, and other
administrative services. The Subadvisors' services have included, among other
things, providing the day-to-day management of the portfolio, providing reports
to the Manager, and reviewing certain aspects of Fund filings. The Trustees
discussed with the Manager the proportion of the portfolio managed by each
Subadvisor and each Subadvisor's capacity with respect to managing assets of the
Fund. The Trustees considered, among other things, the Manager's and
Subadvisors' management, personnel, resources, operations and portfolio
management capabilities. In considering the Manager's and Subadvisors' practices
relating to best execution of portfolio trades, the Board reviewed reports of
the Fund's Brokerage Committee including with respect to analysis prepared by
Plexus Group. The Trustees considered the Manager's supervision of the Fund's
service providers and its attention to the compliance program of the Trust, the
Manager, the Subadvisors and certain other service providers, as well as each
Subadvisor's attention to its compliance program. The Trustees noted the
generally favorable conclusions of financial services research firm DALBAR Inc.
of the services, investor complaint levels, and communications that NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of the Manager, has provided
to Trust shareholders. A majority of the Trustees, including a majority of the
Non-Interested Trustees, concluded that, overall, the nature, extent and quality
of the services expected to be provided by the Manager and Subadvisors were such
that, in the context of the Board's overall review of various factors, the
Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's competitive performance over
several periods and particularly over five years. In addition, the Board
considered each Subadvisor's performance and complementary investment processes
and styles, and the Manager's oversight role, including with respect to
allocating the Fund's assets between the portfolios managed by the two
Subadvisors. The Trustees reviewed information about such options as adding a
new subadviser in the event that the Fund's assets significantly increase in
size or applying to the SEC for an exemption to allow the hiring and replacement
of multiple subadvisers without the requirement of obtaining shareholder
approval for each such hiring and replacement. There is no assurance that the
Fund will seek such an exemption or, if sought, that the SEC would grant an
order providing such an exemption.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees noted the Manager's agreement to limit the Fund's net
expenses to a certain level with respect to the Fund, with the expectation that
the Manager intended, over time, to implement measures designed to reduce the
Trust's transfer agency fees. The Trustees considered certain benefits expected
for, and risks borne by, the Manager and its affiliates, including benefits from
soft dollar arrangements. The Trustees considered the services provided to the
Fund by affiliates of the Manager, NYLIFE Distributors and NYLIM Service, under
other agreements, and the benefits to the Manager and its affiliates from those
relationships. The information provided to the Trustees indicated that the
profitability to the Manager and its affiliates arising directly from those
other agreements was not excessive. The
32 MainStay MAP Fund
Trustees acknowledged certain benefits to the reputation of the Manager and its
affiliates, as well to that of the Trust, from their association with each
other.
The Trustees, in reviewing economies of scale, noted the substantial growth of
the Fund over the past five years. The Trustees discussed the extent to which
economies of scale were projected by the Manager to be realized if the Fund
continues to grow, or as the Trust grows overall, noting in particular the
Manager's plans for marketing and distributing shares of various series of the
Trust. They noted the Manager's willingness to implement contractual
breakpoints, and that the contractual breakpoints in place for the management
fee were intended to provide that the Fund's shareholders would share in
benefits from economies of scale arising from the growth of Fund assets. The
Trustees noted that the Fund's contractual management fee had been reduced in
accordance with the terms of the breakpoint schedule applicable to the Fund.
Acknowledging the difficulty of forecasting economies of scale, the Trustees
generally expressed an intention to monitor the Manager's profitability and
consider the application of fee breakpoints or other appropriate measures as the
Board may determine from time to time. The Trustees reviewed historical
information about changes in the Fund's expense and asset levels over time, as
well as information about certain Fund expenses that would remain fixed even as
Fund assets increase and, therefore, provide the Fund with benefits from
economies of scale as the Fund grows. The Trustees noted that, to the extent the
Fund's gross expenses currently are higher than its net expenses, economies of
scale achieved through an increase in the Fund's assets might not directly
benefit the Fund through lower net expenses. The Trustees considered various
information about transfer agency expenses, including information showing that
transfer agency fees of a significant number of series of the Trust (although
not every such series or with respect to every share class of each series)
tended to be high, when aggregated and expressed as a percentage of the assets
of certain series, compared to the mutual fund industry average according to
certain studies reviewed by the Board and, therefore, adversely affected gross
expense ratios. The Board received information about potential effects on the
Manager were it to subsidize certain portions of the Trust's transfer agency
fees. The Trustees noted that a significant number of shareholders of the
Trust's series had small amounts invested in the series, and have considered
measures intended to increase average shareholder account size and/or otherwise
reduce the Trust's transfer agency fees and expenses, including steps that the
Manager has taken to encourage shareholders to consolidate or close small
accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager, including other registered funds and separate
institutional accounts, that had investment objectives similar to that of the
Fund. The Trustees took into account information provided by the Manager about
the relative scope of services provided to the Fund and to those accounts or
explanations about the accounts' histories. In considering the extent of the
fees received by the Manager for providing services to the Fund, the Trustees
evaluated factors such as the fees and expenses borne by other registered funds
in the market pursuing strategies generally similar to those followed by the
Fund. The Trustees considered the Fund's historical and proposed contractual and
net management fees, its anticipated gross and net expense ratios, and various
components of that expense ratio, in comparison to other funds in comparison
groupings prepared by outside data providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisors and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
www.MAINSTAYfunds.com 33
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 and (October 31, 2005) 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 $42,037,035 on December 13,
2004.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
34 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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
www.MAINSTAYfunds.com 35
(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) 2005 NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A08062 (RECYCLE LOGO) MS475-05 MSMP11-12/05
30
(MAINSTAY LOGO)
MAINSTAY
GOVERNMENT FUND
The MainStay Funds
Annual Report
October 31, 2005
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/S/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 2
- --------------------------------------------------------------------------------
Investment and Performance Comparison 3
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 27
- --------------------------------------------------------------------------------
Federal Income Tax Information 29
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures 29
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 29
- --------------------------------------------------------------------------------
MainStay Funds 30
</Table>
2 MainStay Government Fund
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -3.93% 3.93% 4.66%
Excluding sales charges 0.59 4.89 5.15
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
LEHMAN BROTHERS GOVERNMENT
MAINSTAY GOVERNMENT FUND BOND INDEX
------------------------ --------------------------
10/31/95 9550 10000
9944 10512
10744 11422
11792 12710
11589 12557
12424 13566
14182 15612
14849 16612
15135 17094
15679 17920
10/31/05 15772 18089
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- ------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -5.04% 3.76% 4.39%
Excluding sales charges -0.17 4.10 4.39
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
LEHMAN BROTHERS GOVERNMENT
MAINSTAY GOVERNMENT FUND BOND INDEX
------------------------ --------------------------
10/31/95 10000 10000
10351 10512
11120 11422
12110 12710
11808 12557
12571 13566
14247 15612
14806 16612
14961 17094
15397 17920
10/31/05 15371 18089
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- ------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges -1.15% 4.10% 4.39%
Excluding sales charges -0.17 4.10 4.39
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
LEHMAN BROTHERS GOVERNMENT
MAINSTAY GOVERNMENT FUND BOND INDEX
------------------------ --------------------------
10/31/95 10000 10000
10351 10512
11120 11422
12110 12710
11808 12557
12571 13566
14247 15612
14806 16612
14961 17094
15397 17920
10/31/05 15370 18089
</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. 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 contractual and
may be modified or terminated only with the approval of the Board of Trustees.
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 THE TABLES
AND 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
- ---------------------------------------------
1.08% 5.20% 5.45%
</Table>
(LINE GRAPH FOR CLASS I SHARES IN $)
<Table>
<Caption>
LEHMAN BROTHERS GOVERNMENT
MAINSTAY GOVERNMENT FUND BOND INDEX
------------------------ --------------------------
10/31/95 10000 10000
10442 10512
11329 11422
12470 12710
12268 12557
13193 13566
15112 15612
15858 16612
16183 17094
16819 17920
10/31/05 17001 18089
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Lehman Brothers(R) Government Bond Index(1) 0.94% 5.92% 6.11%
Average Lipper general U.S. government
fund(2) 0.60 5.01 5.13
</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 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 THE
TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Government Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY GOVERNMENT FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT ENDING ACCOUNT
VALUE (BASED VALUE (BASED
BEGINNING ON ACTUAL EXPENSES ON HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $ 999.15 $5.29 $1,019.75 $5.35
- ---------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $ 995.40 $9.05 $1,016.00 $9.15
- ---------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $ 995.40 $9.05 $1,016.00 $9.15
- ---------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,001.65 $3.38 $1,021.65 $3.41
- ---------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.05% for Class A, 1.80% for Class B and Class C, and 0.67% for Class I)
multiplied by the average account value over the period, divided by 365,
multiplied by 184 (to reflect the one-half year period).
www.MAINSTAYfunds.com 5
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-
TERM
INVESTMENTS
(COLLATERAL
FROM
SECURITIES MORTGAGE- ASSET- U.S. U.S.
LENDING BACKED BACKED TREASURY FEDERAL CORPORATE TREASURY
FNMA IS 1.8%) FHLMC SECURITIES SECURITIES BONDS GNMA AGENCIES BONDS NOTES
- ---- ----------- ----- ---------- ---------- -------- ---- -------- --------- --------
63.9 24.30 11.70 5.70 4.60 3.20 3.20 3.00 1.90 1.60
<Caption>
LIABILITIES
IN
EXCESS
OF CASH
AND
MUNICIPAL OTHER
FNMA BOND ASSETS
- ---- --------- -----------
63.9 0.50 (23.60)
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Federal National Mortgage Association
(Mortgage Pass-Through Securities) 6.00%, due
12/1/35 TBA
2. Federal National Mortgage Association
(Mortgage Pass-Through Securities) 4.50%, due
7/1/18
3. Federal National Mortgage Association
(Mortgage Pass-Through Securities) 5.50%, due
12/1/20 TBA
4. Federal National Mortgage Association 6.625%,
due 9/15/09
5. Federal National Mortgage Association 4.00%,
due 9/2/08
6. Federal National Mortgage Association 6.625%,
due 11/15/30
7. Federal National Mortgage Association
(Mortgage Pass-Through Securities) 5.50%, due
12/1/35 TBA
8. Federal National Mortgage Association
(Mortgage Pass-Through Securities) 5.50%, due
2/1/17
9. Federal National Mortgage Association
(Mortgage Pass-Through Securities) 4.50%, due
11/1/18
10. Federal Home Loan Mortgage Corporation 5.25%,
due 11/5/12
</Table>
6 MainStay Government Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Gary Goodenough, Joseph Portera, and
Jeffrey H. Saxon of MacKay Shields LLC
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.
WHAT ECONOMIC FORCES AFFECTED THE BOND MARKET DURING THE 12 MONTHS ENDED OCTOBER
31, 2005?
Debate over the lasting effects of higher energy costs continued, with aggregate
demand and inflation among the key concerns. Noting that "higher energy and
other costs have the potential to add to inflation pressures," the Federal Open
Market Committee raised the targeted federal funds rate to 3.75% on September
20, 2005. The move was the FOMC's eighth 25-basis-point increase during the
12-month reporting period. (A basis point is one-hundredth of a percentage
point.) Since rebuilding activity following hurricanes Katrina and Rita may
stimulate the economy, money-market futures anticipate that additional
interest-rate hikes may be needed to keep inflation in check.
HOW DID THE TREASURY YIELD CURVE CHANGE DURING THE REPORTING PERIOD?
From October 29, 2004, to October 31, 2005, the two-year Treasury yield advanced
183 basis points (from 2.56% to 4.38%). Over the same period, five-year Treasury
yields increased 116 basis points (from 3.29% to 4.45%) and 10-year Treasury
yields rose 53 basis points (from 4.03% to 4.56%). On the other hand, 30-year
Treasury yields declined four basis points (from 4.79% to 4.75%).(1)
With Federal Reserve action pushing short-term interest rates higher and
foreign-investors supporting long bonds, the yield curve flattened
substantially. The spread between two-year and 30-year Treasurys narrowed 186
basis points.
HOW DID YOU POSITION THE PORTFOLIO ACROSS THE VARIOUS BOND SECTORS AVAILABLE TO
THE FUND?
At the end of October 2005, the Fund held approximately 5% of its net assets in
Treasurys, 27% in agency debentures, 55% in residential mortgage-backed
securities issued by government-sponsored and government-related enterprises, 5%
in asset-backed securities, 6% in commercial mortgage-backed securities, and 2%
in investment-grade corporate bonds.
During the reporting period, we favored securitized products for their
relatively high credit quality, liquidity, and incremental yield. We diversified
the Fund's holdings in securitized issues across residential mortgage-backed,
commercial mortgage-backed, and asset-backed securities.
DID YOU MAKE ANY CHANGES TO THE FUND'S ALLOCATION DURING THE REPORTING PERIOD?
In prior periods, we used prepayments from mortgage-backed and asset-backed
bonds to repurchase securities in the respective sectors. During the reporting
period, we had two reasons for deciding to use such proceeds in other ways.
First, we wanted to pare back the Fund's exposure to the mortgage-backed and
asset-backed sectors because we felt that interest-rate volatility might
increase during the Federal Reserve's tightening cycle. Second, we wanted to
offset some of the Fund's extension risk--or the risk that rising rates might
cause mortgage-backed securities to extend the Fund's duration.
During the reporting period, we also added incremental yield by rotating 10% of
the Fund's assets from Treasurys into agency debentures. We added a 1% position
in Treasury Inflation-Protected Securities (TIPS) to capitalize on higher energy
prices. To trim credit risk, we shifted 1% of the Fund's net assets out of
corporate bonds and asset-backed securities into commercial mortgage-backed
securities.
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.
The Fund may experience a portfolio turnover rate of over 100% and may generate
short- term capital gains which are taxable. Funds that invest in bonds are
subject to interest-rate risk and can lose principal value when interest rates
rise and may generate short-term capital gains.
1. Source: Bloomberg-Historical yield curve data. Rounding may affect results.
www.MAINSTAYfunds.com 7
HOW DID YOU MANAGE THE FUND'S DURATION DURING THE REPORTING PERIOD?
We try to maintain the Fund's average duration between 3.75 and 4.25 years, a
range that we believe is consistent with the Fund's peers. On October 31, 2005,
the Fund's duration was 4.22 years. This is close to the top of the range and
nearly a half year longer than the Fund's duration when the 12-month reporting
period began. As we had anticipated, rising mortgage rates slowed prepayments of
the loans that collateralize the Fund's mortgage-backed securities, which caused
the Fund's duration to lengthen during the reporting period.
WHAT OTHER DECISIONS HAD A POSITIVE IMPACT ON THE FUND'S PERFORMANCE DURING THE
REPORTING PERIOD?
The Fund benefited from our efforts to take advantage of a flattening Treasury
yield curve. We increased the Fund's long-term exposure by adding long-dated
agency debentures that offered a yield advantage over Treasury bonds. The Fund's
agency debentures also generated attractive excess returns when compared to
Treasury securities with similar durations. We also managed the Fund's mortgage-
related extension risk by overweighting mortgage-backed securities that are less
sensitive to prepayments. Finally, the Fund's position in Treasury
Inflation-Protected Securities outperformed similar-duration Treasurys when the
price of crude oil spiked.
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 Government Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (99.3%)+
ASSET-BACKED SECURITIES (4.6%)
- -------------------------------------------------------------------------------
CONSUMER FINANCE (1.4%)
BMW Vehicle Owner Trust
Series 2003-A, Class A3
1.94%, due 2/25/07 $ 119,722 $ 119,511
Harley-Davidson
Motorcycle Trust
Series 2002-1, Class A2
4.50%, due 1/15/10 3,684,745 3,682,773
Volkswagen Auto Loan
Enhanced Trust
Series 2003-2, Class A3
2.27%, due 10/22/07 1,207,149 1,197,201
-------------
4,999,485
-------------
CONSUMER LOANS (0.7%)
Atlantic City Electric
Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 2,275,000 2,338,501
-------------
DIVERSIFIED FINANCIAL SERVICES (2.4%)
Capital One Master Trust
Series 2001-5, Class A
5.30%, due 6/15/09 1,620,000 1,627,188
Massachusetts RRB Special Purpose Trust
Series 2001-1, Class A
6.53%, due 6/1/13 6,533,057 6,919,352
-------------
8,546,540
-------------
PERSONAL LOANS (0.0%)++
MMCA Automobile Trust
Series 2001-2, Class A4
4.22%, due 7/15/06 (a) 120,565 120,546
-------------
THRIFTS & MORTGAGE FINANCE (0.1%)
Vanderbilt Mortgage Finance
Series 1999-B, Class 1A4
6.545%, due 4/7/18 506,500 508,682
-------------
Total Asset-Backed Securities
(Cost $16,145,682) 16,513,754
-------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (1.9%)
- -------------------------------------------------------------------------------
CONSUMER FINANCE (0.5%)
HSBC Finance Corp.
5.00%, due 6/30/15 $ 1,500,000 $ 1,445,016
6.375%, due 11/27/12 260,000 275,142
-------------
1,720,158
-------------
ELECTRIC (0.5%)
Kiowa Power Partners LLC
Series B
5.737%, due 3/30/21 (b) 2,000,000 1,979,620
-------------
INSURANCE (0.5%)
Fund American Cos., Inc.
5.875%, due 5/15/13 1,780,000 1,767,211
-------------
MEDIA (0.4%)
TCI Communications, Inc.
8.75%, due 8/1/15 1,075,000 1,297,222
-------------
Total Corporate Bonds
(Cost $6,947,322) 6,764,211
-------------
MORTGAGE-BACKED SECURITIES (5.7%)
- -------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (5.7%)
Banc of America Commercial Mortgage, Inc.
Series 2005-5, Class A2
5.001%, due 9/10/10 2,060,000 2,044,492
Citigroup Commercial Mortgage Trust
Series 2005-EMG, Class A1
4.154%, due 9/20/51 (b) 2,968,950 2,912,334
Series 2004-C2, Class A5
4.733%, due 10/15/41 2,000,000 1,924,617
Fannie Mae Grantor Trust
Series 2003-T1, Class B
4.491%, due 11/25/12 3,865,000 3,761,603
Series 1998-M6, Class A2
6.32%, due 8/15/08 6,859,162 7,054,655
GS Mortgage Securities Corp. II
Series 2001-ROCK, Class A1
6.22%, due 5/3/18 (b) 2,706,660 2,793,525
-------------
Total Mortgage-Backed Securities
(Cost $20,920,618) 20,491,226
-------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MUNICIPAL BOND (0.5%)
- -------------------------------------------------------------------------------
TEXAS (0.5%)
Harris County Texas Industrial Development Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 (a) $ 1,720,000 $ 1,719,897
-------------
Total Municipal Bond
(Cost $1,752,575) 1,719,897
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES (86.6%)
- -------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (3.0%)
V 5.25%, due 11/5/12 10,900,000 10,711,463
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) (8.7%)
3.00%, due 8/1/10 5,425,001 5,133,913
5.00%, due 6/1/33 (c) 6,928,160 6,691,106
5.00%, due 8/1/33 4,906,351 4,738,016
5.00%, due 11/1/35 TBA(d) 5,645,000 5,429,784
5.50%, due 12/1/35 TBA(d) 9,465,000 9,328,941
-------------
31,321,760
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (20.6%)
2.80%, due 3/1/19
6.90%, beginning 3/1/06 1,750,000 1,738,539
V 4.00%, due 9/2/08 16,935,000 16,589,035
4.375%, due 7/17/13 5,140,000 4,914,195
5.25%, due 1/15/09 5,700,000 5,797,516
5.25%, due 8/1/12 3,805,000 3,833,153
5.50%, due 5/2/06 6,970,000 7,007,352
6.25%, due 2/1/11 1,875,000 1,975,464
V 6.625%, due 9/15/09 16,975,000 18,087,507
V 6.625%, due 11/15/30 11,895,000 14,309,697
-------------
74,252,458
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (43.3%)
3.356%, due 4/1/34 (a)(c) 5,461,139 5,403,875
V 4.50%, due 7/1/18 (c) 20,572,800 19,928,648
V 4.50%, due 11/1/18 (c) 12,159,145 11,778,431
5.00%, due 9/1/17 (c) 8,228,154 8,125,601
5.00%, due 12/1/35 TBA(d) 10,405,000 10,001,806
5.50%, due 1/1/17 582,374 586,615
V 5.50%, due 2/1/17 (c) 13,440,049 13,539,478
V 5.50%, due 12/1/20 TBA(d) 19,180,000 19,281,884
5.50%, due 11/1/33 6,583,311 6,505,060
5.50%, due 12/1/33 (c) 7,182,916 7,097,538
V 5.50%, due 12/1/35 TBA(d) 14,035,000 13,824,475
6.00%, due 12/1/16 1,344,024 1,375,251
6.00%, due 11/1/32 3,652,549 3,688,588
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (CONTINUED)
V 6.00%, due 12/1/35 TBA(d) $23,965,000 $ 24,137,260
6.50%, due 10/1/31 (c) 1,827,426 1,879,393
7.00%, due 7/1/31 (c) 1,262,623 1,320,872
7.00%, due 11/1/32 (c) 1,729,005 1,808,755
7.50%, due 1/1/30 466,143 492,872
7.50%, due 4/1/31 (c) 3,662,917 3,876,312
7.50%, due 8/1/31 535,600 565,607
-------------
155,218,321
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (3.2%)
6.00%, due 8/15/32 (c) 3,197,617 3,254,731
6.00%, due 12/15/32 2,411,075 2,453,910
6.50%, due 8/15/28 1,044,560 1,086,474
6.50%, due 4/15/31 (c) 2,847,491 2,958,867
7.50%, due 12/15/28 1,064,302 1,129,614
7.50%, due 2/15/32 525,800 556,915
-------------
11,440,511
-------------
HVIDE VAN OMMEREN TANKERS LLC (1.6%)
Series I
7.54%, due 12/14/23 2,892,000 3,003,429
Series II
7.54%, due 12/14/23 2,894,000 3,005,506
-------------
6,008,935
-------------
TENNESSEE VALLEY AUTHORITY (1.4%)
4.65%, due 6/15/35 5,605,000 5,185,230
-------------
UNITED STATES TREASURY BONDS (3.2%)
6.25%, due 8/15/23 (e) 5,275,000 6,156,294
8.75%, due 8/15/20 (e) 3,695,000 5,228,425
-------------
11,384,719
-------------
UNITED STATES TREASURY NOTES (1.6%)
2.00%, due 7/15/14 T.I.P.(f) 4,167,040 4,177,945
4.00%, due 2/15/15 (e) 1,435,000 1,372,163
-------------
5,550,108
-------------
Total U.S. Government & Federal Agencies
(Cost $314,385,517) 311,073,505
-------------
Total Long-Term Bonds
(Cost $360,151,714) 356,562,593
-------------
</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.
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 (24.3%)
- -------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.1%)
Skandinaviska Enskilda
Banken AB
4.082%, due 2/22/06 (a)(g) $ 240,065 $ 240,065
-------------
Total Certificate of Deposit
(Cost $240,065) 240,065
-------------
COMMERCIAL PAPER (0.1%)
Compass Securitization
3.993%, due 11/22/05 (g) 171,475 171,475
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (g) 102,885 102,885
Silver Tower U.S. Funding
3.932%, due 11/15/05 (g) 101,802 101,802
-------------
Total Commercial Paper
(Cost $376,162) 376,162
-------------
FEDERAL AGENCIES (22.5%)
Federal Home Loan Bank
(Discount Notes)
3.70%, due 11/1/05 7,085,000 7,085,000
3.75%, due 11/9/05 10,000,000 9,991,667
3.77%, due 11/25/05 10,000,000 9,974,866
-------------
27,051,533
-------------
Federal Home Loan Mortgage Corporation
(Discount Notes)
3.72%, due 11/8/05 16,010,000 15,998,419
3.81%, due 12/1/05 9,110,000 9,081,076
-------------
25,079,495
-------------
Federal National Mortgage Association
(Discount Notes)
3.72%, due 11/1/05 7,605,000 7,605,000
3.73%, due 11/14/05 21,160,000 21,131,499
-------------
28,736,499
-------------
Total Federal Agencies
(Cost $80,867,527) 80,867,527
-------------
<Caption>
SHARES
INVESTMENT COMPANY (0.4%)
BGI Institutional Money Market Fund (g) 1,563,909 1,563,909
-------------
Total Investment Company
(Cost $1,563,909) 1,563,909
-------------
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (1.2%)
Bank of the West (The)
4.02%, due 12/8/05 (g) $ 651,606 $ 651,606
Barclays
3.92%, due 12/5/05 (g) 274,360 274,360
3.94%, due 11/28/05 (g) 308,656 308,656
Credit Suisse First Boston Corp.
3.74%, due 11/1/05 (g) 240,065 240,065
Deutsche Bank
3.95%, due 12/2/05 (g) 274,360 274,360
First Tennessee National Corp.
3.88%, due 11/14/05 (g) 274,360 274,360
Fortis Bank
4.00%, due 12/12/05 (g) 308,655 308,655
Halifax Bank of Scotland
3.75%, due 11/1/05 (g) 274,360 274,360
Keybank
4.00%, due 11/1/05 (g) 306,790 306,790
Marshall & Ilsley Bank
3.97%, due 12/29/05 (g) 274,360 274,360
Societe Generale
3.77%, due 11/1/05 (g) 583,016 583,016
UBS AG
4.01%, due 12/13/05 (g) 274,360 274,360
Wells Fargo & Co.
4.00%, due 11/25/05 (g) 274,360 274,360
-------------
Total Time Deposits
(Cost $4,319,308) 4,319,308
-------------
Total Short-Term Investments
(Cost $87,366,971) 87,366,971
-------------
Total Investments
(Cost $447,518,685) (h) 123.6% 443,929,564(i)
Liabilities in Excess of
Cash and Other Assets (23.6) (84,759,714)
----------- -------------
Net Assets 100.0% $ 359,169,850
=========== =============
</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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005 (CONTINUED)
<Table>
++ Less than one tenth of a percent.
(a) Floating rate. Rate shown is the rate in effect at
October 31, 2005.
(b) May be sold to institutional investors only.
(c) Segregated or partially segregated as collateral for
TBA's.
(d) 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 market value of these
securities at October 31, 2005 is $82,004,150.
(e) Represents security, or a portion thereof, which is out
on loan.
(f) Treasury Inflation Indexed Security-Pays a fixed rate of
interest on a principal amount that is continuously
adjusted for inflation based on the Consumer Price
Index-Urban Consumers.
(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
$447,577,394.
(i) At October 31, 2005, net unrealized depreciation was
$3,647,830 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 $2,164,028 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $5,811,858.
</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, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $447,518,685) including
$82,004,150 and $6,252,100 market value of
TBA securities and securities loaned,
respectively $443,929,564
Cash 1,817
Receivables:
Investment securities sold 6,951,481
Dividends and interest 2,599,004
Fund shares sold 458,800
Receivable from Manager 46,039
Other assets 23,990
-------------
Total assets 454,010,695
-------------
LIABILITIES:
Securities lending collateral 6,499,444
Payables:
Investment securities purchased 86,672,865
Fund shares redeemed 795,462
Transfer agent 427,380
NYLIFE Distributors 169,859
Shareholder communication 86,787
Professional 40,887
Custodian 6,214
Accrued expenses 16,603
Dividend payable 125,344
-------------
Total liabilities 94,840,845
-------------
Net assets $359,169,850
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest (par value of
$.01 per share) unlimited number of shares
authorized:
Class A $ 93,888
Class B 336,048
Class C 9,511
Class I 20
Additional paid-in capital 402,184,427
Distributions in excess of net investment
income (71,711)
Accumulated net realized loss on investments (39,793,212)
Net unrealized depreciation on investments (3,589,121)
-------------
Net assets $359,169,850
=============
CLASS A
Net assets applicable to outstanding shares $ 76,816,376
=============
Shares of beneficial interest outstanding 9,388,776
=============
Net asset value per share outstanding $ 8.18
Maximum sales charge (4.50% of offering price) 0.39
-------------
Maximum offering price per share outstanding $ 8.57
=============
CLASS B
Net assets applicable to outstanding shares $274,565,576
=============
Shares of beneficial interest outstanding 33,604,753
=============
Net asset value and offering price per share
outstanding $ 8.17
=============
CLASS C
Net assets applicable to outstanding shares $ 7,771,742
=============
Shares of beneficial interest outstanding 951,096
=============
Net asset value and offering price per share
outstanding $ 8.17
=============
CLASS I
Net assets applicable to outstanding shares $ 16,156
=============
Shares of beneficial interest outstanding 1,968
=============
Net asset value and offering price per share
outstanding $ 8.21
=============
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 16,398,942
Income from securities loaned--net 72,108
------------
Total income 16,471,050
------------
EXPENSES:
Manager 2,375,635
Distribution--Class B 2,278,649
Distribution--Class C 62,182
Transfer agent--Classes A, B and C 1,520,173
Transfer agent--Class I 47
Distribution/Service--Class A 209,524
Service--Class B 759,550
Service--Class C 20,727
Professional 108,363
Shareholder communication 104,124
Recordkeeping 66,261
Registration 52,594
Custodian 42,318
Trustees 29,964
Miscellaneous 25,498
------------
Total expenses before waiver/reimbursement 7,655,609
Expense waiver/reimbursement from Manager (1,157,488)
------------
Net expenses 6,498,121
------------
Net investment income 9,972,929
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 3,097,109
Net change in unrealized appreciation on
investments (12,999,649)
------------
Net realized and unrealized loss on
investments (9,902,540)
------------
Net increase in net assets resulting from
operations $ 70,389
============
</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 YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 9,972,929 $ 11,002,983
Net realized gain (loss) on
investments 3,097,109 (2,060,653)
Net change in unrealized
appreciation (depreciation) on
investments (12,999,649) 4,945,761
-----------------------------
Net increase in net assets
resulting from operations 70,389 13,888,091
-----------------------------
Dividends to shareholders:
From net investment income:
Class A (2,706,725) (2,788,796)
Class B (7,476,171) (9,032,735)
Class C (204,772) (249,466)
Class I (606) (374)
Return of capital:
Class A -- (598,637)
Class B -- (1,938,443)
Class C -- (54,422)
-----------------------------
Total dividends to shareholders (10,388,274) (14,662,873)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 22,653,777 28,921,503
Class B 12,287,303 18,905,610
Class C 2,248,347 2,369,344
Class I 5,200 41,932
Net asset value of shares issued
to shareholders in reinvestment
of dividends:
Class A 2,395,498 2,971,684
Class B 6,291,823 9,046,769
Class C 155,292 226,402
Class I 250 288
-----------------------------
46,037,490 62,483,532
Cost of shares redeemed:
Class A (32,537,780) (45,088,467)
Class B (70,008,494) (101,629,897)
Class C (3,035,383) (6,344,857)
Class I (15,039) (15,979)
-----------------------------
(105,596,696) (153,079,200)
Decrease in net assets derived
from capital share
transactions (59,559,206) (90,595,668)
-----------------------------
Net decrease in net assets (69,877,091) (91,370,450)
NET ASSETS:
Beginning of year 429,046,941 520,417,391
-----------------------------
End of year $ 359,169,850 $ 429,046,941
=============================
Distributions in excess of net
investment income at end of year $ (71,711) $ (202,062)
=============================
</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>
CLASS A
----------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 8.40 $ 8.42 $ 8.67 $ 8.25 $ 8.19 $ 7.75
------- ------- ----------- ------- ------- -------
Net investment income 0.26 0.25 0.20 0.32 0.39(a)(f) 0.46(a)
Net realized and unrealized
gain (loss) on investments (0.21) 0.05 (0.16) 0.47 0.12(f) 0.45
------- ------- ----------- ------- ------- -------
Total from investment
operations 0.05 0.30 0.04 0.79 0.51 0.91
------- ------- ----------- ------- ------- -------
Less dividends and
distributions:
From net investment income (0.27) (0.28) (0.29) (0.37) (0.39) (0.46)
Return of capital -- (0.04) -- -- (0.06) (0.01)
------- ------- ----------- ------- ------- -------
Total dividends and
distributions (0.27) (0.32) (0.29) (0.37) (0.45) (0.47)
------- ------- ----------- ------- ------- -------
Net asset value at end of
period $ 8.18 $ 8.40 $ 8.42 $ 8.67 $ 8.25 $ 8.19
======= ======= =========== ======= ======= =======
Total investment return (b) 0.59% 3.60% 0.50%(c) 9.75% 6.33% 12.20%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.09% 2.96% 2.85%+ 3.76% 4.71%(f) 5.89%
Net expenses 1.05% 1.25% 1.25%+ 1.19% 1.17% 1.16%
Expenses (before
waiver/reimbursement) 1.34% 1.27% 1.25%+ 1.19% 1.17% 1.16%
Portfolio turnover rate 164%(e) 110% 99% 117% 151% 324%
Net assets at end of period
(in 000's) $76,816 $86,516 $99,852 $92,581 $59,405 $58,674
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 8.39 $ 8.40 $ 8.66 $ 8.24 $ 8.18 $ 7.73
------- ------- ----------- ------- ------- -------
Net investment income 0.20 0.17 0.14 0.26 0.33(a)(f) 0.40(a)
Net realized and unrealized
gain (loss) on investments (0.21) 0.07 (0.16) 0.46 0.12(f) 0.46
------- ------- ----------- ------- ------- -------
Total from investment
operations (0.01) 0.24 (0.02) 0.72 0.45 0.86
------- ------- ----------- ------- ------- -------
Less dividends and
distributions:
From net investment income (0.21) (0.21) (0.24) (0.30) (0.34) (0.41)
Return of capital -- (0.04) -- -- (0.05) (0.00)(d)
------- ------- ----------- ------- ------- -------
Total dividends and
distributions (0.21) (0.25) (0.24) (0.30) (0.39) (0.41)
------- ------- ----------- ------- ------- -------
Net asset value at end of
period $ 8.17 $ 8.39 $ 8.40 $ 8.66 $ 8.24 $ 8.18
======= ======= =========== ======= ======= =======
Total investment return (b) (0.17)% 2.92% (0.25)%(c) 8.94% 5.54% 11.49%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 2.34% 2.21% 2.10%+ 3.01% 3.96%(f) 5.14%
Net expenses 1.80% 2.00% 2.00%+ 1.94% 1.92% 1.91%
Expenses (before
waiver/reimbursement) 2.09% 2.02% 2.00%+ 1.94% 1.92% 1.91%
Portfolio turnover rate 164%(e) 110% 99% 117% 151% 324%
Net assets at end of period
(in 000's) $ 7,772 $ 8,620 $12,385 $17,940 $ 9,245 $ 5,059
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ 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) The portfolio turnover rate not including mortgage dollar rolls for the year ended October
31, 2005 is 31%.
(f) As required, effective January 1, 2001 the Fund has adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing premiums 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 gain 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>
CLASS B
---------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
<S
$ 8.39 $ 8.40 $ 8.66 $ 8.24 $ 8.18 $ 7.73
-------- -------- ----------- -------- -------- --------
0.20 0.17 0.14 0.26 0.33(a)(f) 0.40(a)
(0.21) 0.07 (0.16) 0.46 0.12(f) 0.46
-------- -------- ----------- -------- -------- --------
(0.01) 0.24 (0.02) 0.72 0.45 0.86
-------- -------- ----------- -------- -------- --------
(0.21) (0.21) (0.24) (0.30) (0.34) (0.41)
-- (0.04) -- -- (0.05) (0.00)(d)
-------- -------- ----------- -------- -------- --------
(0.21) (0.25) (0.24) (0.30) (0.39) (0.41)
-------- -------- ----------- -------- -------- --------
$ 8.17 $ 8.39 $ 8.40 $ 8.66 $ 8.24 $ 8.18
======== ======== =========== ======== ======== ========
(0.17)% 2.92% (0.25)%(c) 8.94% 5.54% 11.49%
2.34% 2.21% 2.10%+ 3.01% 3.96%(f) 5.14%
1.80% 2.00% 2.00%+ 1.94% 1.92% 1.91%
2.09% 2.02% 2.00%+ 1.94% 1.92% 1.91%
164%(e) 110% 99% 117% 151% 324%
$274,566 $333,884 $408,180 $477,341 $411,271 $403,374
</Table>
<Table>
<Caption>
CLASS I
---------------
JANUARY 2,
2004
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2005 2004
<S
$8.41 $ 8.44
----------- ---------------
0.37 0.29
(0.28) (0.04)
----------- ---------------
0.09 0.25
----------- ---------------
(0.29) (0.28)
-- --
----------- ---------------
(0.29) (0.28)
----------- ---------------
$8.21 $ 8.41
=========== ===============
1.08% 2.99%(c)
3.47% 3.34%+
0.67% 0.87%+
0.96% 0.89%+
164%(e) 110%
$ 16 $ 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 nineteen 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 accounting
principles generally accepted in the United States of America 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.
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 in good faith by 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 principal
market is temporarily closed at a time when under normal conditions it would be
open. The Fund did not hold securities at October 31, 2005, 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. During the roll
period, a Fund forgoes principal and interest on the securities. A Fund is
compensated by the difference between the current sales price and the forward
price for the future purpose as well as by the earnings on the cash proceeds of
the initial sale. MDRs may be renewed without physical delivery of the
securities subject to the contract. 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.)
18 MainStay Government 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
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 accounting principles generally accepted in
the United States of America. 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, net realized loss and
additional paid-in capital arising from permanent differences; net assets at
October 31, 2005 are not affected.
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED NET REALIZED
NET INVESTMENT INCOME LOSS ON INVESTMENTS
$545,696 $ (545,696)
----------------------------------------------------
</Table>
The reclassification for the Fund is primarily due to paydowns.
(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 includes 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 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.
(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 transfer agent expenses and 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.
(I) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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 advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
www.MAINSTAYfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual percentage of the Fund's
average daily net assets as follows: 0.60% on assets up to $1 billion and 0.55%
on assets in excess of $1 billion. In addition, effective August 1, 2004, NYLIM
voluntarily agreed to waive its management fee by 0.10% on assets up to $1
billion and 0.45% on assets in excess of $1 billion. Effective August 1, 2005,
the Manager has entered into a written expense limitation agreement, under which
the Manager has agreed to reimburse the expenses of the Fund so that the total
operating expenses (excluding taxes, interest, litigation, extraordinary
expenses, and brokerage and other transaction expenses relating to the purchase
or sale of portfolio investments) do not exceed, on an annualized basis, 1.05%
of the average daily net assets of the Class A shares. An equivalent
reimbursement, in an equal amount of basis points, will be applied to the other
share classes. The Manager, within three years of incurring such expenses, may
recoup the amount of any management fee waiver or expense reimbursement from the
Fund pursuant to this agreement if such recoupment does not cause the Fund to
exceed the expense limitations. At October 31, 2005, the Fund had $302,892 of
recoupment available. This amount is available until October 31, 2008. This
expense limitation may be modified or terminated only with the approval of the
Board of Trustees. Prior to August 1, 2005 and after December 1, 2004, NYLIM had
agreed to voluntarily reimburse the expenses of the Fund so that the total
operating expenses would not exceed on an annualized basis 1.05% of the average
daily net assets of the Class A shares, and such that there would be an
equivalent reduction for the other classes of shares. For the year ended October
31, 2005, the Manager earned fees from the Fund in the amount of $2,375,635, and
waived its fee and/or reimbursed expenses in the amount of $1,157,488.
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
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 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 $23,490 for the year ended
October 31, 2005. 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 $6,500, $215,418 and $1,780, respectively, for the year ended October
31, 2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $1,520,220.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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
20 MainStay Government Fund
Funds. Thus the Fund only pays a portion of the fees identified above.
F) CAPITAL. At October 31, 2005, New York Life and its affiliates held shares
of Class I with a net asset value of $1,009. This represents 6.2% of the Class I
shares net assets and less than one-tenth of one percent of the Fund's total net
assets at October 31, 2005.
(G) OTHER. Pursuant to the Management Agreement, 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
$10,303 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $66,261 for the year ended
October 31, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, State Street Bank and Trust Company acted as custodian for
the Fund.
NOTE 5--FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED
NET ACCUMULATED OTHER TOTAL
INVESTMENT CAPITAL TEMPORARY UNREALIZED ACCUMULATED
INCOME LOSSES DIFFERENCES APPRECIATION LOSS
$112,342..... $(39,793,212) $(125,344) $(3,647,830) $(43,454,044)
-----------------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to premium amortization adjustments.
At October 31, 2005, for federal income tax purposes, capital loss carryforwards
of $39,793,212 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 AMOUNTS
AVAILABLE THROUGH (000'S)
2007 $29,405
2008 6,930
2012 3,458
-------------------------------------------
$39,793
-------------------------------------------
</Table>
The Fund utilized $2,551,413 of capital loss carryforwards during the year ended
October 31, 2005.
The tax character of distributions paid during the years ended October 31, 2005
and 2004, shown in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2005 2004
Distributions paid from:
Ordinary Income $10,388,274 $12,071,371
Return of Capital -- 2,591,502
- -----------------------------------------------------------
$10,388,274 $14,662,873
- -----------------------------------------------------------
</Table>
NOTE 6--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of U. S. Government
securities were $615,387 and $643,839, respectively. Purchase and sales of
securities, other than U.S. Government securities and short-term securities,
were $27,382 and $21,069, respectively.
NOTE 7--PORTFOLIO SECURITIES LOANED:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $6,252,100. The Fund received $6,499,444 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
www.MAINSTAYfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
borrowings on the line of credit during the year ended October 31, 2005.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C CLASS I
Shares sold 2,719 1,477 270 --(a)
- -------------------------------------------------------------------------------
Shares issued in reinvestment of
dividends and distributions 288 758 19 --(a)
- -------------------------------------------------------------------------------
3,007 2,235 289 --(a)
- -------------------------------------------------------------------------------
Shares redeemed (3,912) (8,414) (365) (1)
- -------------------------------------------------------------------------------
Net decrease (905) (6,179) (76) (1)
- -------------------------------------------------------------------------------
</Table>
<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>
(a) Less than one thousand.
* Commencement of Operations on January 2, 2004.
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review in December 2005, NYLIM made payments totaling
$5.9 million to nine MainStay funds. No payment was made with respect to the
MainStay Government Fund. NYLIM has also agreed to reimburse or pay all expenses
relating to the Board of Trustees' review of this matter and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
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, 2005, and the
related statement of operations for the year then ended, and the statements of
changes in net assets and financial highlights for each of the years in the
two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the
results of its operations for the year then ended, and the changes in its net
assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
24 MainStay Government Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 25
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
26 MainStay Government Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's underperformance when compared
over several time periods with funds concluded by Trustees to be peers of the
Fund, and the means outlined by the Manager and the Subadvisor to the Board
designed to address the Fund's comparative performance.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund, with the expectation that the Manager intended, over time, to
implement measures designed to reduce the Trust's transfer agency fees. The
Trustees considered certain benefits expected for, and risks borne by, the
Manager and its affiliates, including benefits from soft dollar arrangements.
The Trustees considered the services provided to the Fund by affiliates of the
Manager, NYLIFE Distributors and NYLIM Service, under other agreements, and the
benefits to the Manager and its affiliates from those relationships. The
information provided to the Trustees indicated that the profitability to the
Manager and its affiliates arising directly from those other agreements was not
excessive. The Trustees acknowledged certain benefits to the reputation of the
Manager and its affiliates, as well to that of the Trust, from their association
with each other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distribut-
www.MAINSTAYfunds.com 27
ing shares of various series of the Trust. They noted the Manager's willingness
to implement contractual breakpoints, and that the contractual breakpoints in
place for the management fee were intended to provide that the Fund's
shareholders would share in benefits from economies of scale arising from the
growth of Fund assets. The Trustees acknowledged that the Fund had not yet
reached the asset level at which breakpoints would reduce the contractual
management fee to which the Fund is subject. Acknowledging the difficulty of
forecasting economies of scale, the Trustees generally expressed an intention to
monitor the Manager's profitability and consider the application of fee
breakpoints or other appropriate measures as the Board may determine from time
to time. The Trustees reviewed historical information about changes in the
Fund's expense and asset levels over time, as well as information about certain
Fund expenses that would remain fixed even as Fund assets increase and,
therefore, provide the Fund with benefits from economies of scale as the Fund
grows. The Trustees noted that, to the extent the Fund's gross expenses
currently are higher than its net expenses, economies of scale achieved through
an increase in the Fund's assets might not directly benefit the Fund through
lower net expenses. The Trustees considered various information about transfer
agency expenses, including information showing that transfer agency fees of the
Fund and a significant number of series of the Trust (although not every such
series or with respect to every share class of each series) tended to be high,
when aggregated and expressed as a percentage of the assets of certain series,
compared to the mutual fund industry average according to certain studies
reviewed by the Board and, therefore, adversely affected gross expense ratios.
The Board received information about potential effects on the Manager were it to
subsidize certain portions of the Trust's transfer agency fees. The Trustees
noted that a significant number of shareholders of the Trust's series had small
amounts invested in the series, and have considered measures intended to
increase average shareholder account size and/or otherwise reduce the Trust's
transfer agency fees and expenses, including steps that the Manager has taken to
encourage shareholders to consolidate or close small accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated gross and net expense ratios, and various components of that expense
ratio, in comparison to other funds in comparison groupings prepared by outside
data providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
28 MainStay Government Fund
IMPORTANT TAX INFORMATION (UNAUDITED)
For State individual income tax purposes, the Fund hereby designates 27.75% of
the ordinary income dividends paid during its fiscal year ended October 31, 2005
as attributable to interest income from Direct Obligations of the United States.
Such dividends may be exempt from individual income tax purposes in most states
including New York, California and the District of Columbia. Consult your tax
advisor for further details.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
30 MainStay Government 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) 2005 by NYLIFE Distributors LLC. All rights reserved. SEC File Number:
811-04550
NYLIM-A07960 (RECYCLE LOGO) MS475-05 MSG11-12/05
07
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
HIGH YIELD CORPORATE BOND FUND
The MainStay Funds
Annual Report
October 31, 2005
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/s/ Christopher O. Blunt
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 2
- --------------------------------------------------------------------------------
Investment and Performance Comparison 3
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 7
- --------------------------------------------------------------------------------
Portfolio of Investments 9
- --------------------------------------------------------------------------------
Financial Statements 21
- --------------------------------------------------------------------------------
Notes to Financial Statements 26
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 33
- --------------------------------------------------------------------------------
Trustees and Officers 34
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management Subadvisory Agreements 37
- --------------------------------------------------------------------------------
Federal Income Tax Information 39
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures 39
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 39
- --------------------------------------------------------------------------------
MainStay Funds 40
</Table>
2 MainStay High Yield Corporate Bond Fund
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
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>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 1.10% 7.81% 7.89%
Excluding sales charges 5.86 8.81 8.39
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE CREDIT SUISSE FIRST BOSTON HIGH
BOND FUND CLASS A YIELD INDEX
----------------------------- -------------------------------
10/31/95 9550 10000
11031.8 11047.2
12717.7 12676.5
12278.8 12360.6
13857.8 13045.4
14017.8 12945.4
13276.1 12993.1
12482.7 12984.7
17946.9 17069.7
20196 19282.1
10/31/05 21380 19964.3
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 0.12% 7.71% 7.62%
Excluding sales charges 5.04 7.99 7.62
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE CREDIT SUISSE FIRST BOSTON HIGH
BOND FUND CLASS B YIELD INDEX
----------------------------- -------------------------------
10/31/95 10000 10000
11485.8 11047.2
13174.3 12676.5
12620.5 12360.6
14144.9 13045.4
14194.4 12945.4
13333.2 12993.1
12472.2 12984.7
17776.2 17069.7
19846.6 19282.1
10/31/05 20846.3 19964.3
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 4.05% 7.99% 7.62%
Excluding sales charges 5.04 7.99 7.62
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE CREDIT SUISSE FIRST BOSTON HIGH
BOND FUND CLASS C YIELD INDEX
----------------------------- -------------------------------
10/31/95 10000 10000
11485.8 11047.2
13174.3 12676.5
12620.5 12360.6
14144.9 13045.4
14194.4 12945.4
13333.2 12993.1
12472.2 12984.7
17776.2 17069.7
19846.6 19282.1
10/31/05 20846.3 19964.3
</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 THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.MAINSTAYfunds.com 3
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
6.12% 9.06% 8.67%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH YIELD CORPORATE CREDIT SUISSE FIRST BOSTON HIGH
BOND FUND CLASS I YIELD INDEX
----------------------------- -------------------------------
10/31/95 10000 10000
11592.6 11047.2
13419.6 12676.5
12972 12360.6
14681.1 13045.4
14885.6 12945.4
14116.6 12993.1
13320.4 12984.7
19194.5 17069.7
21646.2 19282.1
10/31/05 22971 19964.3
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ---------------------------------------------------------------------
Credit Suisse First Boston(TM) High Yield
Index(1) 3.54% 9.05% 7.16%
Average Lipper high current yield fund(2) 3.25 6.26 5.44
</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 THE
TABLES AND 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
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six-months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% RETURN EXPENSES
ACCOUNT RETURNS AND PAID AND ACTUAL PAID
VALUE EXPENSES) DURING EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,042.60 $5.25 $1,019.90 $5.19
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,037.95 $9.09 $1,016.15 $8.99
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,037.95 $9.09 $1,016.15 $8.99
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,041.75 $4.17 $1,020.95 $4.13
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each Class
(1.02% for Class A, 1.77% for Class B and Class C, and 0.81% for Class I)
multiplied by the average account value over the period, divided by 365,
multiplied by 184 (to reflect the one-half year period).
www.MAINSTAYfunds.com 5
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-
TERM
INVESTMENTS
(COLLATERAL
FROM LOAN
SECURITIES ASSIGNMENTS ASSET-
CORPORATE LENDING FOREIGN CONVERTIBLE AND COMMON YANKEE PREFERRED BACKED
BONDS IS 7.0%) BONDS BONDS PARTICIPATIONS STOCKS BONDS STOCKS SECURITIES
- --------- ----------- ------- ----------- -------------- ------ ------ --------- ----------
58.8 19.10 8.70 5.00 4.50 2.70 2.50 1.80 1.00
<Caption>
LIABILITIES
IN
EXCESS
OF CASH
CONVERTIBLE AND
CORPORATE PREFERRED OTHER
BONDS STOCK WARRANTS ASSETS
- --------- ----------- -------- -----------
58.8 0.60 0.20 (4.90)
</Table>
See Portfolio of Investments on page 9 for specific holdings within these
categories.
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. General Motors Acceptance Corp. 8.00%, due 11/1/31
2. Sovereign Real Estate Investment Corp. 12.00%
3. Calpine Corp. 8.50%, due 7/15/10
4. El Paso Production Holding Co. 7.75%, due 6/1/13
5. Goodyear Tire & Rubber Co. (The) 12.75%, due 3/1/11
6. CanWest Media Inc. 8.00%, due 9/15/12
7. Qwest Services Corp. 13.50%, due 12/15/10
8. Crescent Real Estate Equities, L.P., 7.50%, due 9/15/07
9. Cedar Brakes 1 LLC 9.875%, due 9/1/13
10. Rainbow National Services LLC 10.375%, due 9/1/14
</Table>
6 MainStay High Yield Corporate Bond Fund
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 WERE SOME OF THE TRENDS THAT DROVE THE HIGH-YIELD MARKET DURING THE 12
MONTHS ENDED OCTOBER 31, 2005?
Despite periods of volatility, the high-yield market generated positive results
during the reporting period. The most significant factor facing the market was
the tight yield spread(2) between high-yield bonds and U.S. Treasury bonds. This
may perhaps account for the flow of funds away from high-yield mutual funds
during the reporting period. High-yield default rates have remained at
historical lows. For the first 10 months of 2005, the high-yield new-issue
market slowed from its record pace in 2004. We believe that the overall quality
of new issues has declined.
WHAT EFFECT DID THESE MARKET TRENDS HAVE ON THE FUND?
Traditionally, high-yield bond spreads reflect the amount of additional yield
investors receive for assuming additional risk. In response to the low
yield-spread environment, we broadly diversified the Fund and reduced or
eliminated positions that carried higher risk. Slower new issuance and lower-
quality offerings limited a key source of new investments for the Fund. In the
wake of strong high-yield performance in 2003 and 2004, the secondary market
also provided fewer buying opportunities that we considered attractive. As a
result, cash levels in the Fund rose during the reporting period.
Higher-than-normal tenders from bond issuers have also added to the Fund's cash
level. (A tender is a payment for bonds called prior to maturity.)
HOW DID YOU POSITION THE FUND FROM AN 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. During the
12 months ended October 31, 2005, we reduced the Fund's exposure to bonds in the
utilities, cable, and broadcasting industries.(3) Over the same period, we
increased the Fund's absolute weightings in automotive, information technology,
diversified media, retail, and real estate development bonds.
At the end of the reporting period, the Fund's largest overweighted positions
relative to the Credit Suisse First Boston(TM) High Yield Index(4) were in the
information technology, financial, real estate development,
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. The Fund may experience a portfolio turnover
rate of over 100% and may generate short-term capital gains, which are taxable.
Funds that invest in bonds are subject to interest-rate risk and can lose
principal value when interest rates rise.
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. The terms "spread" and "yield spread" may refer to the difference in yield
between a specific security or type of security and comparable U.S. Treasury
issues. The terms may also refer to the difference in yield between two
specific securities or types of securities at a given time.
3. Industries mentioned in the Portfolio Management Discussion and Analysis are
those included in the Credit Suisse First Boston(TM) High Yield Index.
Industries in the Portfolio of Investments reflect the Global Industry
Classification Standard (GICS) developed by Standard & Poor's and MSCI.
4. See footnote on page 4 for more information on the Credit Suisse First
Boston(TM) High Yield Index.
www.MAINSTAYfunds.com 7
packaging, and medical products industries. At the same time, the Fund held
underweighted positions relative to the Index in gaming, utility, manufacturing,
consumer non-durables, and food and drug bonds.
DID YOU ADJUST THE FUND'S DURATION POSITIONING DURING THE REPORTING 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. As a result, 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% relative to the benchmark index
may serve to reduce the duration risk of the Fund. The duration of the
high-yield market has historically fluctuated around four years. This is true
for several reasons. Coupons are generally higher than those of investment-grade
fixed-income securities, few high-yield bonds are issued with maturities of 15
or more years, and call provisions often allow for refinancing. Given the
low-spread and rising-rate environment during the reporting period, the Fund has
had a shorter duration than its benchmark index.
WHICH SECURITIES WERE STRONG AND WEAK PERFORMERS DURING THE REPORTING PERIOD?
The Fund's top performers included At Home, UnitedGlobalCom, ICO Global
Communications Holdings, President Casinos, and General Motors Acceptance Corp.
The Fund's weak performers included Collins & Aikman Products, Northwest
Airlines, Delta Air Lines, Globix Corp., and Abitibi-Consolidated.
At Home, an Internet service provider that filed for bankruptcy protection in
2001, had partnered with several prominent cable partners, the largest of which
was AT&T. The company reached a substantial settlement with AT&T weeks before a
major lawsuit was to go to trial. This resulted in a significant award that
helped the Fund's performance.
While the market had priced in the possibility of defaults before Delta Air
Lines and Northwest Airlines filed for bankruptcy in September 2005, the airline
industry as a whole showed poor performance during the reporting period. Rising
oil prices and their impact on the cost of jet fuel drove the Fund's investments
in Delta Air Lines and Northwest Airlines downward. The Fund continues to hold
Delta and Northwest because we see attractive value in these companies relative
to their current trading levels.
Bonds of automakers General Motors and Ford Motor traded at yields comparable to
high-yield issuers for several months before both companies faced credit
downgrades by Moody's and S&P in early May 2005. We initiated a large position
in General Motors Acceptance Corp. (GMAC) earlier in 2005, before the debt was
downgraded. GMAC now constitutes a large part of the high-yield market. We view
GMAC as a separate issuer from General Motors because the companies have
distinctly separate assets covering their bonds, separate financial statements,
and separate boards. News reports that General Motors has considered selling or
spinning off GMAC have strengthened the performance of GMAC bonds.
WERE THERE ANY OTHER AREAS THAT DIDN'T MEET YOUR EXPECTATIONS?
The Fund's position in automotive interior components and systems manufacturer
Collins & Aikman Products had a significant negative impact on performance. When
the auto industry suffered in the first quarter of 2005, we met with Collins &
Aikman's management team. A few weeks after our meeting, the CEO was forced out
by the company's board and accounting irregularities were disclosed. The bonds
traded down sharply, and the company filed for bankruptcy protection.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
During the 12 months ended October 31, 2005, we established positions in General
Motors Acceptance Corp. and added to CanWest Media, Qwest Services, El
Paso/Cedar Brakes, and Qwest Communications International. Significant sales
during the reporting period included UnitedGlobalCom, El Paso/Cedar Brakes,
Hollinger Participation Trust, TSI Telecommunications, and FrontierVision
Capital Corp.
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 High Yield Corporate Bond Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (80.5%)+
ASSET-BACKED SECURITIES (1.0%)
- ---------------------------------------------------------------------------------
ELECTRIC (0.9%)
AES Eastern Energy LP
Series 1999-A
9.00%, due 1/2/17 $ 17,861,376 $ 20,629,889
Series 1999-B
9.67%, due 1/2/29 16,820,000 21,025,000
--------------
41,654,889
--------------
ENTERTAINMENT (0.1%)
United Artists Theatre Circuit, Inc.
Series 1995-A
9.30%, due 7/1/15 3,031,320 3,001,007
--------------
Total Asset-Backed Securities
(Cost $36,928,926) 44,655,896
--------------
CONVERTIBLE BONDS (5.0%)
- ---------------------------------------------------------------------------------
ADVERTISING (0.1%)
Lamar Advertising Co.
2.875%, due 12/31/10 (a) 4,755,000 5,087,850
--------------
AIRLINES (0.0%) ++
Delta Air Lines, Inc.
8.00%, due 6/3/23 (b)(c) 11,530,000 1,960,100
--------------
BIOTECHNOLOGY (0.3%)
Amgen, Inc.
(zero coupon), due 3/1/32 18,680,000 14,547,050
--------------
HEALTH CARE-SERVICES (1.2%)
Laboratory Corp. of
America Holdings
(zero coupon), due 9/11/21 43,980,000 32,435,250
Lincare Holdings, Inc.
3.00%, due 6/15/33 (b) 5,400,000 5,420,250
3.00%, due 6/15/33 (a) 13,390,000 13,440,212
--------------
51,295,712
--------------
INSURANCE (0.2%)
Conseco, Inc.
3.50%, due 9/30/35 (a)(b)(d)
(zero coupon), beginning 10/1/10 9,680,000 9,643,700
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
INTERNET (0.2%)
At Home Corp.
4.75%, due 12/15/06 (e)(c)(f)(g) $ 61,533,853 $ 6,153
Riverstone Networks, Inc.
3.75%, due 12/1/06 (b)(c) 7,745,000 7,280,300
--------------
7,286,453
--------------
MEDIA (0.6%)
Adelphia Communications Corp.
6.00%, due 2/15/06 (c) 12,365,000 370,950
UnitedGlobalCom, Inc.
1.75%, due 4/15/24 20,480,000 24,973,780
--------------
25,344,730
--------------
SEMICONDUCTORS (0.5%)
Amkor Technology, Inc.
5.75%, due 6/1/06 (a) 14,240,000 13,777,200
LSI Logic Corp.
4.00%, due 11/1/06 6,725,000 6,615,719
--------------
20,392,919
--------------
TELECOMMUNICATIONS (1.9%)
CIENA Corp.
3.75%, due 2/1/08 39,835,000 36,399,231
Lucent Technologies, Inc.
8.00%, due 8/1/31 (a) 12,800,000 13,232,000
Nortel Networks Corp.
4.25%, due 9/1/08 (a) 33,670,000 31,439,362
--------------
81,070,593
--------------
Total Convertible Bonds
(Cost $225,132,653) 216,629,107
--------------
CORPORATE BONDS (58.8%)
- ---------------------------------------------------------------------------------
ADVERTISING (0.6%)
Bear Creek Corp.
9.00%, due 3/1/13 (b) 7,160,000 7,339,000
Vertis, Inc.
9.75%, due 4/1/09 17,690,000 17,955,350
--------------
25,294,350
--------------
AEROSPACE & DEFENSE (0.8%)
BE Aerospace, Inc.
8.00%, due 3/1/08 10,660,000 10,633,350
8.50%, due 10/1/10 1,965,000 2,127,112
8.875%, due 5/1/11 1,405,000 1,471,737
Sequa Corp.
8.875%, due 4/1/08 5,580,000 5,719,500
9.00%, due 8/1/09 14,815,000 15,370,562
--------------
35,322,261
--------------
</Table>
+ Percentages indicated are based on Fund net assets.
++ Less than one tenth of a percent.
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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
AGRICULTURE (0.4%)
Commonwealth Brands, Inc.
9.75%, due 4/15/08 (b) $ 13,035,000 $ 13,686,750
10.625%, due 9/1/08 (b) 2,300,000 2,415,000
--------------
16,101,750
--------------
AIRLINES (0.8%)
Delta Air Lines, Inc.
8.30%, due 12/15/29 (a)(c) 50,361,000 8,939,077
Series B
9.25%, due 12/27/07 (c) 5,175,000 892,687
9.25%, due 3/15/22 (c) 9,000,000 1,575,000
9.75%, due 5/15/21 (c) 2,115,000 370,125
10.00%, due 8/15/08 (c) 7,040,000 1,214,400
10.375%, due 2/1/11 (c) 3,895,000 671,887
10.375%, due 12/15/22 (c) 13,960,000 2,443,000
Northwest Airlines, Inc.
7.875%, due 3/15/08 (c) 1,790,000 519,100
8.70%, due 3/15/07 (c) 445,000 129,050
8.97%, due 1/2/15 (c) 1,725,305 250,169
9.875%, due 3/15/07 (c) 29,140,000 8,596,300
10.00%, due 2/1/09 (a)(c) 27,301,500 7,780,927
--------------
33,381,722
--------------
AUTO PARTS & EQUIPMENT (2.2%)
Collins & Aikman Products Co.
10.75%, due 12/31/11 (c) 6,430,000 3,118,550
12.875%, due 8/15/12 (b)(c) 33,645,000 4,037,400
Dana Corp.
7.00%, due 3/1/29 525,000 388,500
9.00%, due 8/15/11 (a) 8,355,000 7,268,850
Goodyear Tire & Rubber Co. (The)
6.375%, due 3/15/08 (a) 5,845,000 5,669,650
6.625%, due 12/1/06 7,469,000 7,506,345
8.50%, due 3/15/07 (a) 4,605,000 4,674,075
V 12.75%, due 3/1/11 (b) 40,235,000 44,459,675
Tenneco Automotive, Inc.
8.625%, due 11/15/14 (a) 11,285,000 10,777,175
10.25%, due 7/15/13 7,625,000 8,235,000
--------------
96,135,220
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
BANKS (0.2%)
Fremont General Corp.
Series B
7.875%, due 3/17/09 $ 8,630,000 $ 8,371,100
--------------
BUILDING MATERIALS (1.3%)
Compression Polymers Corp.
10.50%, due 7/1/13 (b) 13,620,000 12,394,200
Dayton Superior Corp.
10.75%, due 9/15/08 18,355,000 17,804,350
Goodman Global
Holding Co., Inc.
6.41%, due 6/15/12 (b)(h) 3,710,000 3,635,800
Interline Brands, Inc.
11.50%, due 5/15/11 6,734,000 7,474,740
MMI Products, Inc.
Series B
11.25%, due 4/15/07 6,965,000 6,442,625
Panolam Industries International, Inc.
10.75%, due 10/1/13 (a)(b) 10,630,000 10,311,100
--------------
58,062,815
--------------
CHEMICALS (2.8%)
Constar International, Inc.
7.165%, due 2/15/12 (a)(h) 8,635,000 7,901,025
Crompton Corp.
9.875%, due 8/1/12 12,740,000 14,268,800
Equistar Chemicals, L.P.
7.55%, due 2/15/26 11,985,000 11,370,769
10.125%, due 9/1/08 5,685,000 6,125,587
10.625%, due 5/1/11 12,905,000 14,066,450
Lyondell Chemical Co.
9.50%, due 12/15/08 7,965,000 8,343,337
10.50%, due 6/1/13 14,310,000 16,223,962
Millennium America, Inc.
7.625%, due 11/15/26 8,115,000 7,648,387
Terra Capital, Inc.
12.875%, due 10/15/08 28,715,000 33,883,700
--------------
119,832,017
--------------
</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)
- ---------------------------------------------------------------------------------
COMMERCIAL SERVICES (3.1%)
American Color Graphics, Inc.
10.00%, due 6/15/10 $ 4,745,000 $ 3,143,562
Cardtronics, Inc.
9.25%, due 8/15/13 (b) 2,975,000 3,004,750
Chemed Corp.
8.75%, due 2/24/11 11,290,000 12,052,075
El Comandante Capital Corp.
11.75%, due 12/15/06 (c) 17,186,051 18,045,354
Great Lakes Dredge & Dock Corp.
7.75%, due 12/15/13 (a) 9,240,000 8,547,000
Language Line, Inc.
11.125%, due 6/15/12 8,695,000 7,390,750
Phoenix Color Corp.
10.375%, due 2/1/09 7,935,000 7,300,200
Protection One Alarm Monitoring, Inc.
Series B
8.125%, due 1/15/09 5,470,000 5,333,250
Quintiles Transnational Corp.
10.00%, due 10/1/13 31,635,000 34,917,131
Rent-Way, Inc.
11.875%, due 6/15/10 9,630,000 10,352,250
Vertrue, Inc.
9.25%, due 4/1/14 12,670,000 12,986,750
Williams Scotsman, Inc.
8.50%, due 10/1/15 (a)(b) 12,260,000 12,443,900
--------------
135,516,972
--------------
COMPUTERS (1.6%)
Activant Solutions, Inc.
10.054%, due 4/1/10 (b)(h) 7,305,000 7,469,362
SunGard Data Systems, Inc.
4.875%, due 1/15/14 10,695,000 9,304,650
8.525%, due 8/15/13 (a)(b)(h) 7,020,000 7,195,500
9.125%, due 8/15/13 (b) 18,440,000 18,716,600
10.25%, due 8/15/15 (b) 29,075,000 28,820,594
--------------
71,506,706
--------------
CONSTRUCTION & ENGINEERING (0.1%)
Amsted Industries, Inc.
10.25%, due 10/15/11 (b) 3,200,000 3,424,000
--------------
DISTRIBUTION & WHOLESALE (0.2%)
Intcomex, Inc.
11.75%, due 1/15/11 (b) 8,395,000 8,353,025
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
DIVERSIFIED FINANCIAL SERVICES (8.8%)
ACCO Brands Corp.
7.625%, due 8/15/15 (b) $ 8,065,000 $ 7,661,750
American Real Estate Partners, LP
8.125%, due 6/1/12 23,940,000 24,598,350
American Real Estate Partners, LP/American Real
Estate Finance Corp.
7.125%, due 2/15/13 (b) 21,155,000 20,573,237
V Cedar Brakes I LLC
9.875%, due 9/1/13 (b) 35,467,402 40,707,711
Dollar Financial Group, Inc.
9.75%, due 11/15/11 14,200,000 14,484,000
General Motors
Acceptance Corp.
5.625%, due 5/15/09 8,795,000 8,316,103
6.15%, due 4/5/07 23,240,000 22,929,676
6.75%, due 12/1/14 (a) 29,575,000 28,280,650
V 8.00%, due 11/1/31 (a) 59,140,000 61,052,647
LaBranche & Co., Inc.
9.50%, due 5/15/09 (a) 8,720,000 9,177,800
11.00%, due 5/15/12 15,820,000 17,481,100
Pharma Services Intermediate Holding Corp.
(zero coupon), due 4/1/14 (d)
11.50%, beginning 4/1/09 27,335,000 19,612,862
Rainbow National Services LLC
8.75%, due 9/1/12 (b) 10,205,000 10,715,250
V 10.375%, due 9/1/14 (b) 35,590,000 39,149,000
Ucar Finance, Inc.
10.25%, due 2/15/12 20,290,000 21,405,950
UGS Corp.
10.00%, due 6/1/12 8,270,000 9,034,975
Vanguard Health
Holding Co. II LLC
9.00%, due 10/1/14 15,350,000 16,002,375
Venoco, Inc.
8.75%, due 12/15/11 10,795,000 10,902,950
--------------
382,086,386
--------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
ELECTRIC (3.3%)
AES Corp. (The)
9.00%, due 5/15/15 (b) $ 28,070,000 $ 30,455,950
Calpine Corp.
V 8.50%, due 7/15/10 (a)(b) 70,400,000 49,280,000
9.875%, due 12/1/11 (b) 10,730,000 7,671,950
Calpine Gilroy, L.P.
10.00%, due 9/30/14 (i) 21,384,753 21,384,753
NRG Energy, Inc.
8.00%, due 12/15/13 17,679,000 19,270,110
PSE&G Energy Holdings LLC
8.625%, due 2/15/08 8,459,000 8,776,212
Reliant Resources, Inc.
9.25%, due 7/15/10 6,150,000 6,457,500
Western Resources, Inc.
7.125%, due 8/1/09 50,000 52,457
--------------
143,348,932
--------------
ELECTRICAL COMPONENTS & EQUIPMENT (0.1%)
Spectrum Brands, Inc.
8.50%, due 10/1/13 4,565,000 4,131,325
--------------
ELECTRONICS (0.2%)
Dresser, Inc.
9.375%, due 4/15/11 974,000 1,008,090
Fisher Scientific International, Inc.
6.125%, due 7/1/15 (b) 9,505,000 9,433,712
--------------
10,441,802
--------------
ENTERTAINMENT (1.7%)
Gaylord Entertainment Co.
8.00%, due 11/15/13 4,475,000 4,665,187
Isle of Capri Casinos, Inc.
9.00%, due 3/15/12 2,550,000 2,652,000
Jacobs Entertainment Co.
11.875%, due 2/1/09 15,620,000 16,557,200
Loews Cineplex Entertainment Corp.
9.00%, due 8/1/14 12,955,000 12,469,187
President Casinos, Inc.
12.00%, due 9/15/06 (b)(c)(g) 5,057,352 4,045,882
13.00%, due 9/15/06 (c)(g) 10,771,312 8,401,624
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
ENTERTAINMENT (CONTINUED)
Six Flags, Inc.
9.625%, due 6/1/14 $ 9,785,000 $ 9,687,150
9.75%, due 4/15/13 (a) 9,805,000 9,755,975
Warner Music Group
7.375%, due 4/15/14 5,620,000 5,479,500
--------------
73,713,705
--------------
ENVIRONMENTAL CONTROL (0.4%)
Geo Sub Corp.
11.00%, due 5/15/12 16,855,000 16,475,762
--------------
FOOD (1.0%)
Chiquita Brands International, Inc.
7.50%, due 11/1/14 1,750,000 1,649,375
Pinnacle Foods Holding Corp.
8.25%, due 12/1/13 22,280,000 20,609,000
Swift & Co.
10.125%, due 10/1/09 3,655,000 3,856,025
12.50%, due 1/1/10 16,418,000 17,444,125
--------------
43,558,525
--------------
FOREST PRODUCTS & PAPER (0.4%)
Georgia-Pacific Corp.
8.875%, due 5/15/31 15,280,000 17,381,000
--------------
GAS UTILITIES (0.6%)
Star Gas Partners,
LP/Star Gas Finance Co.
10.25%, due 2/15/13 32,800,000 27,060,000
--------------
HAND & MACHINE TOOLS (0.2%)
Thermadyne Holdings Corp.
9.25%, due 2/1/14 10,320,000 9,236,400
--------------
HEALTH CARE PROVIDERS & SERVICES (0.7%)
Ameripath, Inc.
10.50%, due 4/1/13 23,005,000 23,925,200
Vanguard Health
Holding Co. I LLC
(zero coupon), due 10/1/15 (d)
11.25%, beginning 10/1/09 11,070,000 7,749,000
--------------
31,674,200
--------------
</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)
- ---------------------------------------------------------------------------------
HEALTH CARE-SERVICES (1.0%)
HCA, Inc.
7.50%, due 11/15/20 $ 37,124,000 $ 34,353,325
8.36%, due 4/15/24 100,000 104,870
National Nephrology Associates, Inc.
9.00%, due 11/1/11 (b) 6,455,000 7,132,775
--------------
41,590,970
--------------
HOME FURNISHINGS (0.1%)
Fedders North America, Inc.
9.875%, due 3/1/14 8,810,000 6,497,375
--------------
HOTELS, RESTAURANTS & LEISURE (0.8%)
Caesars Entertainment, Inc.
8.875%, due 9/15/08 70,000 75,250
MGM Mirage, Inc.
6.75%, due 9/1/12 4,180,000 4,159,100
Mohegan Tribal Gaming Authority
6.375%, due 7/15/09 3,650,000 3,650,000
Park Place Entertainment
8.125%, due 5/15/11 20,000 21,850
San Pasqual Casino
8.00%, due 9/15/13 (b) 250,000 248,750
Starwood Hotel & Resorts
7.375%, due 11/15/15 18,475,000 19,583,500
7.75%, due 11/15/25 10,000 10,137
Trump Entertainment Resorts, Inc.
8.50%, due 6/1/15 (a) 7,734,650 7,492,942
--------------
35,241,529
--------------
HOUSEHOLD PRODUCTS & WARES (0.3%)
Spectrum Brands, Inc.
7.375%, due 2/1/15 (a) 15,525,000 13,409,719
--------------
INSURANCE (0.8%)
Crum & Forster Holdings Corp.
10.375%, due 6/15/13 19,730,000 21,111,100
First Mercury Financial Corp.
12.33%, due 8/15/12 (b)(h) 11,065,000 11,175,650
Lumbermens Mutual Casualty
8.30%, due 12/1/37 (b)(c) 8,525,000 298,375
8.45%, due 12/1/97 (b)(c) 2,575,000 90,125
9.15%, due 7/1/26 (b)(c) 42,123,000 1,474,305
UnumProvident Corp.
6.75%, due 12/15/28 2,915,000 2,686,776
--------------
36,836,331
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
INTERNET (0.1%)
Globix Corp.
11.00%, due 5/1/08 (b)(j) $ 5,600,314 $ 5,334,299
--------------
IRON & STEEL (0.7%)
Allegheny Ludlum Corp.
6.95%, due 12/15/25 14,390,000 14,030,250
Allegheny Technologies, Inc.
8.375%, due 12/15/11 (e) 3,510,000 3,755,700
United States Steel LLC
10.75%, due 8/1/08 9,425,000 10,461,750
--------------
28,247,700
--------------
MEDIA (2.2%)
Houghton Mifflin Co.
7.20%, due 3/15/11 9,530,000 9,863,550
Medianews Group, Inc.
6.875%, due 10/1/13 6,935,000 6,848,312
Morris Publishing Group LLC
7.00%, due 8/1/13 19,795,000 19,448,588
Paxson Communications Corp.
(zero coupon), due 1/15/09 (d)
12.25%, beginning 1/15/06 29,860,000 29,188,150
10.75%, due 7/15/08 50,000 48,875
Ziff Davis Media, Inc.
10.25%, due 5/1/12 (h) 12,615,000 12,299,625
Series B
13.00%, due 8/12/09 (j) 16,261,269 16,708,454
--------------
94,405,554
--------------
METAL FABRICATE & HARDWARE (0.3%)
Mueller Group, Inc.
10.00%, due 5/1/12 11,965,000 12,563,250
--------------
MISCELLANEOUS--MANUFACTURING (0.8%)
Mark IV Industries, Inc.
7.50%, due 9/1/07 36,245,000 34,432,750
--------------
OIL & GAS (1.5%)
Forest Oil Corp.
8.00%, due 6/15/08 5,833,000 6,110,068
Hilcorp Energy I,
LP/Hilcorp Finance Co.
10.50%, due 9/1/10 (b) 759,000 850,080
Newfield Exploration Co.
7.625%, due 3/1/11 1,785,000 1,901,025
8.375%, due 8/15/12 1,665,000 1,785,713
Parker Drilling Co.
9.625%, due 10/1/13 (a)(b) 9,710,000 10,972,300
Plains Exploration & Production Co.
8.75%, due 7/1/12 6,030,000 6,437,025
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
OIL & GAS (CONTINUED)
Vintage Petroleum, Inc.
7.875%, due 5/15/11 $ 25,000 $ 26,188
8.25%, due 5/1/12 25,580,000 27,562,450
Whiting Petroleum Corp.
7.25%, due 5/1/13 9,750,000 9,823,125
--------------
65,467,974
--------------
OIL & GAS SERVICES (0.0%) ++
Lone Star Technologies, Inc.
9.00%, due 6/1/11 1,710,000 1,804,050
--------------
PACKAGING & CONTAINERS (1.8%)
Owens-Brockway
8.25%, due 5/15/13 5,710,000 5,824,200
8.75%, due 11/15/12 8,710,000 9,341,475
Owens-Brockway Glass Container, Inc.
7.75%, due 5/15/11 45,000 46,125
8.875%, due 2/15/09 24,525,000 25,628,625
Owens-Illinois, Inc.
7.80%, due 5/15/18 10,530,000 10,108,800
8.10%, due 5/15/07 26,405,000 26,801,075
--------------
77,750,300
--------------
PAPER & FOREST PRODUCTS (1.0%)
Georgia-Pacific Corp.
8.00%, due 1/15/24 17,785,000 18,941,025
8.875%, due 2/1/10 4,420,000 4,839,900
9.375%, due 2/1/13 2,690,000 2,965,725
Pope & Talbot, Inc.
8.375%, due 6/1/13 18,875,000 14,722,500
--------------
41,469,150
--------------
PHARMACEUTICALS (0.2%)
Warner Chilcott Corp.
8.75%, due 2/1/15 (b) 8,330,000 7,663,600
--------------
PIPELINES (3.2%)
ANR Pipeline Co.
7.375%, due 2/15/24 1,785,000 1,788,267
9.625%, due 11/1/21 20,721,000 25,101,709
Dynegy Holdings, Inc.
9.875%, due 7/15/10 (b) 20,715,000 22,268,625
10.125%, due 7/15/13 (b) 2,440,000 2,684,000
10.65%, due 7/15/08 (b)(h) 6,905,000 7,302,038
El Paso Corp.
6.95%, due 12/15/07 (h) 1,870,000 1,881,688
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
PIPELINES (CONTINUED)
El Paso Natural Gas Co.
7.50%, due 11/15/26 $ 1,910,000 $ 1,939,332
7.625%, due 8/1/10 8,175,000 8,579,058
8.375%, due 6/15/32 11,060,000 12,228,821
V El Paso Production Holding Co.
7.75%, due 6/1/13 47,560,000 48,986,800
Pacific Energy Partners, L.P.
7.125%, due 6/15/14 5,940,000 6,177,600
Southern Natural Gas Co.
7.35%, due 2/15/31 1,665,000 1,663,780
--------------
140,601,718
--------------
REAL ESTATE (2.9%)
CB Richard Ellis Services, Inc.
9.75%, due 5/15/10 7,982,000 8,740,290
11.25%, due 6/15/11 25,215,000 27,232,200
Crescent Real Estate Equities, L.P.
V 7.50%, due 9/15/07 41,047,000 41,662,705
9.25%, due 4/15/09 25,000 26,375
Esi Tractebel Acquisition Corp. Class B
7.99%, due 12/30/11 13,612,000 14,263,089
Omega Healthcare Investors, Inc.
7.00%, due 4/1/14 9,105,000 9,150,525
Salton Sea Funding Series E
8.30%, due 5/30/11 22,404 24,300
Trustreet Properties, Inc.
7.50%, due 4/1/15 23,615,000 23,910,188
--------------
125,009,672
--------------
REAL ESTATE INVESTMENT TRUSTS (0.1%)
Chukchansi Economic Development Authority
8.00%, due 11/15/13 (b) 3,200,000 3,200,000
--------------
RETAIL (1.4%)
Doane Pet Care Co.
10.625%, due 11/25/15 (b) 4,450,000 4,505,625
Duane Reade, Inc.
8.37%, due 12/15/10 (a)(h) 4,265,000 4,051,750
Toys "R" Us, Inc.
7.625%, due 8/1/11 (a) 39,121,000 32,274,825
8.75%, due 9/1/21 20,751,000 19,713,450
--------------
60,545,650
--------------
</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
CORPORATE BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
SEMICONDUCTORS (0.5%)
Amkor Technology, Inc.
7.125%, due 3/15/11 $ 520,000 $ 449,800
MagnaChip Semiconductor S.A.
7.12%, due 12/15/11 (h) 8,975,000 8,817,938
8.00%, due 12/15/14 12,360,000 11,309,400
--------------
20,577,138
--------------
TELECOMMUNICATIONS (7.0%)
American Tower Escrow Corp. (zero coupon), due
8/1/08 5,250,000 4,049,063
Dobson Cellular Systems
8.375%, due 11/1/11 3,775,000 3,935,438
9.00%, due 11/1/11 (h) 8,070,000 8,372,625
9.875%, due 11/1/12 6,635,000 7,165,800
Loral Cyberstar, Inc.
10.00%, due 7/15/06 (c) 35,306,000 29,480,510
Lucent Technologies, Inc.
5.50%, due 11/15/08 (a) 8,959,000 8,936,603
6.45%, due 3/15/29 18,340,000 15,680,700
6.50%, due 1/15/28 5,485,000 4,662,250
7.25%, due 7/15/06 6,450,000 6,482,250
PanAmSat Corp.
9.00%, due 8/15/14 8,833,000 9,296,733
Qwest Capital Funding, Inc.
7.75%, due 8/15/06 8,555,000 8,683,325
Qwest Communications International, Inc.
7.25%, due 2/15/11 (a) 26,385,000 25,659,413
Series B
7.50%, due 11/1/08 2,208,000 2,097,600
7.50%, due 2/15/14 4,100,000 3,925,750
7.50%, due 2/15/14 (b) 35,145,000 33,651,338
Qwest Corp.
5.625%, due 11/15/08 1,420,000 1,405,800
7.50%, due 6/15/23 335,000 314,900
8.875%, due 3/15/12 13,755,000 15,096,113
8.875%, due 6/1/31 4,315,000 4,466,025
Qwest Services Corp.
13.00%, due 12/15/07 (b) 11,631,000 12,808,639
V 13.50%, due 12/15/10 36,604,000 41,820,070
14.00%, due 12/15/14 12,881,000 15,602,111
Telcordia Technologies, Inc.
10.00%, due 3/15/13 (b) 19,310,000 16,992,800
Triton PCS, Inc.
8.50%, due 6/1/13 (a) 22,474,000 21,013,190
--------------
301,599,046
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TEXTILES (0.4%)
Invista
9.25%, due 5/1/12 (b) $ 16,650,000 $ 17,877,938
--------------
TRUCKING & LEASING (0.2%)
Interpool, Inc.
Series A
6.00%, due 9/1/14 10,595,000 9,429,550
--------------
Total Corporate Bonds
(Cost $2,590,064,147) 2,551,965,238
--------------
FOREIGN BONDS (8.7%)
- ---------------------------------------------------------------------------------
BUILDING MATERIALS (0.1%)
Ainsworth Lumber Co. Ltd.
7.25%, due 10/1/12 6,370,000 5,748,925
--------------
CHEMICALS (0.2%)
Nova Chemicals Corp.
7.561%, due 11/15/13 (b) 9,020,000 9,110,200
--------------
COMMERCIAL SERVICES & SUPPLIES (1.1%)
Quebecor Media, Inc.
11.125%, due 7/15/11 9,230,000 9,991,475
Quebecor Media, Inc.
(zero coupon), due 7/15/11
13.75%, beginning 7/15/06 37,195,000 37,845,913
--------------
47,837,388
--------------
FOREST PRODUCTS & PAPER (0.4%)
Abitibi-Consolidated, Inc.
8.85%, due 8/1/30 8,217,000 6,861,195
Tembec Industries, Inc.
7.75%, due 3/15/12 11,635,000 7,271,875
8.50%, due 2/1/11 6,355,000 4,035,425
--------------
18,168,495
--------------
HOUSEHOLD PRODUCTS & WARES (0.3%)
Jafra Cosmetics International, Inc./Distribuidora
Comerical Jafra S.A. de C.V.
10.75%, due 5/15/11 11,873,000 13,030,618
--------------
INDUSTRIAL CONGLOMERATES (0.3%)
Stena AB
9.625%, due 12/1/12 10,205,000 11,021,400
--------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN BONDS (CONTINUED)
- ---------------------------------------------------------------------------------
MEDIA (1.9%)
V CanWest Media, Inc.
8.00%, due 9/15/12 $ 41,430,459 $ 43,398,406
Hollinger, Inc.
11.875%, due 3/1/11 (b) 3,610,000 3,610,000
12.875%, due 3/1/11 (b) 6,793,000 7,175,106
Ono Finance
10.50%, due 5/15/14 (b) 7,115,000 8,974,638
Shaw Communications, Inc.
7.50%, due 11/20/13 22,825,000 20,639,319
Sun Media Corp.
7.625%, due 2/15/13 40,000 41,400
--------------
83,838,869
--------------
PACKAGING & CONTAINERS (1.5%)
Crown European Holdings S.A.
9.50%, due 3/1/11 26,110,000 28,721,000
10.875%, due 3/1/13 30,055,000 35,389,763
--------------
64,110,763
--------------
TELECOMMUNICATIONS (2.2%)
Inmarsat Finance PLC
(zero coupon), due 11/15/12 (d)
10.375%, beginning 11/15/08 22,335,000 18,258,863
Intelsat Bermuda Ltd.
8.25%, due 1/15/13 (b) 12,700,000 12,668,250
8.695%, due 1/15/12 (b)(h) 18,910,000 19,146,375
Millicom International Cellular S.A.
10.00%, due 12/1/13 26,360,000 27,150,800
MobiFon Holdings BV
12.50%, due 7/31/10 13,425,000 15,707,250
--------------
92,931,538
--------------
TRANSPORTATION (0.7%)
Grupo Transportacion Ferroviaria Mexicana, S.A. de
C.V.
12.50%, due 6/15/12 16,270,000 18,791,850
Navigator Gas Transport PLC
10.50%, due 6/30/07 (b)(c)(k) 10,425,000 11,363,250
--------------
30,155,100
--------------
Total Foreign Bonds
(Cost $351,188,068) 375,953,296
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LOAN ASSIGNMENTS & PARTICIPATIONS (4.5%)
- ---------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT (0.5%)
Goodyear Tire &
Rubber Co. (The)
7.06%, due 4/30/10 (h)(i) $ 20,350,000 $ 20,506,858
--------------
CONSTRUCTION & ENGINEERING (0.0%) ++
Foster Wheeler Ltd.
8.50%, due 3/18/10 1,166,400 1,143,072
--------------
CONTAINERS & PACKAGING (0.0%) ++
Graham Packaging Holdings Co.
8.25%, due 4/7/12 (i) 1,000,000 1,015,833
--------------
DIVERSIFIED FINANCIAL SERVICES (0.6%)
Satbirds Capital
10.464%, due 5/1/14 (i) E 20,185,000 25,400,249
--------------
MEDIA (0.4%)
Fidelity National Information Solutions, Inc.
Series B
5.685%, due 3/9/13 (i) $ 17,411,725 17,464,587
--------------
PHARMACEUTICALS (0.3%)
Warner Chilcott Corp.
Series D
6.77%, due 1/18/12 (i) 12,084,385 12,118,910
--------------
REAL ESTATE (0.9%)
LNR Property Corp.
Series B
6.71%, due 2/3/08 (h)(i) 22,764,703 22,878,527
Riley Mezzainine Corp.
8.39%, due 2/3/08 (i) 7,000,000 7,004,375
Series 2
8.96%, due 2/3/08 (i) 9,000,000 9,005,625
--------------
38,888,527
--------------
RETAIL (0.5%)
Neiman Marcus
Group, Inc. (The)
6.475%, due 4/6/13 14,900,000 14,965,188
Riverdeep Group Ltd.
(zero coupon), due 10/30/11 (i) 6,080,000 6,414,400
--------------
21,379,588
--------------
</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>
PRINCIPAL
AMOUNT VALUE
LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED)
- ---------------------------------------------------------------------------------
SOFTWARE (0.8%)
SunGard Data Systems, Inc.
Series B
6.28%, due 12/11/12 (i) $ 24,548,475 $ 24,746,532
Telcordia Technologies, Inc.
6.36%, due 9/15/12 (i) 10,198,750 10,084,014
--------------
34,830,546
--------------
TELECOMMUNICATIONS (0.4%)
Qwest Corp.
Series B
6.95%, due 6/30/10 (i) 18,000,000 17,996,256
--------------
TEXTILES, APPAREL & LUXURY GOODS (0.1%)
Jostens IH Corp.
Series B
5.94%, due 10/4/11 (i) 3,800,000 3,855,814
--------------
Total Loan Assignments & Participations
(Cost $193,715,453) 194,600,240
--------------
YANKEE BONDS (2.5%) (L)
- ---------------------------------------------------------------------------------
ENVIRONMENTAL CONTROL (0.1%)
Marsulex, Inc.
9.625%, due 7/1/08 6,355,000 6,355,000
--------------
FOREST PRODUCTS & PAPER (0.1%)
Tembec Industries, Inc.
8.625%, due 6/30/09 (a) 7,155,000 4,829,625
--------------
INSURANCE (0.4%)
Fairfax Financial Holdings Ltd.
7.375%, due 4/15/18 (a) 4,697,000 3,826,956
7.75%, due 4/26/12 (a) 2,965,000 2,727,936
7.75%, due 7/15/37 4,810,000 3,672,666
8.25%, due 10/1/15 8,125,000 7,271,030
8.30%, due 4/15/26 (a) 3,000,000 2,486,427
--------------
19,985,015
--------------
MEDIA (0.2%)
Rogers Cablesystems Ltd.
11.00%, due 12/1/15 7,205,000 7,619,288
--------------
METALS & MINING (0.6%)
Algoma Steel, Inc.
11.00%, due 12/31/09 23,265,000 24,660,900
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
OIL & GAS SERVICES (0.8%)
Petroleum Geo-Services ASA
8.00%, due 11/5/06 $ 1,939,701 $ 1,959,098
10.00%, due 11/5/10 29,486,136 32,582,180
--------------
34,541,278
--------------
PACKAGING & CONTAINERS (0.1%)
Smurfit Capital Funding PLC
7.50%, due 11/20/25 3,475,000 3,058,000
--------------
TELECOMMUNICATIONS (0.2%)
Nortel Networks Corp.
6.75%, due 9/1/23 3,000,000 2,745,000
Rogers Cantel, Inc.
9.75%, due 6/1/16 3,660,000 4,382,850
--------------
7,127,850
--------------
Total Yankee Bonds
(Cost $98,441,863) 108,176,956
--------------
Total Long-Term Bonds
(Cost $3,495,471,110) 3,491,980,733
--------------
<Caption>
SHARES
COMMON STOCKS (2.7%)
- ---------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT (0.5%)
Goodyear Tire &
Rubber Co. (The) (e)(a) 1,427,400 22,324,536
--------------
FOOD (0.2%)
Parmalat SpA, GDR (e)(b) 2,918,820 8,486,469
--------------
FOREST PRODUCTS & PAPER (0.1%)
Abitibi-Consolidated, Inc. (a) 1,465,965 4,573,811
--------------
HAND & MACHINE TOOLS (0.4%)
Thermadyne Holdings Corp. (e) 1,237,712 16,028,370
--------------
HEALTH CARE PROVIDERS & SERVICES (0.0%) ++
Skilled Healthcare Group (e)(g)(i)(k) 11,689 187,024
--------------
HOLDING COMPANIES--DIVERSIFIED (0.0%) ++
TLC Beatrice International Holdings (e)(g) 25,000 25,000
--------------
INTERNET (0.2%)
Globix Corp. (e)(g)(i)(k) 5,331,771 7,277,867
--------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ---------------------------------------------------------------------------------
MACHINERY--DIVERSIFIED (0.0%) ++
MMH Holdings, Inc. (e)(g)(i)(k) 69,236 $ 366,951
--------------
MEDIA (0.6%)
Digital On-Demand (g) 1,095,395 10,954
Liberty Global, Inc. Class A (e) 275,398 6,821,608
Liberty Global, Inc. Class C (e) 220,798 5,237,329
Viacom, Inc. Class B 450,200 13,942,694
--------------
26,012,585
--------------
METAL FABRICATE & HARDWARE (0.2%)
ACP Holding Co. (e)(b)(k) 3,998,756 7,397,699
--------------
SOFTWARE (0.0%) ++
Quadramed Corp. (e) 1,577,650 2,508,463
--------------
TELECOMMUNICATIONS (0.5%)
ICO Global Communications Holdings Ltd. (e)(k) 3,403,903 13,709,219
Loral Cyberstar, Inc. (g) 6,023 6,023,000
Remote Dynamics, Inc. (e) 358,615 283,306
--------------
20,015,525
--------------
TOBACCO (0.0%) ++
North Atlantic Trading Co., Inc. (g) 2,156 22
--------------
Total Common Stocks
(Cost $135,482,458) 115,204,322
--------------
CONVERTIBLE PREFERRED STOCKS (0.6%)
- ---------------------------------------------------------------------------------
AUTO MANUFACTURERS (0.0%) ++
General Motors Corp.
6.25% 43,500 798,225
--------------
INSURANCE (0.2%)
Conseco, Inc.
5.501% 420,050 10,753,280
--------------
INTERNET (0.0%) ++
Globix Corp.
6.00% (e)(g)(k) 572,843 837,783
--------------
</Table>
<Table>
<Caption>
SHARES VALUE
SOFTWARE (0.4%)
QuadraMed Corp.
5.50% (b)(i) 814,000 $ 15,873,000
--------------
Total Convertible Preferred Stocks
(Cost $33,551,030) 28,262,288
--------------
PREFERRED STOCKS (1.8%)
- ---------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES (0.0%) ++
Colorado Prime Corp. (g)(i)(k) 7,232 72
Colorado Prime Corp. (g) 15,000 0
--------------
72
--------------
MEDIA (0.7%)
Haights Cross Communications, Inc.
16.00% (i)(k) 369,962 21,272,815
Paxson Communications Corp.
14.25% (e)(j) 749 5,111,925
Ziff Davis Holdings, Inc.
10.00% (e)(k) 4,240 2,544,000
--------------
28,928,740
--------------
REAL ESTATE (1.1%)
V Sovereign Real Estate Investment Corp.
12.00% (b) 34,813 50,217,753
--------------
Total Preferred Stocks
(Cost $77,634,207) 79,146,565
--------------
<Caption>
NO. OF
WARRANTS VALUE
WARRANTS (0.2%)
- ---------------------------------------------------------------------------------
HAND & MACHINE TOOLS (0.0%) ++
Thermadyne Holdings--B
Strike Price $20.78
Expire 5/23/06 (e)(k) 2,198 $ 15
--------------
MEDIA (0.0%) ++
Haights Cross Communications, Inc.
Strike Price $0.001
Expire 12/10/11 (e)(g)(i)(k) 388 4
Strike Price $0.001
Expire 12/10/11 (e)(g)(i)(k) 374,921 3,749
</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>
NO. OF
WARRANTS VALUE
WARRANTS (CONTINUED)
- ---------------------------------------------------------------------------------
MEDIA (CONTINUED)
Ono Finance PLC
Strike Price $0.01
Expire 3/16/11 (b)(e)(g)(k) 40,495 $ 405
Ziff Davis Holdings, Inc.
Strike Price $0.001
Expire 8/12/12 (e)(b) 777,370 77,737
--------------
81,895
--------------
METAL FABRICATE & HARDWARE (0.2%)
ACP Holding Co.
Strike Price $0.01
Expire 10/7/13 (e)(b)(k) 3,938,309 7,285,872
--------------
SEMICONDUCTORS (0.0%) ++
ASAT Finance LLC
Strike Price $18.60
Expire 11/1/06 (e)(b)(g) 8,680 87
--------------
TELECOMMUNICATIONS (0.0%) ++
UbiquiTel, Inc.
Strike Price $22.74
Expire 4/15/10 (e)(b)(k) 14,230 142
--------------
Total Warrants
(Total Cost $4,541,250) 7,368,011
--------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (19.1%)
- ---------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.3%)
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (h)(m) $ 11,207,745 11,207,745
--------------
Total Certificate of Deposit
(Cost $11,207,745) 11,207,745
--------------
COMMERCIAL PAPER (9.5%)
American General Finance Corp.
3.84%, due 11/15/05 4,225,000 4,218,691
3.85%, due 11/9/05 24,220,000 24,199,278
Compass Securitization
3.993%, due 11/22/05 (m) 8,005,532 8,005,532
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (m) 4,803,319 4,803,319
General Electric Capital Corp.
3.86%, due 11/9/05 24,595,000 24,573,903
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL PAPER (CONTINUED)
General Electric Capital Corp.
4.13%, due 1/19/06 $ 14,500,000 $ 14,368,586
Goldman Sachs Group, Inc.
3.98%, due 11/21/05 18,485,000 18,444,128
ING US Funding LLC
3.99%, due 11/29/05 11,975,000 11,937,837
Merck & Co., Inc.
3.74%, due 11/2/05 60,535,000 60,528,711
Merrill Lynch & Co., Inc.
3.94%, due 11/4/05 25,000,000 24,991,792
Morgan Stanley
3.85%, due 11/7/05 40,000,000 39,974,333
Rabobank USA Finance Corp.
3.92%, due 11/3/05 295,000 294,936
Silver Tower U.S. Funding
3.932%, due 11/15/05 (m) 4,752,760 4,752,760
Toyota Motor Credit Corp.
3.81%, due 11/8/05 27,835,000 27,814,379
3.85%, due 11/18/05 59,545,000 59,436,744
UBS Finance Delaware LLC
4.00%, due 11/1/05 29,280,000 29,280,000
4.12%, due 1/19/06 690,000 683,762
Wells Fargo & Co.
3.79%, due 11/7/05 55,960,000 55,924,652
--------------
Total Commercial Paper
(Cost $414,233,342) 414,233,343
--------------
FEDERAL AGENCIES (1.1%)
Federal Home Loan Mortgage Corporation (Discount
Note)
3.72%, due 11/8/05 13,990,000 13,979,880
Federal National Mortgage Association (Discount
Note)
3.73%, due 11/14/05 32,140,000 32,096,709
--------------
Total Federal Agencies
(Cost $46,076,590) 46,076,589
--------------
<Caption>
SHARES
INVESTMENT COMPANIES (3.6%)
BGI Institutional Money Market Fund (m) 73,013,045 73,013,045
Merrill Lynch Funds--Premier Institutional Fund 81,864,065 81,864,065
--------------
Total Investment Companies
(Cost $154,877,110) 154,877,110
--------------
</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, 2005 (CONTINUED)
<Table>
Principal
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ---------------------------------------------------------------------------------
TIME DEPOSITS (4.6%)
Bank of the West (The)
4.02%, due 12/8/05 (m) $ 30,421,021 $ 30,421,021
Barclays
3.92%, due 12/5/05 (m) 12,808,851 12,808,851
3.94%, due 11/28/05 (m) 14,409,958 14,409,958
Credit Suisse First Boston Corp.
3.74%, due 11/1/05 (m) 11,207,745 11,207,745
Deutsche Bank
3.95%, due 12/2/05 (m) 12,808,851 12,808,851
First Tennessee National Corp.
3.88%, due 11/14/05 (m) 12,808,851 12,808,851
Fortis Bank
4.00%, due 12/12/05 (m) 14,409,958 14,409,958
Halifax Bank of Scotland
3.75%, due 11/1/05 (m) 12,808,851 12,808,851
Keybank
4.00%, due 11/1/05 (m) 14,322,852 14,322,852
Marshall & Ilsley Bank
3.97%, due 12/29/05 (m) 12,808,851 12,808,851
Societe Generale
3.77%, due 11/1/05 (m) 27,218,809 27,218,809
UBS AG
4.01%, due 12/13/05 (m) 12,808,851 12,808,851
Wells Fargo & Co.
4.00%, due 11/25/05 (m) 12,808,851 12,808,851
--------------
Total Time Deposits
(Cost $201,652,300) 201,652,300
--------------
Total Short-Term Investments
(Cost $828,047,087) 828,047,087
--------------
Total Investments
(Cost $4,574,727,142) (n) 104.9% 4,550,009,006(o)
Liabilities in Excess of Cash and Other Assets (4.9) (212,015,198)
------------- --------------
Net Assets 100.0% $4,337,993,808
============= ==============
</Table>
<Table>
(a) Represents security, or a portion thereof, which is out on loan.
(b) May be sold to institutional investors only.
(c) Issue in default.
(d) Step Bond. Coupon rate increases in increments to maturity. Rate shown is the rate in effect
at October 31, 2005.
(e) Non-income producing security.
(f) Issuer in bankruptcy.
(g) Fair valued security. The total market value of these securities at October 31, 2005 is
$27,186,592, which reflects 0.6% of the Fund's net assets.
(h) Floating rate. Rate shown is the rate in effect at October 31, 2005.
(i) Restricted security. (See Note 7)
(j) PIK ("Payment in Kind")--interest or dividend payment is made with additional securities.
(k) Illiquid security.
(l) Yankee Bond--dollar-denominated bond issued in the United States by a foreign bank or
corporation.
(m) Represents security, or a portion thereof, purchased with cash collateral received for
securities on loan.
(n) The cost for federal income tax purposes is $4,667,056,841.
(o) At October 31, 2005 net unrealized depreciation was $117,047,835, 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 $172,371,026 and
aggregate gross unrealized depreciation for all investments on which there was an excess of
cost over market value of $289,418,861.
The following abbreviations have been used in the portfolio:
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, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $4,574,727,142) including
$293,817,676 market value of securities
loaned $4,550,009,006
Cash denominated in foreign currencies
(identified cost of $24,965,836) 24,642,682
Receivables:
Dividends and interest 82,577,999
Investment securities sold 31,239,089
Fund shares sold 8,762,925
Other assets 145,714
Unrealized appreciation on foreign currency
forward contracts 28,400
--------------
Total assets 4,697,405,815
--------------
LIABILITIES:
Securities lending collateral 303,434,701
Payables:
Investment securities purchased 33,618,293
Fund shares redeemed 6,156,769
NYLIFE Distributors 2,772,425
Manager 2,096,842
Transfer agent 1,581,783
Shareholder communication 521,923
Custodian 34,448
Accrued expenses 474,082
Due to custodian 491,612
Dividend payable 8,101,382
Unrealized depreciation on foreign currency
forward contracts 127,747
--------------
Total liabilities 359,412,007
--------------
Net assets $4,337,993,808
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest (par value of
$.01 per share) unlimited number of shares
authorized:
Class A $ 2,221,101
Class B 4,014,238
Class C 648,892
Class I 110,409
Additional paid-in capital 5,047,769,005
Accumulated distributions in excess of net
investment income (28,602,241)
Accumulated net realized loss on investments
and foreign currency transactions (663,124,142)
Net unrealized depreciation on investments (24,718,136)
Net unrealized depreciation on translation
of other assets and liabilities in
foreign currencies and foreign currency
forward contracts (325,318)
--------------
Net assets $4,337,993,808
==============
CLASS A
Net assets applicable to outstanding shares $1,381,080,385
==============
Shares of beneficial interest outstanding 222,110,059
==============
Net asset value per share outstanding $ 6.22
Maximum sales charge (4.50% of offering
price) 0.29
--------------
Maximum offering price per share outstanding $ 6.51
==============
CLASS B
Net assets applicable to outstanding shares $2,486,330,614
==============
Shares of beneficial interest outstanding 401,423,848
==============
Net asset value and offering price per share
outstanding $ 6.19
==============
CLASS C
Net assets applicable to outstanding shares $ 401,923,340
==============
Shares of beneficial interest outstanding 64,889,233
==============
Net asset value and offering price per share
outstanding $ 6.19
==============
CLASS I
Net assets applicable to outstanding shares $ 68,659,469
==============
Shares of beneficial interest outstanding 11,040,895
==============
Net asset value and offering price per share
outstanding $ 6.22
==============
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 356,985,803
Dividends (a) 7,601,818
Income from securities loaned--net 2,911,978
-------------
Total income 367,499,599
-------------
EXPENSES:
Manager 25,241,244
Distribution--Class B 20,264,640
Distribution--Class C 3,208,739
Distribution/Service--Class A 3,408,800
Service--Class B 6,754,880
Service--Class C 1,069,580
Transfer agent--Classes A, B and C 6,513,299
Transfer agent--Class I 89,801
Professional 957,577
Shareholder communication 882,534
Recordkeeping 476,386
Custodian 356,103
Trustees 314,612
Registration 164,514
Miscellaneous 164,237
-------------
Total expenses 69,866,946
-------------
Net investment income 297,632,653
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on:
Security transactions 95,345,974
Foreign currency transactions 9,540,232
-------------
Net realized gain on investments and foreign
currency transactions 104,886,206
-------------
Net change in unrealized depreciation on:
Security transactions (166,382,613)
Translation of other assets and liabilities
in foreign currencies and foreign
currency contracts (572,031)
-------------
Net change in unrealized depreciation on
investments and foreign currency contracts (166,954,644)
-------------
Net realized and unrealized loss on
investments and foreign currency (62,068,438)
-------------
Net increase in net assets resulting from
operations $ 235,564,215
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of $4,622.
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 YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 297,632,653 $ 313,938,195
Net realized gain on
investments and foreign
currency transactions 104,886,206 116,559,162
Net change in unrealized
appreciation (depreciation)
on investments and foreign
currency transactions (166,954,644) 83,295,158
--------------------------------
Net increase in net assets
resulting from operations 235,564,215 513,792,515
--------------------------------
Dividends to shareholders:
From net investment income:
Class A (99,144,651) (93,887,880)
Class B (178,840,012) (193,902,652)
Class C (28,348,396) (28,937,774)
Class I (3,939,459) (218,341)
--------------------------------
Total dividends to
shareholders (310,272,518) (316,946,647)
--------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 642,682,516 757,113,555
Class B 146,721,557 258,995,408
Class C 142,075,340 152,107,934
Class I 50,212,676 23,399,481
Net asset value of shares issued to
shareholders in reinvestment of dividends:
Class A 67,494,117 62,973,482
Class B 121,051,883 129,078,409
Class C 16,414,248 16,718,558
Class I 3,395,763 54,774
--------------------------------
1,190,048,100 1,400,441,601
Cost of shares redeemed: +
Class A (585,092,843) (863,943,469)
Class B (553,407,898) (571,894,928)
Class C (168,688,555) (189,340,177)
Class I (5,860,984) (786,945)
--------------------------------
(1,313,050,280) (1,625,965,519)
Decrease in net assets
derived from capital
share transactions (123,002,180) (225,523,918)
--------------------------------
Net decrease in net assets (197,710,483) (28,678,050)
</Table>
<Table>
<Caption>
2005 2004
NET ASSETS:
Beginning of year 4,535,704,291 4,564,382,341
--------------------------------
End of year $4,337,993,808 $ 4,535,704,291
--------------------------------
Accumulated distributions in
excess of net investment
income at end of year $ (28,602,241) $ (27,263,761)
--------------------------------
</Table>
+ Cost of shares redeemed net of redemption fee of $85,572, $55,449, $17,544,
and $289 for the year ended October 31, 2005.
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>
CLASS A
-------------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning of period $ 6.32 $ 6.05 $ 4.95 $ 5.56 $ 6.10 $ 7.41
---------- ---------- ----------- -------- -------- --------
Net investment income 0.45 0.46(a) 0.39 0.51 0.65(e) 0.80
Net realized and unrealized gain (loss)
on investments (0.09) 0.25 1.12 (0.54) (0.50)(e) (1.25)
Net realized and unrealized gain (loss)
on foreign currency transactions 0.00(c) 0.02 0.00(c) (0.02) 0.00(c) 0.02
---------- ---------- ----------- -------- -------- --------
Total from investment operations 0.36 0.73 1.51 (0.05) 0.15 (0.43)
---------- ---------- ----------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.46) (0.46) (0.40) (0.51) (0.65) (0.83)
From net realized gain on investments -- -- -- -- -- (0.05)
Return of capital -- -- (0.01) (0.05) (0.04) --
---------- ---------- ----------- -------- -------- --------
Total dividends and distributions (0.46) (0.46) (0.41) (0.56) (0.69) (0.88)
---------- ---------- ----------- -------- -------- --------
Redemption fee (a) 0.00(c) 0.00(c) -- -- -- --
---------- ---------- ----------- -------- -------- --------
Net asset value at end of period $ 6.22 $ 6.32 $ 6.05 $ 4.95 $ 5.56 $ 6.10
========== ========== =========== ======== ======== ========
Total investment return (b) 5.86% 12.53% 31.57%(d) (0.78%) 2.49% (6.48%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 7.10% 7.44% 8.43%+ 9.63% 10.84%(e) 11.35%
Net expenses 1.02% 1.01% 1.01%+ 1.07% 1.04% 1.03%
Expenses (before reimbursement) 1.02% 1.01% 1.01%+ 1.08% 1.08% 1.07%
Portfolio turnover rate 35% 41% 47% 50% 51% 54%
Net assets at end of period (in 000's) $1,381,080 $1,279,164 $1,265,856 $850,899 $710,205 $456,770
</Table>
<Table>
<Caption>
CLASS C
-------------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning of period $ 6.30 $ 6.04 $ 4.94 $ 5.55 $ 6.09 $ 7.40
---------- ---------- ----------- -------- -------- --------
Net investment income 0.40 0.42(a) 0.36 0.46 0.61(e) 0.74
Net realized and unrealized gain (loss)
on investments (0.09) 0.24 1.12 (0.53) (0.50)(e) (1.25)
Net realized and unrealized gain (loss)
on foreign currency transactions 0.00(c) 0.02 0.00(c) (0.02) 0.00(c) 0.02
---------- ---------- ----------- -------- -------- --------
Total from investment operations 0.31 0.68 1.48 (0.09) 0.11 (0.49)
---------- ---------- ----------- -------- -------- --------
Less dividends and distributions:
From net investment income (0.42) (0.42) (0.38) (0.48) (0.61) (0.77)
From net realized gain on investments -- -- -- -- -- (0.05)
Return of capital -- -- (0.00)(c) (0.04) (0.04) --
---------- ---------- ----------- -------- -------- --------
Total dividends and distributions (0.42) (0.42) (0.38) (0.52) (0.65) (0.82)
---------- ---------- ----------- -------- -------- --------
Redemption fee (a) 0.00(c) 0.00(c) -- -- -- --
---------- ---------- ----------- -------- -------- --------
Net asset value at end of period $ 6.19 $ 6.30 $ 6.04 $ 4.94 $ 5.55 $ 6.09
========== ========== =========== ======== ======== ========
Total investment return (b) 5.04% 11.65% 30.82%(d) (1.53%) 1.72% (7.20%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 6.35% 6.69% 7.68%+ 8.88% 10.09%(e) 10.60%
Net expenses 1.77% 1.76% 1.76%+ 1.82% 1.79% 1.78%
Expenses (before reimbursement) 1.77% 1.76% 1.76%+ 1.83% 1.83% 1.82%
Portfolio turnover rate 35% 41% 47% 50% 51% 54%
Net assets at end of period (in 000's) $ 401,923 $ 419,496 $ 422,392 $236,791 $174,205 $106,709
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ 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 premiums 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 in 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 (0.04%) (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>
CLASS B
-------------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 6.30 $ 6.04 $ 4.94 $ 5.55 $ 6.09 $ 7.40
---------- ---------- ----------- ---------- ---------- ----------
0.40 0.42(a) 0.36 0.46 0.61 (e) 0.74
(0.08) 0.24 1.12 (0.53) (0.50)(e) (1.25)
0.00(c) 0.02 0.00 (c) (0.02) 0.00(c) 0.02
---------- ---------- ----------- ---------- ---------- ----------
0.32 0.68 1.48 (0.09) 0.11 (0.48)
---------- ---------- ----------- ---------- ---------- ----------
(0.43) (0.42) (0.38) (0.48) (0.61) (0.77)
-- -- (0.00)(c) (0.04) (0.04) (0.05)
-- -- -- -- -- --
---------- ---------- ----------- ---------- ---------- ----------
(0.43) (0.42) (0.38) (0.52) (0.65) (0.82)
---------- ---------- ----------- ---------- ---------- ----------
0.00(c) 0.00(c) -- -- -- --
---------- ---------- ----------- ---------- ---------- ----------
$ 6.19 $ 6.30 $ 6.04 $ 4.94 $ 5.55 $ 6.09
========== ========== =========== ========== ========== ==========
5.04% 11.65% 30.82%(d) (1.53%) 1.72% (7.20%)
6.35% 6.69% 7.68%+ 8.88% 10.09%(e) 10.60%
1.77% 1.76% 1.76%+ 1.82% 1.79% 1.78%
1.77% 1.76% 1.76%+ 1.83% 1.83% 1.82%
35% 41% 47% 50% 51% 54%
$2,486,331 $2,814,176 $2,876,134 $2,211,253 $2,475,037 $2,609,320
</Table>
<Table>
<Caption>
CLASS I
- -----------------------------------
JANUARY 2,
2004**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2005 2004
$ 6.32 $ 6.24
----------- -----------
0.48 0.41(a)
(0.10) 0.07
0.00(c) 0.00(c)
----------- -----------
0.38 0.48
----------- -----------
(0.48) (0.40)
-- --
-- --
----------- -----------
----------- -----------
0.00(c) 0.00(c)
----------- -----------
$ 6.22 $ 6.32
=========== ===========
6.12% 7.97%(d)
7.31% 7.79%+
0.81% 0.66%+
0.81% 0.66%+
35% 41%
$68,659 $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 nineteen 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 a
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 except that Class B shares and Class C shares are
subject to higher distribution fee rates than Class A shares under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are
not subject to a distribution or service fee.
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 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 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. 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 accounting
principles generally accepted in the United States of America 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 normally taken
from the principal market in which each security trades. 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 in good faith by 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 principal market is temporarily closed at a time when
under normal conditions it would be open. At October 31, 2005, the Fund held
securities with a value of $27,186,592 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
26 MainStay High Yield Corporate Bond Fund
impact on the price of such securities as a result of such events.
(B) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward contract is
an agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. During the period the forward contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" such contract on a daily basis to reflect the
market value of the contract at the end of each day's trading. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into foreign currency forward
contracts primarily to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates or to try to enhance the Fund's returns.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized 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. (See Note 7).
(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 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.
(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 accounting principles generally accepted in
the United States of America. 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 and accumulated net
realized loss on investments arising from permanent differences; net assets at
October 31, 2005, are not affected.
<Table>
<Caption>
ACCUMULATED
DISTRIBUTIONS IN ACCUMULATED NET
EXCESS OF NET REALIZED LOSS ON
INVESTMENT INCOME INVESTMENTS
$11,301,385 $ (11,301,385)
- --------------------------------------------------
</Table>
www.MAINSTAYfunds.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The reclassifications for the Fund are primarily due to premium amortization
adjustments and 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. 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.
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.
The Fund may place a debt obligation on non-accrual status and reduce related
interest income by ceasing current accruals and writing off interest receivables
when the collection of all or a portion of interest has become doubtful based on
consistently applied procedures. A debt obligation is removed from non-accrual
status when the issuer resumes interest payments or when collectibility of
interest is reasonably assured.
(H) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at
the mean between the buying and selling rates last quoted by any major U.S. bank
at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented.
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, are reflected in
unrealized foreign exchange gains or losses at period end exchange rates.
(I) 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. (See Note 7).
(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 transfer agent expenses and 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) 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 for each class of shares. The redemption fee is designed to offset
brokerage commissions and other costs associated with short-term trading and is
not assessed on the 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.
(M) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the Fund.
28 MainStay High Yield Corporate Bond 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 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 percentage of the Fund's
average daily net assets as follows: 0.60% on assets up to $500 million and
0.55% on assets in excess of $500 million. For the year ended October 31, 2005,
the Manager earned fees from the Fund in the amount of $25,241,244. It was not
necessary for the Manager to reimburse the Fund for expenses for the year ended
October 31, 2005.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager paid the Subadvisor a monthly fee of 0.30% of the Fund's
average daily net assets 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 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 $740,788 for the year
ended October 31, 2005. 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 $48,581, $2,708,943 and $116,485, respectively, for the year ended
October 31, 2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $6,603,100.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(F) OTHER. Pursuant to the Management Agreement, 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
$957,577 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
www.MAINSTAYfunds.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
provided to the Fund by the Manager amounted to $476,386 for the year ended
October 31, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the custodian of cash and securities of the
Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund. Formerly, State Street Bank and Trust Company acted as custodian for
the Fund.
NOTE 5--FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED OTHER TOTAL
ORDINARY CAPITAL TEMPORARY UNREALIZED ACCUMULATED
INCOME LOSSES DIFFERENCES DEPRECIATION LOSS
6$,125,527.. $(597,843,329) $(7,678,882) $(117,375,153) $(716,769,837)
-----------------------------------------------------------------------------
</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, 2005, for federal income tax purposes, capital loss carryforwards
of $597,843,329 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 AMOUNTS
AVAILABLE THROUGH (000'S)
2009 $122,690
2010 169,119
2011 306,034
-------------------------------------------
$597,843
-------------------------------------------
</Table>
The Fund utilized $79,996,059 of capital loss carryforwards during the year
ended October 31, 2005.
The tax character of distributions paid during the year ended October 31, 2005,
and the year ended October 31, 2004, shown in the Statement of Changes in Net
Assets, was as follows:
<Table>
<Caption>
2005 2004
Distributions paid from:
Ordinary Income $310,272,518 $316,946,647
- -----------------------------------------------------------------
</Table>
NOTE 6--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than U.S. Government and short-term securities, were $1,508,291 and $1,354,230,
respectively.
NOTE 7--PORTFOLIO SECURITIES LOANED, LOAN COMMITMENTS, FOREIGN CURRENCY FORWARD
CONTRACTS, FOREIGN CURRENCY AND RESTRICTED SECURITIES:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $293,817,676. The Fund received $303,434,701 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.
As of October 31, 2005 the Fund had unfunded loan commitments pursuant to the
following loan agreements:
<Table>
<Caption>
UNFUNDED
BORROWER COMMITMENT
Foster Wheeler Ltd., due 3/18/10 $27,993,600
- ------------------------------------------------------------------------------
Warner Chilcott Corp., due 1/01/06 1,545,741
- ------------------------------------------------------------------------------
Warner Chilcott Corp., due 6/30/06 309,148
- ------------------------------------------------------------------------------
Neiman Marcus Group, Inc., due 7/16/06 94,995
- ------------------------------------------------------------------------------
$29,943,484
- ------------------------------------------------------------------------------
</Table>
These commitments are available until the maturity date of the respective
security.
Foreign forward currency contracts held at October 31, 2005:
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT UNREALIZED
FOREIGN CURRENCY BUY CONTRACTS PURCHASED SOLD APPRECIATION
Euro Dollar vs. U.S. Dollar, expiring 01/06/06 $11,577,588 $9,650,000 $ 28,400
- ------------------------------------------------------------------------------------------------------------------
</Table>
30 MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT UNREALIZED
FOREIGN CURRENCY SALE CONTRACTS SOLD PURCHASED DEPRECIATION
U.S. Dollar vs. Euro Dollar, expiring 01/06/06 EUR 51,242,041 EUR 61,500,697 $ (127,747)
- ------------------------------------------------------------------------------------------------------------------------
Unrealized depreciation on foreign currency forward
contracts $ (99,347)
- ------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
FOREIGN CURRENCY HELD AT OCTOBER 31, 2005: CURRENCY COST MARKET VALUE
Euro E20,581,547 $24,988,992 $ 24,665,954
- ------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
FOREIGN CURRENCY OVERDRAFT AT OCTOBER 31, 2005: CURRENCY COST MARKET VALUE
Canadian Dollar C$(27,487) $(23,156) $ (23,272)
- ----------------------------------------------------------------------------------------------------------------
</Table>
Restricted securities held at October 31, 2005
<Table>
<Caption>
PRINCIPAL
DATE(S) OF AMOUNT/ 10/31/2005 PERCENTAGE OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
Calpine Gilroy, L.P.
10.00%, due 9/30/14 11/28/2003 $21,384,753 $ 21,441,123 $ 21,384,753 0.5%
- ------------------------------------------------------------------------------------------------------------------------------
Colorado Prime Corp.
Preferred Stock 5/6/97-11/10/99 7,232 23,048,641 72 0.0(a)
- ------------------------------------------------------------------------------------------------------------------------------
Fidelity National Information
Solutions, Inc.
Bank debt, Series B
5.68%, due 3/9/13 3/16/2005 17,411,725 17,411,725 17,464,587 0.4
- ------------------------------------------------------------------------------------------------------------------------------
Goodyear Tire & Rubber Co. (The)
Bank debt
7.06%, due 4/30/10 2/25/04-3/11/04 20,350,000 20,350,000 20,506,858 0.5
- ------------------------------------------------------------------------------------------------------------------------------
Graham Packaging Holdings Co.
Bank debt
8.25%, due 4/7/12 10/1/04 1,000,000 1,000,000 1,015,833 0.0(a)
- ------------------------------------------------------------------------------------------------------------------------------
Jostens IH Corp.
Bank debt, Series B
5.94%, due 10/4/11 10/8/04 3,800,000 3,800,000 3,855,814 0.1
- ------------------------------------------------------------------------------------------------------------------------------
Haights Cross Communications, Inc.
Preferred Stock
16.00%, 1/22/04 369,962 17,218,875 21,272,815 0.5
Warrants 1/22/04 374,921 3,749 3,749 0.0(a)
Warrants 1/22/04 388 4 4 0.0(a)
- ------------------------------------------------------------------------------------------------------------------------------
LNR Property Corp.
Bank debt, Series B
6.71%, due 2/3/08 2/10/05 22,764,703 22,764,703 22,878,527 0.5
- ------------------------------------------------------------------------------------------------------------------------------
MMH Holdings, Inc.
Common Stock 3/11/99-10/30/01 69,236 36,341 366,951 0.0(a)
- ------------------------------------------------------------------------------------------------------------------------------
Quadramed Corp.
Convertible Preferred Stock
5.50% 1,577,650 15,777 2,508,463 0.1
- ------------------------------------------------------------------------------------------------------------------------------
Qwest Corp.
Bank debt, Series B
6.95%, due 6/30/10 6/12/03 18,000,000 17,504,316 17,996,256 0.4
- ------------------------------------------------------------------------------------------------------------------------------
Riley Mezzainine Corp.
Bank debt
8.39%, due 2/3/08 2/10/05 7,000,000 7,000,000 7,004,375 0.2
Bank debt, Series 2
8.96%, due 2/3/08 2/10/05 9,000,000 9,000,000 9,005,625 0.2
- ------------------------------------------------------------------------------------------------------------------------------
Riverdeep Group, Ltd.
Bank debt
(zero coupon), due 10/30/11 7/26/05 6,080,000 6,080,000 6,414,000 0.1
- ------------------------------------------------------------------------------------------------------------------------------
Satbirds Capital
Bank debt
10.464%, due 5/1/14 4/8/05 E20,185,000 25,651,470 25,400,249 0.6
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
PRINCIPAL
DATE(S) OF AMOUNT/ 10/31/2005 PERCENTAGE OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
SunGard Data Systems, Inc.
Bank debt, Series B
6.28%, due 12/11/12 7/28/05 $24,548,475 $ 24,517,789 $ 24,746,532 0.6%
- ------------------------------------------------------------------------------------------------------------------------------
Telcordia Technologies, Inc.
Bank debt
6.36%, due 9/15/12 4/5/05 10,198,750 10,185,349 10,084,014 0.2
- ------------------------------------------------------------------------------------------------------------------------------
Warner Chilcott Corp.
Bank debt, Series D
6.77%, due 1/18/12 1/19/05 12,084,385 12,090,901 12,118,910 0.3
- ------------------------------------------------------------------------------------------------------------------------------
Skilled Healthcare Group
Common Stock 9/4/03 11,689 117 187,024 0(a)
- ------------------------------------------------------------------------------------------------------------------------------
$239,120,880 $224,215,411 5.5%
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Less than one tenth of a percent.
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, 2005.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C CLASS I
Shares sold 100,802 23,045 22,331 7,807
- --------------------------------------------------------------------------------
Shares issued in reinvestment of
dividend and distributions 10,633 19,125 2,593 536
- --------------------------------------------------------------------------------
111,435 42,170 24,924 8,343
- --------------------------------------------------------------------------------
Shares redeemed (91,727) (87,134) (26,576) (921)
- --------------------------------------------------------------------------------
Net increase (decrease) 19,708 (44,964) (1,652) 7,422
- --------------------------------------------------------------------------------
</Table>
<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
dividend 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>
* Commenced operations on January 2, 2004.
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.9 million to nine MainStay funds. The amount paid to the MainStay
High Yield Corporate Bond Funds was $814,000. NYLIM has also agreed to reimburse
or pay all expenses relating to the Board of Trustees' review of this matter and
has paid substantially all of the costs associated with the other regulatory
matters described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
32 MainStay High Yield Corporate 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 High Yield Corporate Bond Fund
("the Fund"), one of the funds constituting The MainStay Funds, as of October
31, 2005, and the related statement of operations for the year then ended, and
the statements of changes in net assets and financial highlights for each of the
years in the two-year period then ended. These financial statements and
financial highlights are the responsibility of this Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. 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 audits 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
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, 2005, 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 audits provide 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,
2005, the results of its operations for the year then ended, and the changes in
its net assets and financial highlights for each of the years in the two-year
period then ended, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
34 MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 35
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
36 MainStay High Yield Corporate Bond Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's performance (top decile) when
compared over several time periods with funds concluded by Trustees to be peers
of the Fund.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees considered certain benefits
expected for, and risks borne by, the Manager and its affiliates, including
benefits from soft dollar arrangements. The Trustees considered the services
provided to the Fund by affiliates of the Manager, NYLIFE Distributors and NYLIM
Service, under other agreements, and the benefits to the Manager and its
affiliates from those relationships. The information provided to the Trustees
indicated that the profitability to the Manager and its affiliates arising
directly from those other agreements was not excessive. The Trustees
acknowledged certain benefits to the reputation of the Manager and its
affiliates, as well to that of the Trust, from their association with each
other.
The Trustees, in considering economies of scale, noted the Fund was the largest
series of The MainStay Funds. The Trustees discussed the extent to which
economies of scale were projected by the Manager to be realized as the Fund
grows, or as the Trust grows overall, noting in particular the Manager's plans
for marketing and distributing shares of various series of the Trust. They noted
that a contractual breakpoint was in place for the management fee and was
intended to provide that the Fund's shareholders would share in benefits from
economies of scale as the Fund grows. The Trustees noted that the Fund's
contractual management fee had been reduced in accordance with the
www.MAINSTAYfunds.com 37
terms of the breakpoint schedule applicable to the Fund, and reviewed
information provided by the Manager intended to show that the profitability of
the Fund to the Manager and the Subadviser was not excessive. In discussing the
large size of the Fund relative to the low asset level at which the breakpoint
became applicable, the Manager emphasized the increase of the Manager's and
Subadvisor's costs applicable to the Fund as its assets have increased, the lack
of a significant increase of the Manager's and Subadvisor's profitability level
relating to the Fund, the Fund's competitive fee level, and the Manager's
willingness to keep the Fund open to new investors. Acknowledging the difficulty
of forecasting economies of scale, the Trustees generally expressed an intention
to monitor the Manager's profitability and consider the application of fee
breakpoints or other appropriate measures as the Board may determine from time
to time. The Trustees reviewed historical information about changes in the
Fund's expense and asset levels over time, as well as information about certain
Fund expenses that would remain fixed even as Fund assets increase and,
therefore, provide the Fund with benefits from economies of scale as the Fund
grows. The Trustees considered various information about transfer agency
expenses, including information showing that transfer agency fees of a
significant number of series of the Trust (although not every such series or
with respect to every share class of each series) tended to be high, when
aggregated and expressed as a percentage of the assets of certain series,
compared to the mutual fund industry average according to certain studies
reviewed by the Board and, therefore, adversely affected gross expense ratios.
The Board received information about potential effects on the Manager were it to
subsidize certain portions of the Trust's transfer agency fees. The Trustees
noted that a significant number of shareholders of the Trust's series had small
amounts invested in the series, and have considered measures intended to
increase average shareholder account size and/or otherwise reduce the Trust's
transfer agency fees and expenses, including steps that the Manager has taken to
encourage shareholders to consolidate or close small accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated expense ratio, and various components of that expense ratio, in
comparison to other funds in comparison groupings prepared by outside data
providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
38 MainStay High Yield Corporate Bond Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2005,
should be multiplied by 0.2% to arrive at the amount eligible for qualified
dividend income and 0.1% for the corporate dividends received deduction.
In January 2006, 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 2005. 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, 2005.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
40 MainStay High Yield Corporate Bond Fund
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[True Blank Page]
(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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A08038 (RECYCLE
LOGO) MS475-05 MSHY11-12/05
08
(MAINSTAY LOGO)
MAINSTAY
INTERNATIONAL EQUITY FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay International Equity Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/S/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- --------------------------------------------------------------------------------
Investment and Performance Comparison 4
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 8
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 15
- --------------------------------------------------------------------------------
Notes to Financial Statements 20
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 26
- --------------------------------------------------------------------------------
Trustees and Officers 27
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 30
- --------------------------------------------------------------------------------
Federal Income Tax Information 32
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures 32
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 32
- --------------------------------------------------------------------------------
MainStay Funds 33
</Table>
www.MAINSTAYfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
A REDEMPTION FEE OF 2% WILL BE APPLIED TO SHARES THAT ARE REDEEMED WITHIN 60
DAYS OF PURCHASE. PERFORMANCE DATA SHOWN DOES NOT REFLECT THE DEDUCTION OF THIS
FEE, WHICH IF SHOWN, WOULD REDUCE PERFORMANCE.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 7.17% 4.05% 5.95%
Excluding sales charges 13.40 5.23 6.55
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/95 9450 10000
10669.8 11047.1
11531 11558.6
12701.1 12673.4
15470 15592.5
13813.1 15141.1
11274.3 11366.3
11416.6 9864.6
13653.1 12531.5
15716.2 14892
10/31/05 17822.6 17586.6
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 7.59% 4.12% 5.78%
Excluding sales charges 12.59 4.45 5.78
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/95 10000.00 10000.00
11207.30 11047.10
12020.40 11558.60
13156.90 12673.40
15898.00 15592.50
14103.90 15141.10
11443.60 11366.30
11494.70 9864.60
13644.90 12531.50
15576.80 14892.00
10/31/05 17537.50 17586.60
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 11.50% 4.44% 5.77%
Excluding sales charges 12.50 4.44 5.77
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/95 10000.00 10000.00
11207.30 11047.10
12020.40 11558.60
13156.90 12673.40
15898.00 15592.50
14103.90 15141.10
11430.20 11366.30
11494.80 9864.60
13645.00 12531.50
15576.90 14892.00
10/31/05 17524.00 17586.60
</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%.
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 contractual and may be modified or terminated only with the
approval of the Board of Trustees. 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 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 THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay International Equity Fund
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
13.98% 5.53% 6.76%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/95 10000 10000
11298.3 11047.1
12211.9 11558.6
13476.4 12673.4
16435.2 15592.5
14701.5 15141.1
12006.1 11366.3
12172.9 9864.6
14588.3 12531.5
16880.9 14892
10/31/05 19240.7 17586.6
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
13.57% 5.36% 6.63%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/95 10000 10000
11296.3 11047.1
12198.3 11558.6
13436.1 12673.4
16373.3 15592.5
14632.2 15141.1
11933.8 11366.3
12087.8 9864.6
14475.3 12531.5
16726.1 14892
10/31/05 18995.2 17586.6
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
13.52% 5.17% 6.41%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY INTERNATIONAL EQUITY
FUND MSCI EAFE INDEX
----------------------------- ---------------
10/31/95 10000 10000
11264.7 11047.1
12135.8 11558.6
13335.9 12673.4
16218.5 15592.5
14459.7 15141.1
11775.1 11366.3
11891.5 9864.6
14202.6 12531.5
16391.2 14892
10/31/05 18607.8 17586.6
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -------------------------------------------------------------------------
MSCI EAFE Index(1) 18.09% 3.04% 5.81%
Average Lipper international multicap core
fund(2) 18.11 2.85 6.83
</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 THE
TABLES AND 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
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT ENDING ACCOUNT
VALUE (BASED VALUE (BASED
BEGINNING ON ACTUAL EXPENSES ON HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,032.40 $ 8,91 $1,016.30 $ 8.84
- -------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,028.45 $12.73 $1,012.55 $12.63
- -------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,028.45 $12.73 $1,012.55 $12.63
- -------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,034.25 $ 6.00 $1,019.15 $ 5.95
- -------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,031.25 $ 6.50 $1,018.65 $ 6.46
- -------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,032.10 $ 7.79 $1,017.40 $ 7.73
- -------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.74% for Class A, 2.49% for Class B and Class C, 1.17% for Class I, 1.27%
for Class R1, and 1.52% for Class R2) multiplied by the average account value
over the period, divided by 365, multiplied by 184 (to reflect the one-half
year period).
6 MainStay International Equity Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-TERM
INVESTMENTS
(COLLATERAL FROM LIABILITIES IN EXCESS
SECURITIES LENDING IS INVESTMENT OF CASH AND OTHER
COMMON STOCKS 10.8%) WARRANT COMPANIES ASSETS
- ------------- --------------------- ------- ---------- ---------------------
86.7 12.80 2.50 1.00 (3.00)
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Tesco PLC
2. Man Group PLC
3. Nestle S.A. Registered
4. Reed Elsevier N.V.
5. Banco Popular Espanol, S.A.
6. Diageo PLC*
7. Snam Rete Gas S.p.A.
8. Takeda Pharmaceutical Co. Ltd.
9. Bayerische Motoren Werke AG
10. UBS AG*
</Table>
www.MAINSTAYfunds.com 7
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 MSCI EAFE(R) Index,(1) unless the stock-selection
process strongly argues against it.
WHAT MAJOR FACTORS INFLUENCED INTERNATIONAL EQUITIES DURING THE 12 MONTHS ENDED
OCTOBER 31, 2005?
International equity markets advanced significantly during the 12-month
reporting period. The global focus on high energy prices sparked renewed
concerns about higher inflation. In Japan, good corporate sector performance has
begun to spill into the household sector, creating a recovery path that will
likely be led by private demand. From a price per-spective, the Japanese economy
was still in a mild deflationary period. Still, the possible economic
ramifications of oil price fluctuations on Japan's domestic and overseas
businesses could not be ignored.
In Europe, economic news was mixed. The euro hit a record high versus the U.S.
dollar in November 2004 and has since declined in value. The European Central
Bank has expressed concern about the weakness but has not yet been moved to
raise interest rates. In the United States, corporate profit growth and higher
commodity prices once again ignited inflation fears, but the Federal Open Market
Committee continued to raise the targeted federal funds rate at a measured pace,
with eight 25-basis-point increases during the reporting period. (A basis point
is one-hundredth of a percentage point.) At the end of October 2005, the federal
funds target rate stood at 3.75%, and the market anticipated additional
tightening moves.
The key factor driving international markets, however, was not interest rates
but an appetite for risk. The more-volatile parts of the global economy
continued to outperform during the reporting period. With gross domestic product
showing strength worldwide, emerging markets, commodity-related stocks, and
high-fixed-cost companies continued to enjoy market favor.
WHAT WERE THE STRONGEST AND WEAKEST AREAS OF THE MARKET DURING THE REPORTING
PERIOD?
The international equity market saw broad-based advances during the 12-month
period ended October 31, 2005, with every sector recording gains. Within the
MSCI EAFE(R) Index, the materials and energy sectors were the best performers in
U.S. dollar terms. Telecommunications services and information technology were
the worst-performing sectors, although they still generated positive returns in
U.S. dollars during the reporting period.
WHICH FUND HOLDINGS DID PARTICULARLY WELL DURING THE REPORTING PERIOD?
Deutsche Boerse, a German-based provider of various stock-exchange services, was
one of the strongest positive contributors to the Fund's performance during the
reporting period. The company approved a significant share-buyback program
during the reporting period and did not rule out a dividend payout ratio
increase. Ryanair Holdings, an Ireland-based low-cost airline that operates
through Europe, was another strong performer. The company continued to increase
business and profits while other airlines were struggling with the high cost of
fuel. At a time when high fuel prices were forcing many competitors out of
business, Ryanair actually flew more passengers than British Airways. Another
positive contributor was Nestle, the Switzerland-based
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. The Fund may experience a
portfolio turnover rate of over 100% and may generate short-term capital gains
which are taxable.
1. See footnote on page 5 for more information on the MSCI EAFE(R) Index.
8 MainStay International Equity Fund
food manufacturer, whose businesses include coffee, infant formula, bottled
water, and pet food. Of particular note was Nestle's lucrative bottled-water
business, because bottled water has become a powerhouse in the global beverage
market.
WHAT STOCKS DETRACTED FROM RESULTS?
Enel, the largest Italian electric utility, detracted from the Fund's
performance during the reporting period. The company's cash position was
affected by a change in the Italian government's rules on amortization of
property, plant, and equipment. Another stock that hurt performance was
Kingfisher, a do-it-yourself retailer that faced profit problems in a
deteriorating U.K. retail environment. Tesco, a U.K. retailing giant, declined
when the market responded negatively to the actions of Asda, a competitor owned
by Wal-Mart Stores.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
We added Roche Holdings, a Switzerland-based pharmaceutical company, to the
Fund's portfolio during the reporting period because of the company's strong
growth prospects, which were strengthened by increased penetration in the
oncology field. Roche also has a solid pipeline of products that many analysts
appear to have ignored in their forecasts. We also initiated a Fund position in
Denso, an auto parts manufacturer based in Japan. Although we have concerns
about projected auto sales, we feel that as the main supplier to Toyota, Denso
may benefit. Toyota is one of the few automakers that has gained market share
globally. We also added to several of the Fund's energy positions, including BP
and Total, because earnings expectations have not kept up with the rising price
of oil.
We eliminated the Fund's position in Euronext, a pan-European stock exchange
that resulted from the merger of exchanges in Paris, Brussels, Amsterdam, and
Lisbon. The decision to sell Euronext was driven by concerns that the winds of
consolidation would lead the company to overpay for the acquisition of the
London Stock Exchange. For this reason, we felt it prudent to liquidate the
Fund's position. The Fund took profits in Porsche, an automaker known for its
premium sports cars and new Cayenne SUV. We decided to sell the stock after we
learned that the company's management had decided to acquire a 20% stake in
Volkswagen. We believed that Volkswagen's business model was not up to par and
that shareholders would have been better served if the money had been returned
to them or invested in Porsche's own high-return business.
HOW WAS THE FUND POSITIONED RELATIVE TO THE MSCI EAFE(R) INDEX AS OF OCTOBER 31,
2005?
The Fund and its benchmark were invested primarily in stocks of developed
markets. The Fund tends to have limited exposure to emerging markets. As always,
we remained focused on the fundamental analysis of individual businesses rather
than on the market's perception. At the end of October 2005, the Fund was
overweighted in diversified financials and higher-dividend-yielding sectors,
such as consumer staples and utilities. The Fund was also slightly overweighted
in health care. At the same time, the Fund was underweighted in
telecommunications services, industrials, and materials. The Fund held a
market-weighted position in information technology.
During the reporting period, the Fund's holdings in diversified financials and
health care provided the biggest contribution to absolute performance. The
Fund's utility holdings detracted from absolute performance.
WHERE HAVE YOU RECENTLY FOUND THE MOST COMPELLING OPPORTUNITIES?
We have found promising opportunities in Europe and Asian nations outside Japan.
Since we find Japanese companies less compelling, the Fund has been
underweighted relative to the Index in Japan.
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 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (86.7%)+
- -------------------------------------------------------------------------------
AUSTRALIA (0.7%)
Australian Gas Light Co., Ltd. (multi-utilities) 192,300 $ 2,177,016
------------
BELGIUM (0.2%)
UCB S.A. (pharmaceuticals) 16,100 795,728
------------
CANADA (0.9%)
Bank of Montreal (commercial banks) (a) 24,700 1,208,964
Loblaw Cos., Ltd. (food & staples retailing) 28,700 1,631,946
------------
2,840,910
------------
DENMARK (0.4%)
Danske Bank A/S (commercial banks) 45,205 1,417,409
------------
FRANCE (7.9%)
Air Liquide S.A. (chemicals) (a) 22,700 4,126,970
BNP Paribas S.A. (commercial banks) 108,480 8,222,997
M6-Metropole Television (media) 117,551 2,993,679
Sanofi-Aventis, ADR (pharmaceuticals) (b) 18,800 754,256
Societe Generale (commercial banks) 5,000 570,762
Societe Television Francaise 1 (media) 80,400 2,062,005
Total S.A. Class B (oil, gas & consumable fuels) 28,300 7,102,039
------------
25,832,708
------------
GERMANY (8.5%)
Altana AG (pharmaceuticals) 45,800 2,579,783
V Bayerische Motoren Werke AG (automobiles) 208,238 9,034,174
Deutsche Boerse AG (diversified financial
services) 55,878 5,256,909
Hannover Rueckversicherung AG (insurance) (a) 190,712 6,900,190
Henkel KGaA (household products) 7,100 611,797
Muenchener Rueckversicherungs-
Gesellschaft AG Registered (insurance) 22,309 2,620,150
Siemens AG (industrial conglomerates) 10,300 766,071
------------
27,769,074
------------
</Table>
<Table>
<Caption>
SHARES VALUE
HONG KONG (1.5%)
HongKong Electric Holdings, Ltd. (electric
utilities) 1,003,100 $ 4,735,937
------------
INDIA (0.5%)
ITC, Ltd., Sponsored GDR (tobacco) (c)(d) 652,700 1,740,816
------------
IRELAND (2.0%)
Bank of Ireland (commercial banks) 421,703 6,423,506
------------
ITALY (9.6%)
Banco Popolare di Verona e Novara Scrl (commercial
banks) 230,700 4,257,829
Enel S.p.A. (electric utilities) (a) 818,100 6,598,441
ENI S.p.A. (oil, gas & consumable fuels) (a) 182,900 4,901,234
ENI S.p.A., Sponsored ADR (oil, gas & consumable
fuels) (a)(b) 3,000 401,250
Mediaset S.p.A. (media) 435,900 4,785,224
V Snam Rete Gas S.p.A. (gas utilities) (a) 1,742,875 9,566,468
Terna S.p.A. (construction & engineering) 320,100 771,084
------------
31,281,530
------------
JAPAN (9.5%)
Acom Co., Ltd. (consumer finance) 21,400 1,384,262
Canon, Inc. (office electronics) 106,000 5,527,188
Canon, Inc., Sponsored ADR (office electronics)
(b) 57,423 3,047,439
Credit Saison Co. Ltd. (consumer finance) 15,600 703,548
Denso Corp. (auto components) 56,800 1,605,292
Keyence Corp. (electronic equipment & instruments) 3,000 686,539
Konica Minolta Holdings, Inc. (office electronics) 188,400 1,555,299
+ 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
COMMON STOCKS (CONTINUED)
- -------------------------------------------------------------------------------
JAPAN (CONTINUED)
OBIC Co., Ltd. (it services) 18,100 $ 2,938,665
RICOH Co., Ltd. (office electronics) 144,400 2,281,175
Secom Co. Ltd. (commercial services & supplies) 31,700 1,571,248
Seven & I Holdings Co., Ltd. (retail) (e) 14,800 483,120
V Takeda Pharmaceutical Co., Ltd.
(pharmaceuticals) 171,200 9,353,423
------------
31,137,198
------------
NETHERLANDS (5.6%)
V Reed Elsevier N.V. (media) 729,270 9,823,688
TNT N.V. (air freight & logistics) 363,846 8,585,849
------------
18,409,537
------------
SPAIN (5.2%)
V Banco Popular Espanol S.A. (commercial banks) 802,570 9,743,439
Gestevision Telecinco S.A. (media) 79,500 1,763,573
Iberdrola S.A. (electric utilities) 78,848 2,111,027
Telefonica S.A. (diversified telecommunication
services) 199,616 3,184,149
------------
16,802,188
------------
SWEDEN (0.7%)
Hennes & Mauritz AB Class B (specialty retail) 47,900 1,554,999
Svenska Handelsbanken Class A (commercial banks) 34,900 795,493
------------
2,350,492
------------
SWITZERLAND (13.8%)
Adecco S.A. (commercial services & supplies) 19,873 847,726
V Nestle S.A. Registered (food products) 36,660 10,918,246
Novartis AG Registered (pharmaceuticals) 60,848 3,272,819
Novartis AG, ADR (pharmaceuticals) (b) 75,800 4,079,556
Roche Holding AG Genusscheine (pharmaceuticals) 29,200 4,361,826
</Table>
<Table>
<Caption>
SHARES VALUE
SWITZERLAND (CONTINUED)
Serono S.A. Class B (biotechnology) 8,312 $ 5,376,514
Swiss Reinsurance (insurance) 113,300 7,649,409
V UBS AG Registered (capital markets) (f) 83,494 7,090,854
V UBS AG Registered (capital markets) 18,608 1,594,147
------------
45,191,097
------------
UNITED KINGDOM (19.5%)
BP PLC Sponsored ADR (oil, gas & consumable fuels)
(b) 81,333 5,400,511
V Diageo PLC (beverages) 515,961 7,625,646
V Diageo PLC, Sponsored ADR (beverages) (a)(b) 34,740 2,064,598
GlaxoSmithKline PLC, ADR (pharmaceuticals) (a)(b) 27,100 1,408,929
HSBC Holdings PLC, Sponsored ADR (commercial
banks) (a)(b) 28,200 2,221,032
Lloyds TSB Group PLC (commercial banks) 640,900 5,240,896
Lloyds TSB Group PLC, Sponsored ADR (commercial
banks) (a)(b) 9,910 327,129
V Man Group PLC (capital markets) 446,610 12,173,695
Provident Financial PLC (consumer finance) 145,716 1,547,504
Royal Bank of Scotland Group PLC (commercial
banks) 87,700 2,427,782
Scottish & Southern Energy PLC (electric
utilities) 187,930 3,259,834
Smith & Nephew PLC (health care equipment &
supplies) 297,241 2,514,837
V Tesco PLC (food & staples retailing) 2,633,674 14,019,767
Vodafone Group PLC, Sponsored ADR (wireless
telecommunication services) (b) 126,300 3,316,638
------------
63,548,798
------------
UNITED STATES (0.2%)
AFLAC, Inc. (insurance) 10,900 520,802
------------
Total Common Stocks
(Cost $255,274,943) 282,974,746
------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
INVESTMENT COMPANIES (1.0%)
- -------------------------------------------------------------------------------
UNITED KINGDOM (0.8%)
iShares MSCI United Kingdom Index Fund (capital
markets) (g) 133,500 $ 2,469,750
------------
UNITED STATES (0.2%)
iShares S&P Europe 350 Index Fund (capital
markets) (a)(g) 10,700 835,670
------------
Total Investment Companies
(Cost $3,205,949) 3,305,420
------------
NUMBER OF
WARRANTS
WARRANT (2.5%)
- -------------------------------------------------------------------------------
IRELAND (2.5%)
Ryanair Holdings PLC Strike price E0.000001
Expire 3/21/08 (airlines) (e)(c)(h) 968,823 8,301,764
------------
Total Warrant
(Total Cost $6,294,479) 8,301,764
------------
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (12.8%)
- -------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.4%)
UNITED STATES (0.4%)
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (banking) (i)(j) $ 1,306,665 1,306,665
------------
Total Certificate of Deposit
(Cost $1,306,665) 1,306,665
------------
COMMERCIAL PAPER (1.5%)
UNITED STATES (1.5%)
Compass Securitization 3.993%, due 11/22/05
(banking) (i) 933,332 933,332
Falcon Asset
Securitization Corp.
4.026%, due 12/2/05 (banking) (i) 559,999 559,999
Merrill Lynch & Co., Inc.
3.84%, due 11/14/05 (banking) 3,000,000 2,995,840
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL PAPER (CONTINUED)
UNITED STATES (CONTINUED)
Silver Tower U.S. Funding 3.932%, due 11/15/05
(banking) (i) $ 554,105 $ 554,105
------------
Total Commercial Paper
(Cost $5,043,276) 5,043,276
------------
FEDERAL AGENCIES (1.1%)
UNITED STATES (1.1%)
Federal Home Loan Bank 3.72%, due 11/2/05 (U.S.
federal agencies) 800,000 799,918
Federal National
Mortgage Association
3.72%, due 11/1/05
(U.S. federal agencies) 2,670,000 2,670,000
------------
Total Federal Agencies
(Cost $3,469,918) 3,469,918
------------
<Caption>
SHARES
INVESTMENT COMPANY (2.6%)
UNITED STATES (2.6%)
BGI Institutional Money
Market Fund
(investment companies) (i) 8,512,290 8,512,290
------------
Total Investment Company
(Cost $8,512,290) 8,512,290
------------
PRINCIPAL
AMOUNT
TIME DEPOSITS (7.2%)
UNITED STATES (7.2%)
Bank of the West (The)
4.02%, due 12/8/05 (banking) (i) $ 3,546,661 3,546,661
Barclays
3.92%, due 12/5/05 (banking) (i) 1,493,331 1,493,331
3.94%, due 11/28/05 (banking) (i) 1,679,997 1,679,997
Credit Suisse First Boston Corp.
3.74%, due 11/1/05 (banking) (i) 1,306,665 1,306,665
Deutsche Bank
3.95%, due 12/2/05 (banking) (i) 1,493,331 1,493,331
</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.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- -------------------------------------------------------------------------------
TIME DEPOSITS (CONTINUED)
UNITED STATES (CONTINUED)
First Tennessee National Corp.
3.88%, due 11/14/05 (banking) (i) $ 1,493,331 $ 1,493,331
Fortis Bank
4.00%, due 12/12/05 (banking) (i) 1,679,998 1,679,998
Halifax Bank of Scotland
3.75%, due 11/1/05 (diversified financial
services) (i) 1,493,331 1,493,331
Keybank
4.00%, due 11/1/05 (banking) (i) 1,669,842 1,669,842
Marshall & Ilsley Bank
3.97%, due 12/29/05 (banking) (i) 1,493,331 1,493,331
Societe Generale
3.77%, due 11/1/05 (banking) (i) 3,173,329 3,173,329
UBS AG
4.01%, due 12/13/05 (banking) (i) 1,493,331 1,493,331
Wells Fargo & Co.
4.00%, due 11/25/05 (banking) (i) 1,493,331 1,493,331
------------
Total Time Deposits
(Cost $23,509,809) 23,509,809
------------
Total Short-Term Investments
(Cost $41,841,958) 41,841,958
------------
Total Investments
(Cost $306,617,329) (k) 103.0% 336,423,888
Liabilities in Excess of
Cash and Other Assets (3.0) (9,824,957)
------------ ------------
Net Assets 100.0% $326,598,931
============ ============
</Table>
<Table>
(a) Represents security, or a portion thereof, which is out
on loan.
(b) ADR--American Depositary Receipt.
(c) May be sold to institutional investors only.
(d) GDR--Global Depositary Receipt.
(e) Non-income producing security.
(f) Security primarily trades on New York Stock Exchange.
(g) Exchange Traded Fund--represents a basket of securities
that are traded on an exchange.
(h) The following abbreviation is used in the above
portfolio: E--Euro.
(i) Represents security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(j) Floating rate. Rate shown is the rate in effect at
October 31, 2005.
(k) The cost for federal income tax purposes is
$306,723,736.
(l) At October 31, 2005 net unrealized appreciation for
securities was $29,700,152, 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
$33,410,155 and aggregate gross unrealized depreciation
for all investments on which there was an excess of cost
over market value of $3,710,003.
</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, 2005 (CONTINUED)
The table below sets forth the diversification of MainStay International Equity
Fund investments by industry.
INDUSTRY DIVERSIFICATION
<Table>
<Caption>
VALUE PERCENT+
Air Freight & Logistics $ 8,585,849 2.6%
Airlines 8,301,764 2.5
Auto Components 1,605,292 0.5
Automobiles 9,034,174 2.8
Banking 28,366,419 8.7
Beverages 9,690,244 3.0
Biotechnology 5,376,514 1.6
Capital Markets 24,164,116 7.4
Chemicals 4,126,970 1.3
Commercial Banks 42,857,238 13.1
Commercial Services & Supplies 2,418,974 0.7
Construction & Engineering 771,084 0.2
Consumer Finance 3,635,314 1.1
Diversified Financial Services 6,750,240 2.1
Diversified Telecommunication Services 3,184,149 1.0
Electric Utilities 16,705,239 5.1
Electronic Equipment & Instruments 686,539 0.2
Food & Staples Retailing 15,651,713 4.8
Food Products 10,918,246 3.3
Gas Utilities 9,566,468 2.9
Health Care Equipment & Supplies 2,514,837 0.8
Household Products 611,797 0.2
Industrial Conglomerates 766,071 0.2
Insurance 17,690,551 5.4
Investment Companies 8,512,290 2.6
IT Services 2,938,665 0.9
Media 21,428,169 6.6
Multi-Utilities 2,177,016 0.7
Office Electronics 12,411,101 3.8
Oil, Gas & Consumable Fuels 17,805,034 5.5
Pharmaceuticals 26,606,320 8.1
Retail 483,120 0.2
Specialty Retail 1,554,999 0.5
Tobacco 1,740,816 0.5
U.S. Federal Agencies 3,469,918 1.1
Wireless Telecommunication Services 3,316,638 1.0
------------ ----------
336,423,888 103.0
Liabilities in Excess of Cash and Other Assets (9,824,957) (3.0)
------------ ----------
Net Assets $326,598,931 100.0
============ ==========
</Table>
<Table>
+ Percentages indicated are based on Portfolio net assets.
</Table>
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 ASSETS AND LIABILITIES AS OF OCTOBER 31, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $306,617,329) including
$33,391,502 market value of securities
loaned $336,423,888
Cash denominated in foreign currencies
(identified cost $23,963,453) 23,349,730
Cash 6,408
Receivables:
Investment securities sold 3,187,361
Fund shares sold 991,468
Dividends and interest 561,340
Other assets 30,822
-------------
Total assets 364,551,017
-------------
LIABILITIES:
Securities lending collateral 35,376,200
Payables:
Investment securities purchased 1,492,445
Transfer agent 241,702
Manager 200,804
Fund shares redeemed 186,006
NYLIFE Distributors 104,106
Shareholder communication 62,228
Professional 35,537
Accrued expenses 53,368
Unrealized depreciation on foreign currency
forward contracts 199,690
-------------
Total liabilities 37,952,086
-------------
Net assets $326,598,931
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 64,466
Class B 68,660
Class C 9,015
Class I 99,748
Class R1 2,456
Class R2 307
Additional paid-in capital 280,733,177
Accumulated undistributed net investment
income 1,743,616
Accumulated net realized gain on investments 14,875,405
Net unrealized appreciation on investments 29,806,559
Net unrealized depreciation on translation of
other assets and liabilities in foreign
currencies and foreign currency forward
contracts (804,478)
-------------
Net assets $326,598,931
=============
CLASS A
Net assets applicable to outstanding shares $ 87,204,385
=============
Shares of beneficial interest outstanding 6,446,563
=============
Net asset value per share outstanding $ 13.53
Maximum sales charge (5.50% of offering price) 0.79
-------------
Maximum offering price per share outstanding $ 14.32
=============
CLASS B
Net assets applicable to outstanding shares $ 88,410,412
=============
Shares of beneficial interest outstanding 6,866,038
=============
Net asset value and offering price per share
outstanding $ 12.88
=============
CLASS C
Net assets applicable to outstanding shares $ 11,599,914
=============
Shares of beneficial interest outstanding 901,495
=============
Net asset value and offering price per share
outstanding $ 12.87
=============
CLASS I
Net assets applicable to outstanding shares $135,643,399
=============
Shares of beneficial interest outstanding 9,974,843
=============
Net asset value and offering price per share
outstanding $ 13.60
=============
CLASS R1
Net assets applicable to outstanding shares $ 3,325,143
=============
Shares of beneficial interest outstanding 245,573
=============
Net asset value and offering price per share
outstanding $ 13.54
=============
CLASS R2
Net assets applicable to outstanding shares $ 415,678
=============
Shares of beneficial interest outstanding 30,676
=============
Net asset value and offering price per share
outstanding $ 13.55
=============
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 6,888,953
Income from securities loaned--net 255,979
Interest 217,658
------------
Total income 7,362,590
------------
EXPENSES:
Manager 2,301,353
Transfer agent--Classes A, B and C 742,276
Transfer agent--Classes I and R1 78,272
Distribution--Class B 631,923
Distribution--Class C 72,236
Distribution/Service--Class A 203,133
Service--Class B 210,641
Service--Class C 24,079
Distribution/Service--Class R2 163
Custodian 121,149
Shareholder communication 84,871
Professional 84,172
Registration 74,394
Recordkeeping 52,237
Trustees 20,123
Shareholder service fees--Class R1 1,927
Shareholder service fees--Class R2 64
Miscellaneous 34,859
------------
Total expenses before reimbursement 4,737,872
Expense reimbursement from Manager (39,296)
------------
Net expenses 4,698,576
------------
Net investment income 2,664,014
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN
CURRENCY:
Net realized gain (loss) on:
Security transactions 16,084,306
Foreign currency transactions (931,503)
------------
Net realized gain on investments and foreign
currency transactions 15,152,803
------------
Net change in unrealized appreciation on:
Security transactions 8,819,132
Translation of other assets and liabilities
in foreign currencies and foreign currency
forwards contracts (1,277,949)
------------
Net change in unrealized appreciation on
investments and foreign currency transactions 7,541,183
------------
Net realized and unrealized gain on investments
and foreign currency transactions 22,693,986
------------
Net increase in net assets resulting from
operations $25,358,000
============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$812,961.
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.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 2,664,014 $ 541,838
Net realized gain on investments
and foreign currency transactions 15,152,803 8,939,748
Net change in unrealized
appreciation on investments and
foreign currency transactions 7,541,183 7,864,111
---------------------------
Net increase in net assets
resulting from operations 25,358,000 17,345,697
---------------------------
Dividends to shareholders:
From net investment income:
Class A (124,050) (555,225)
Class B -- (414,033)
Class C -- (22,730)
Class I (315,680) --
Class R1 (7) --
Class R2 (5) --
---------------------------
Total dividends to shareholders (439,742) (991,988)
---------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 31,994,008 33,536,680
Class B 22,268,445 14,390,516
Class C 5,607,703 4,309,233
Class I 104,105,747 43,940,803
Class R1 3,402,303 1,000
Class R2 812,060 1,000
Net asset value of shares issued to shareholders
in reinvestment of dividends:
Class A 104,879 451,765
Class B -- 396,920
Class C -- 17,677
Class I 315,680 --
Class R1 8 --
Class R2 5 --
---------------------------
168,610,838 97,045,594
</Table>
<Table>
<Caption>
2005 2004
Cost of shares redeemed+:
Class A (24,514,014) (14,451,562)
Class B (12,671,567) (9,181,696)
Class C (1,620,586) (810,363)
Class I (13,757,168) (5,788,084)
Class R1 (103,598) --
Class R2 (383,485) --
---------------------------
(53,050,418) (30,231,705)
Increase in net assets derived
from capital share
transactions 115,560,420 66,813,889
---------------------------
Net increase in net assets 140,478,678 83,167,598
NET ASSETS:
Beginning of year 186,120,253 102,952,655
---------------------------
End of year $326,598,931 $186,120,253
===========================
Accumulated undistributed net
investment income at end of period $ 1,743,616 $ 451,999
===========================
</Table>
+ Cost of shares redeemed net of redemption fee of $15,431 and $2,886 for the
years ended October 31, 2005 and October 31, 2004, 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 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
----------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 11.95 $ 10.50 $ 8.73 $ 9.11 $ 10.98 $ 15.23
------- ------- ----------- ------- ------- -------
Net investment income (loss) 0.15(a) 0.07(a) 0.08(a) (0.00)(a)(d) (0.01)(a) (0.08)(a)
Net realized and unrealized
gain (loss) on investments 1.59 1.48 1.63 (0.43) (1.82) (3.07)
Net realized and unrealized
gain (loss) on foreign
currency transactions (0.14) 0.03 0.04 0.05 0.11 (0.12)
------- ------- ----------- ------- ------- -------
Total from investment
operations 1.60 1.58 1.75 (0.38) (1.72) (3.27)
------- ------- ----------- ------- ------- -------
Less dividends and
distributions:
From net investment income (0.02) (0.13) -- -- (0.09) --
From net realized gain on
investments -- -- -- -- (0.06) (0.98)
------- ------- ----------- ------- ------- -------
Total dividends and
distributions (0.02) (0.13) -- -- (0.15) (0.98)
------- ------- ----------- ------- ------- -------
Redemption fee (a) 0.00(d) 0.00(d) 0.02 -- -- --
------- ------- ----------- ------- ------- -------
Net asset value at end of
period $ 13.53 $ 11.95 $ 10.50 $ 8.73 $ 9.11 $ 10.98
======= ======= =========== ======= ======= =======
Total investment return (b) 13.40% 15.11% 20.27%(c) (4.17%) (15.70%) (21.32%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income
(loss) 1.15% 0.60% 0.99%+ (0.05%) (0.07%) (0.56%)
Net expenses 1.74% 1.90% 2.27%+ 2.26% 2.17% 2.15%
Expenses (before
reimbursement) 1.76% -- -- -- -- --
Portfolio turnover rate 51% 54% 71% 102% 129% 30%
Net assets at end of period
(in 000's) $87,204 $70,252 $43,747 $30,084 $25,470 $29,730
</Table>
<Table>
<Caption>
CLASS C
----------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 11.44 $ 10.09 $ 8.44 $ 8.87 $ 10.70 $ 14.95
------- ------- ----------- ------- ------- -------
Net investment income (loss) 0.05(a) (0.02)(a) 0.02(a) (0.08)(a) (0.07)(a) (0.17)(a)
Net realized and unrealized
gain (loss) on investments 1.59 1.41 1.57 (0.40) (1.80) (2.98)
Net realized and unrealized
gain (loss) on foreign
currency transactions (0.14) 0.03 0.04 0.05 0.11 (0.12)
------- ------- ----------- ------- ------- -------
Total from investment
operations 1.43 1.42 1.63 (0.43) (1.76) (3.27)
------- ------- ----------- ------- ------- -------
Less dividends and
distributions:
From net investment income -- (0.07) -- -- (0.01) --
From net realized gain on
investments -- -- -- -- (0.06) (0.98)
------- ------- ----------- ------- ------- -------
Total dividends and
distributions -- (0.07) -- -- (0.07) (0.98)
------- ------- ----------- ------- ------- -------
Redemption fee (a) 0.00(d) 0.00(d) 0.02 -- -- --
------- ------- ----------- ------- ------- -------
Net asset value at end of
period $ 12.87 $ 11.44 $ 10.09 $ 8.44 $ 8.87 $ 10.70
======= ======= =========== ======= ======= =======
Total investment return (b) 12.50% 14.16% 19.55%(c) (4.85%) (16.44%) (21.71%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income
(loss) 0.40% (0.15%) 0.24%+ (0.80%) (0.82%) (1.31%)
Net expenses 2.49% 2.65% 3.02%+ 3.01% 2.92% 2.90%
Expenses (before
reimbursement) 2.51% -- -- -- -- --
Portfolio turnover rate 51% 54% 71% 102% 129% 30%
Net assets at end of period
(in 000's) $11,600 $ 6,718 $ 2,715 $ 1,284 $ 371 $ 692
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share date based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges. Class I, R1 and R2 are not subject
to sales charges.
(c) Total return is not annualized.
(d) Less than one cent per share.
</Table>
18 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>
CLASS B
----------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 11.44 $ 10.09 $ 8.44 $ 8.88 $ 10.70 $ 14.95
------- ------- ----------- ------- ------- -------
0.05(a) (0.02)(a) 0.02(a) (0.08)(a) (0.07)(a) (0.17)(a)
1.53 1.41 1.57 (0.41) (1.79) (2.98)
(0.14) 0.03 0.04 0.05 0.11 (0.12)
------- ------- ----------- ------- ------- -------
1.44 1.42 1.63 (0.44) (1.75) (3.27)
------- ------- ----------- ------- ------- -------
-- (0.07) -- -- (0.01) --
-- -- -- -- (0.06) (0.98)
------- ------- ----------- ------- ------- -------
-- (0.07) -- -- (0.07) (0.98)
------- ------- ----------- ------- ------- -------
0.00(d) 0.00(d) 0.02 -- -- --
------- ------- ----------- ------- ------- -------
$ 12.88 $ 11.44 $ 10.09 $ 8.44 $ 8.88 $ 10.70
======= ======= =========== ======= ======= =======
12.59% 14.16% 19.55%(c) (4.95%) (16.34%) (21.71%)
0.40% (0.15%) 0.24%+ (0.80%) (0.82%) (1.31%)
2.49% 2.65% 3.02%+ 3.01% 2.92% 2.90%
2.51% -- -- -- -- --
51% 54% 71% 102% 129% 30%
$88,410 $69,882 $56,490 $46,779 $51,887 $70,182
</Table>
<Table>
<Caption>
CLASS I CLASS R1 CLASS R2
---------------------------- ---------------------------- ----------------------------
JANUARY 2, JANUARY 2, JANUARY 2,
2004** 2004** 2004**
YEAR ENDED THROUGH YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2005 2004 2005 2004
$ 12.02 $ 11.40 $ 12.00 $ 11.40 $ 11.99 $ 11.40
----------- ----------- ----------- ----------- ----------- -----------
0.23(a) 0.12(a) 0.22(a) 0.12(a) (0.19)(a) 0.09(a)
1.59 0.49 1.54 0.47 1.57 0.49
(0.14) 0.01 (0.14) 0.01 (0.14) 0.01
----------- ----------- ----------- ----------- ----------- -----------
1.68 0.62 1.62 0.60 1.62 0.59
----------- ----------- ----------- ----------- ----------- -----------
(0.10) -- (0.08) -- (0.06) --
-- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
(0.10) -- (0.08) -- (0.06) --
----------- ----------- ----------- ----------- ----------- -----------
0.00(d) 0.00(d) 0.00(d) 0.00(d) 0.00(d) 0.00(d)
----------- ----------- ----------- ----------- ----------- -----------
$ 13.60 $ 12.02 $ 13.54 $ 12.00 $ 13.55 $ 11.99
=========== =========== =========== =========== =========== ===========
13.98% 5.44%(c) 13.57% 5.26%(c) 13.52% 5.18%(c)
1.72% 1.33%+ 1.62% 1.23%+ 1.37% 0.98%+
1.17% 1.17%+ 1.27% 1.27%+ 1.52% 1.52%+
1.19% -- 1.29% -- 1.54% --
51% 54% 51% 54% 51% 54%
$135,643 $39,266 $ 3,325 $ 1 $ 416 $ 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 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 nineteen 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 a
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. 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 accounting
principles generally accepted in the United States of America 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 normally are taken from the principal 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 in good faith by 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 principal
market is temporarily closed at a time when under normal conditions it would be
open. The Fund did not hold securities at October 31, 2005, that were valued in
such a 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) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward contract is
an agreement to buy or
20 MainStay International Equity Fund
sell currencies of different countries on a specified future date at a specified
rate. During the period the forward contract is open, changes in the value of
the contract are recognized as unrealized gains or losses by "marking to market"
such contract on a daily basis to reflect the market value of the contract at
the end of each day's trading. When the forward contract is closed, the Fund
records a realized gain or loss equal to the difference between the proceeds
from (or cost of) the closing transaction and the Fund's basis in the contract.
The Fund enters into foreign currency forward contracts primarily to hedge its
foreign currency denominated investments and receivables and payables against
adverse movements in future foreign exchange rates or to try to enhance the
Fund's returns.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized 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. (see Note 7).
(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.
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 accounting principles generally accepted in
the United States of America. 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, accumulated net realized gain on
investments, and paid-in capital.
<Table>
<Caption>
ACCUMULATED NET
UNDISTRIBUTED REALIZED GAIN ON PAID-IN-
NET INVESTMENT INCOME INVESTMENTS CAPITAL
$(932,655) $931,504 $1,151
----------------------------------------------------
</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) 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
www.MAINSTAYfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, are reflected in unrealized foreign exchange gains or losses at
period end exchange rates.
(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 transfer agent expenses and 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) 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 for 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 the 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.
(K) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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 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 facilities furnished at an annual percentage of the Fund's average
daily net assets as follows: 0.90% on assets up to $500 million and 0.85% on
assets in excess of $500 million. Effective August 1, 2005, the Manager has
entered into a written expense limitation agreement, under which the Manager has
agreed to reimburse the expenses of the Fund so that the total operating
expenses (excluding taxes, interest, litigation, extraordinary expenses, and
brokerage and other transaction expenses relating to the purchase or sale of
portfolio investments) do not exceed, on an annualized basis, 1.75% of the
average daily net assets of the Class A shares. An equivalent reimbursement, in
an equal amount of basis points, will be applied to the other share classes. The
Manager, within three years of incurring such expenses, may recoup the amount of
any management fee waiver or expense reimbursement from the Fund pursuant to
this agreement if such recoupment does not cause the Fund to exceed the expense
limitations. At October 31, 2005, the Fund had $33,294 of recoupment available.
This amount is available until October 31, 2008. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. Prior to
August 1, 2005 and after December 1, 2004, NYLIM agreed to voluntarily reimburse
the expenses of the Fund so that the total operating expenses would not exceed
on an annualized basis 1.95% of the average daily net assets of the Class A
shares, and such that there would be an equivalent reduction for the other
classes of shares. For the year ended October 31, 2005, the Manager earned fees
from the Fund in the amount of $2,301,353 and waived its fee and/or reimbursed
expenses in the amount of $39,296.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager pays the Subadvisor a monthly fee of 0.60% of the Fund's
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, 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
22 MainStay International Equity Fund
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 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 $462,015 for the year
ended October 31, 2005. 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 $5,705, $63,443 and $1,830, respectively, for the year ended October
31, 2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $820,548.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(F) CAPITAL. At October 31, 2005, New York Life held shares of Class A with a
net value of $11,218,391. This represents 12.6% of Class A shares net assets and
3.4% of the Funds total net assets at period end.
(G) OTHER. Pursuant to the Management Agreement, 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
$7,051 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $52,237 for the year ended
October 31, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, The Bank of New York acted as custodian for the Fund.
NOTE 5--FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows.
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED TOTAL
ORDINARY CAPITAL UNREALIZED ACCUMULATED
INCOME GAINS APPRECIATION GAIN
$3,408,093... $13,117,645 $29,095,364 $45,621,102
-----------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale loss deferrals and the tax treatment of foreign
currency forward contracts.
www.MAINSTAYfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Fund utilized $980,301 of capital loss carryforwards during the year ended
October 31, 2005.
The tax character of distributions paid during the year ended October 31, 2005
and 2004 shown in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2005 2004
Distributions paid from:
Ordinary Income $439,742 $991,988
- ----------------------------------------------------------
</Table>
NOTE 6--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $221,121 and $118,546, respectively.
NOTE 7--PORTFOLIO SECURITIES LOANED AND FOREIGN CURRENCY FORWARD CONTRACTS:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $33,391,502. The Fund received $35,376,200 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 at October 31, 2005:
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT UNREALIZED
SOLD PURCHASED DEPRECIATION
Foreign Currency Sale Contracts
- ---------------------------------------------------------------------------------------------------
Swiss Francs vs
Japanese Yen,
expiring 12/7/05 CF 13,391,344 Y 1,185,000,000 $ (199,690)
- ---------------------------------------------------------------------------------------------------
</Table>
Foreign Currency held at October 31, 2005:
<Table>
<Caption>
CURRENCY COST VALUE
Euro E 1,324,245 $ 1,592,007 $ 1,587,042
Japanese Yen Y 1,387,302,986 12,411,770 11,917,387
Pound Sterling L 4,522,549 8,031,617 8,004,911
Swedish Krona SEK 9,932,939 1,336,303 1,247,418
Swiss Francs CF 764,549 591,756 592,972
- -------------------------------------------------------------------------------------------------
$23,963,453 $23,349,730
- -------------------------------------------------------------------------------------------------
</Table>
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, 2005.
24 MainStay International Equity Fund
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
CLASS A CLASS B CLASS C CLASS I CLASS R1 CLASS R2
------- ------- ------- ------- -------- --------
YEAR ENDED
OCTOBER 31, 2005
Shares sold 2,408 1,753 441 7,718 254 58
- -------------------------------------------------------------------------------------------------------------------------
Shares issued in reinvestment of dividends 8 -- -- 24 --(a) --
- -------------------------------------------------------------------------------------------------------------------------
2,416 1,753 441 7,742 254 58
- -------------------------------------------------------------------------------------------------------------------------
Shares redeemed (1,848) (994) (127) (1,033) (8) (27)
- -------------------------------------------------------------------------------------------------------------------------
Net increase 568 759 314 6,709 246 31
- -------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
CLASS CLASS
CLASS A CLASS B CLASS C CLASS I* R1* R2*
------- ------- ------- -------- -------- --------
YEAR ENDED
OCTOBER 31, 2004
Shares sold 2,924 1,303 389 3,762 --(a) --(a)
- --------------------------------------------------------------------------------------------------------------------------
Shares issued in reinvestment of dividends 41 37 2 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
2,965 1,340 391 3,762 --(a) --(a)
- --------------------------------------------------------------------------------------------------------------------------
Shares redeemed (1,252) (834) (73) (496) -- --
- --------------------------------------------------------------------------------------------------------------------------
Net increase 1,713 506 318 3,266 --(a) --(a)
- --------------------------------------------------------------------------------------------------------------------------
</Table>
* Commencement of Operations on January 2, 2004.
(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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.9 million to nine MainStay funds. The amount paid to the MainStay
International Equity Fund was $772,000. NYLIM has also agreed to reimburse or
pay all expenses relating to the Board of Trustees' review of this matter and
has paid substantially all of the costs associated with the other regulatory
matters described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
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 International Equity Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2005, and the related statement of operations for the year then ended, and the
statements of changes in net assets and financial highlights for each of the
years in the two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005,
the results of its operations for the year then ended, and the changes in its
net assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
26 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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
www.MAINSTAYfunds.com 27
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
28 MainStay International Equity Fund
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 29
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's top quartile performance over
longer time periods when compared with funds concluded by Trustees to be peers
of the Fund and its shorter term mid-range performance compared with those
funds.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund, with the expectation that the Manager intended, over time, to
implement measures designed to reduce the Trust's transfer agency fees. The
Trustees considered certain benefits expected for, and risks borne by, the
Manager and its affiliates, including benefits from soft dollar arrangements.
The Trustees considered the services provided to the Fund by affiliates of the
Manager, NYLIFE Distributors and NYLIM Service, under other agreements, and the
benefits to the Manager and its affiliates from those relationships. The
information provided to the Trustees indicated that the profitability to the
Manager and its affiliates arising directly from those other agreements was not
excessive. The Trustees acknowledged certain benefits to the reputation of the
Manager and its affiliates, as well to that of the Trust, from their association
with each other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distributing shares
of various series of the Trust. They noted the
30 MainStay International Equity Fund
Manager's willingness to implement contractual breakpoints, and that the
contractual breakpoints in place for the management fee were intended to provide
that the Fund's shareholders would share in benefits from economies of scale
arising from the growth of Fund assets. The Trustees acknowledged that the Fund
had not yet reached the asset level at which breakpoints would reduce the
contractual management fee to which the Fund is subject. Acknowledging the
difficulty of forecasting economies of scale, the Trustees generally expressed
an intention to monitor the Manager's profitability and consider the application
of fee breakpoints or other appropriate measures as the Board may determine from
time to time. The Trustees reviewed historical information about changes in the
Fund's expense and asset levels over time, as well as information about certain
Fund expenses that would remain fixed even as Fund assets increase and,
therefore, provide the Fund with benefits from economies of scale as the Fund
grows. The Trustees noted that, to the extent the Fund's gross expenses
currently are higher than its net expenses, economies of scale achieved through
an increase in the Fund's assets might not directly benefit the Fund through
lower net expenses. The Trustees considered various information about transfer
agency expenses, including information showing that transfer agency fees of a
significant number of series of the Trust (although not every such series or
with respect to every share class of each series) tended to be high, when
aggregated and expressed as a percentage of the assets of certain series,
compared to the mutual fund industry average according to certain studies
reviewed by the Board and, therefore, adversely affected gross expense ratios.
The Board received information about potential effects on the Manager were it to
subsidize certain portions of the Trust's transfer agency fees. The Trustees
noted that a significant number of shareholders of the Trust's series had small
amounts invested in the series, and have considered measures intended to
increase average shareholder account size and/or otherwise reduce the Trust's
transfer agency fees and expenses, including steps that the Manager has taken to
encourage shareholders to consolidate or close small accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated gross and net expense ratios, and various components of that expense
ratio, in comparison to other funds in comparison groupings prepared by outside
data providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
www.MAINSTAYfunds.com 31
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, 2005:
- -- the total amount of taxes paid to foreign countries was $812,961
- -- the total amount of income sourced from foreign countries was $7,701,914
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 2005 calendar year with form 1099-DIV, which will be mailed during January
2006.
The dividends paid by the Fund during the fiscal year ended October 31, 2005,
should be multiplied by 100% to arrive at the amount eligible for qualified
dividend income.
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 2005. 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, 2005.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
32 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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
www.MAINSTAYfunds.com 33
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[True Blank Page]
(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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A08017 (RECYCLE LOGO) MS475-05 MSIE11-12/05
10
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP GROWTH FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay Mid Cap Growth Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/s/ Christopher O. Blunt
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- --------------------------------------------------------------------------------
Investment and Performance Comparison 4
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 8
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 14
- --------------------------------------------------------------------------------
Notes to Financial Statements 20
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 24
- --------------------------------------------------------------------------------
Trustees and Officers 25
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 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 (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE SINCE
TOTAL RETURNS YEAR INCEPTION
- ------------------------------------------
With sales charges 18.51% 1.55%
Excluding sales charges 25.41 2.75
</Table>
<Table>
<Caption>
MAINSTAY MID CAP RUSSELL 2500 GROWTH S&P MIDCAP 400 RUSSELL MIDCAP
GROWTH FUND INDEX INDEX GROWTH INDEX
---------------- ------------------- -------------- --------------
1/2/01 9450.00 10000.00 10000.00 10000.00
7078.05 7780.64 8796.95 6944.78
5915.70 6174.69 8376.63 5721.51
7777.35 8938.36 10940.50 7969.87
8590.05 9486.81 12148.10 8668.54
10/31/05 10773.00 10798.50 14292.30 10047.50
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE SINCE
TOTAL RETURNS YEAR INCEPTION
- ------------------------------------------
With sales charges 19.49% 1.57%
Excluding sales charges 24.49 1.95
</Table>
<Table>
<Caption>
MAINSTAY MID CAP RUSSELL 2500 GROWTH S&P MIDCAP 400 RUSSELL MIDCAP
GROWTH FUND INDEX INDEX GROWTH INDEX
---------------- ------------------- -------------- --------------
1/2/01 10000.00 10000.00 10000.00 10000.00
7440.00 7780.64 8796.95 6944.78
6170.00 6174.69 8376.63 5721.51
8050.00 8938.36 10940.50 7969.87
8820.00 9486.81 12148.10 8668.54
10/31/05 10780.00 10798.50 14292.30 10047.50
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE SINCE
TOTAL RETURNS YEAR INCEPTION
- ------------------------------------------
With sales charges 23.60% 1.97%
Excluding sales charges 24.60 1.97
</Table>
<Table>
<Caption>
MAINSTAY MID CAP RUSSELL 2500 GROWTH S&P MIDCAP 400 RUSSELL MIDCAP
GROWTH FUND INDEX INDEX GROWTH INDEX
---------------- ------------------- -------------- --------------
1/2/01 10000.00 10000.00 10000.00 10000.00
7440.00 7780.64 8796.95 6944.78
6170.00 6174.69 8376.63 5721.51
8050.00 8938.36 10940.50 7969.87
8820.00 9486.81 12148.10 8668.54
10/31/05 10990.00 10798.50 14292.30 10047.50
</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 contractual and may be modified or terminated only with the
approval of the Board of Trustees. 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 through 3/28/05 performance of Class I shares (first
offered 3/29/05) includes the historical performance of Class A shares adjusted
to reflect the applicable sales charge (or CDSC) and fees and expenses for Class
I shares.
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Mid Cap Growth Fund
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE SINCE
TOTAL RETURNS YEAR INCEPTION
- ------------------------------------------
25.87% 3.03%
</Table>
<Table>
<Caption>
MAINSTAY MID CAP RUSSELL 2500 GROWTH S&P MIDCAP 400 RUSSELL MIDCAP
GROWTH FUND INDEX INDEX GROWTH INDEX
---------------- ------------------- -------------- --------------
1/2/01 10000.10 10000.00 10000.00 10000.00
7505.58 7780.64 8796.95 6944.78
6288.73 6174.69 8376.63 5721.51
8288.45 8938.36 10940.50 7969.87
9177.53 9486.81 12148.10 8668.54
10/31/05 11551.80 10798.50 14292.30 10047.50
</Table>
<Table>
<Caption>
ONE SINCE
BENCHMARK PERFORMANCE YEAR INCEPTION
Russell Midcap(R) Growth Index(1) 15.91% 0.10%
Russell 2500(R) Growth Index(2) 13.83 1.60
S&P MidCap 400(R) Index(3) 17.65 7.69
Average Lipper mid-cap growth
fund(4) 14.07 -1.68
</Table>
1. The Russell Midcap(R) Growth Index is an unmanaged index that measures the
performance of those Russell Midcap(R) companies with higher price-to-book
ratios and higher forecasted growth values. The Russell Midcap(R) Index is an
un-managed 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 companies based on total market
cap-italization. Results assume reinvestment of all income and capital gains.
The Russell Midcap(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 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
un-managed index that measures the performance of the 2,500 smallest
companies in the Russell 3000(R) Index, which, in turn, is an unmanaged index
that measures the performance of the 3,000 largest U.S. companies based on
total market capitalization. Results assume reinvestment of all income and
capital gains. An investment cannot be made directly into an index.
3. 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.
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 PREVIOUS PAGE ARE AN INTEGRAL PART OF THE
TABLES AND 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 GROWTH FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% RETURN EXPENSES
ACCOUNT RETURNS AND PAID AND ACTUAL PAID
VALUE EXPENSES) DURING EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD 10/31/05 PERIOD
CLASS A SHARES(1) $1,000.00 $1,148.10 $ 8.12 $1,017.50 $ 7.63
- -------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES(1) $1,000.00 $1,143.15 $12.15 $1,013.75 $11.42
- -------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES(1) $1,000.00 $1,145.45 $12.17 $1,013.75 $11.42
- -------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES(1) $1,000.00 $1,149.60 $ 5.96 $1,019.50 $ 5.60
- -------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.50% for Class A and 2.25% for Class B and Class C and 1.10% for Class I)
multiplied by the average account value over the period, divided by 365,
multiplied by 184 (to reflect the one-half year period).
6 MainStay Mid Cap Growth Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
SHORT-TERM INVESTMENTS
(COLLATERAL FROM SECURITIES LIABILITIES IN EXCESS OF CASH AND
COMMON STOCKS LENDING IS 17.5%) OTHER ASSETS
- ------------- --------------------------- ---------------------------------
98.1 19.00 (17.10)
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Arch Coal, Inc.
2. Peabody Energy Corp.
3. PacifiCare Health Systems, Inc.
4. Coventry Health Care, Inc.
5. National-Oilwell Varco, Inc.
6. Tesoro Corp.
7. WellChoice, Inc.
8. D.R. Horton, Inc.
9. Chico's FAS, Inc.
10. Newfield Exploration Co.
</Table>
www.MAINSTAYfunds.com 7
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 normally invests at least 80% of its assets in companies with market
capitalizations that, at the time of investment, are similar to the market
capitalizations of companies in the Russell Midcap(R) Growth Index(1) and
invests primarily in U.S. common stocks and securities related to U.S. common
stocks. The Fund seeks to participate primarily in the expanding markets of
technology, health care, communications, and other dynamic 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, as well as 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 its peer group, or if the stock no longer appears likely to
help the Fund meet its investment objective.
WHAT MAJOR FACTORS AND RISKS INFLUENCED THE STOCK MARKET DURING THE 12 MONTHS
ENDED OCTOBER 31, 2005?
Some of the most significant factors included Federal Reserve interest-rate
hikes, high energy prices, rising inflation, and an apparent slowdown in the
rate of corporate-earnings growth and economic advancement. The potential impact
of hurricanes Katrina and Rita on the overall economy also weighed heavily on
investor sentiment.
WHAT FACTORS HAD THE GREATEST IMPACT ON THE FUND'S RELATIVE PERFORMANCE?
During the reporting period, the Fund's strong performance relative to its peers
and the Russell Midcap(R) Growth Index resulted primarily from effective
individual security selection in the consumer discretionary, energy, health
care, and materials sectors. The Fund's overweighted position in the energy
sector also contributed positively to the Fund's relative results. On the other
hand, adverse stock selection in the financials sector detracted from the Fund's
performance.
WHAT DECISIONS GUIDED THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
The most significant positive decision we made during the reporting period was
to overweight the Fund's exposure to the consumer discretionary and energy
sectors. Our decision to maintain the Fund's underweighted position in the
information technology sector during the reporting period also proved
beneficial.
WHICH STOCKS WERE STRONG POSITIVE CONTRIBUTORS TO THE FUND'S PERFORMANCE DURING
THE REPORTING PERIOD?
Peabody Energy and Arch Coal are leading coal producers. Both companies
benefited from robust earnings growth, healthy worldwide demand for coal, and
sharply higher coal prices.
PacifiCare Health Systems and Coventry Health Care are managed-care companies
that benefited from solid enrollment trends, premium increases, and stringent
containment of medical costs. Shares of PacifiCare Health Systems also benefited
from a takeover offer at a substantial premium by UnitedHealth Group.
Chico's FAS is a specialty retailer of exclusively designed, private-label
casual and formal women's apparel. The company's sales and earnings performance
was driven by strong merchandising and marketing strategies and by management's
solid execution of the company's business plan.
KB HOME is one of the nation's leading homebuilders. During the reporting
period, the company's positive financial results were driven by market share
gains, low interest rates, and a residential housing market that remained
relatively healthy.
Mid-capitalization companies are generally less established and their stocks may
be more volatile and less liquid than the securities of larger companies. The
Fund may experience a portfolio turnover rate of over 100% and may generate
short-term capital gains, which are taxable.
1. See footnote on page 5 for information on the Russell Midcap(R) Growth Index.
8 MainStay Mid Cap Growth Fund
WHICH STOCKS TOOK THE GREATEST TOLL ON THE FUND'S PERFORMANCE?
First Marblehead is a Boston-based provider of student-loan services. The
company saw its stock price decline sharply after Bank of America, a key client,
rejected the automatic renewal of its contract with First Marblehead for
direct-to-consumer private student loans.
Claire's Stores is a leading international costume-jewelry retailer that
suffered when the company strayed from its core women's accessory business into
catalog sales. Overall corporate results were also hurt by the company's
purchase of the Mr. Rags chain, which caters primarily to teenage boys.
MannKind is a biopharmaceutical company focused on the development and
commercialization of therapeutic products for diabetes, cancer, and inflammatory
and autoimmune diseases. The company's stock price declined on concerns about
additional spending requirements for the development of the company's inhalable
insulin product for diabetics.
Acxiom is a global information-management solutions company that suffered when
revenue growth came under pressure on several fronts. The company saw declining
volume in Europe, customer consolidations, ongoing competition from IBM, and
increasing integration of enterprise software.
Pacific Sunwear of California is a specialty retailer of private-label casual
apparel for young men and women. The company's stock declined following reports
of weaker-than-expected comparable-store sales growth.
Maverick Tube, which manufactures and markets steel tubular products for the oil
services industry, saw its share price decline on competitive concerns.
Specifically, investors worried that pricing pressure from an increase in carbon
grade tubular imports might make it difficult for Maverick Tube to meet its
revenue and earnings goals.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
Yes. In the health care sector, we added Omnicare, Health Net, Health Management
Associates, Invitrogen, and WellChoice to the Fund. Omnicare provides
professional pharmacy and data management services to skilled nursing, assisted
living, and other institutional health care providers. The company's results are
being bolstered by timely acquisitions. Health Net and WellChoice are
managed-care companies that have benefited from strong enrollment and industry
pricing trends. Health Management Associates is a Naples-based hospital-
management company, which stands to benefit from favorable demographic trends in
Florida. Invitrogen is a leading provider of research products and services to
academic, government, biotechnology, and biopharmaceutical clients. The company
is enjoying double-digit bottom-line growth because of robust demand for its
products and services.
In the energy sector, we added Tesoro, Atwood Oceanics, and Massey Energy.
Tesoro is a leading refiner and marketer of petroleum products whose sales and
earnings are benefiting from strong fundamentals in the energy industry. Atwood
Oceanics is an oil and natural gas contract driller. Massey Energy is a
well-positioned coal producer.
In the consumer discretionary sector, we added American Eagle Outfitters and Las
Vegas Sands to the Fund. American Eagle is a mall-based specialty retailer of
men's and women's casual apparel, footwear, and accessories. The company has
enjoyed healthy same-store sales trends nationwide. Las Vegas Sands has
benefited from the growing popularity of Las Vegas as a vacation destination.
WHICH STOCKS DID THE FUND SELL DURING THE REPORTING PERIOD?
We sold the Fund's positions in First Marblehead, Pacific Sunwear of California,
Acxiom, Maverick Tube, and Claire's Stores, all of which detracted from the
Fund's performance. During the reporting period, we also eliminated the Fund's
position in St. Jude Medical, a provider of implantable medical devices, because
the company's shares grew beyond the Fund's capitalization parameters. We sold
the Fund's position in credit-card company First Providian after an offer from
Washington Mutual at a substantial premium caused a surge in First Providian's
share price. We sold Doral Financial and Patterson Companies because of rapidly
deteriorating business fundamentals.
HOW DID THE FUND'S WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
The Fund increased its exposure to the energy sector during the reporting
period. Over the same period, we increased the Fund's allocation to the
materials sector. During the reporting period, the Fund decreased its weightings
in the consumer discretionary, health care, and information technology sectors.
www.MAINSTAYfunds.com 9
HOW DO THE FUND'S WEIGHTINGS COMPARE WITH THOSE OF THE RUSSELL MIDCAP(R) GROWTH
INDEX?
As of October 31, 2005, the Fund was overweighted relative to the Russell
Midcap(R) Growth Index in the consumer discretionary, energy, financials, health
care, and materials sectors. At the same time, the Fund was underweighted
relative to the Index in the industrials and information technology sectors. At
the end of the reporting period, the Fund had no holdings in the consumer
staples, telecommunications services, or utilities sectors.
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 Mid Cap Growth Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (98.1%)+
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE (2.5%)
Alliant Techsystems, Inc. (a) 26,150 $ 1,836,253
L-3 Communications Holdings, Inc. 17,900 1,392,978
-------------
3,229,231
-------------
AUTOMOBILES (0.6%)
Winnebago Industries, Inc. (b) 25,300 741,796
-------------
BIOTECHNOLOGY (1.9%)
Invitrogen Corp. (a)(b) 22,400 1,424,416
MannKind Corp. (a)(b) 93,400 1,056,354
-------------
2,480,770
-------------
BUILDING PRODUCTS (1.4%)
Lennox International, Inc. 14,700 409,983
Simpson Manufacturing Co., Inc. 34,100 1,345,586
-------------
1,755,569
-------------
CAPITAL MARKETS (1.3%)
Affiliated Managers Group, Inc. (a)(b) 22,200 1,703,850
-------------
CHEMICALS (1.3%)
Scotts Miracle-Gro Co. (The) Class A 19,600 1,720,684
-------------
COMMERCIAL BANKS (1.6%)
UCBH Holdings, Inc. 51,500 896,100
Westcorp 19,300 1,216,093
-------------
2,112,193
-------------
COMMUNICATIONS EQUIPMENT (0.4%)
Avocent Corp. (a) 17,400 533,484
-------------
COMPUTERS & PERIPHERALS (0.9%)
QLogic Corp. (a) 40,200 1,212,432
-------------
CONSTRUCTION & ENGINEERING (1.2%)
Fluor Corp. (b) 23,800 1,513,680
-------------
CONSTRUCTION MATERIALS (1.7%)
Eagle Materials, Inc. (b) 20,929 2,228,730
-------------
</Table>
<Table>
<Caption>
SHARES VALUE
CONSUMER FINANCE (1.0%)
Capital One Financial Corp. (b) 17,000 $ 1,297,950
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (1.1%)
Amphenol Corp. Class A 14,200 567,574
CDW Corp. 14,000 788,900
Symbol Technologies, Inc. 747 6,200
-------------
1,362,674
-------------
ENERGY EQUIPMENT & SERVICES (4.7%)
Atwood Oceanics, Inc. (a) 22,400 1,577,408
ENSCO International, Inc. 43,400 1,978,606
V National-Oilwell Varco, Inc. (a) 41,400 2,586,258
-------------
6,142,272
-------------
HEALTH CARE EQUIPMENT & SUPPLIES (5.4%)
Cooper Cos., Inc. (The) 22,900 1,576,436
Cytyc Corp. (a)(b) 58,000 1,470,300
Fisher Scientific International, Inc. (a) 17,600 994,400
Hospira, Inc. (a) 32,000 1,275,200
Varian Medical Systems, Inc. (a) 36,000 1,640,160
-------------
6,956,496
-------------
HEALTH CARE PROVIDERS & SERVICES (16.5%)
Caremark Rx, Inc. (a) 30,500 1,598,200
V Coventry Health Care, Inc. (a) 53,850 2,907,361
Health Management
Associates, Inc. Class A 34,600 740,786
Health Net, Inc. (a) 37,300 1,747,132
Henry Schein, Inc. (a) 33,400 1,323,976
Omnicare, Inc. 43,000 2,326,300
V PacifiCare Health Systems, Inc. (a) 40,400 3,327,343
Pharmaceutical Product Development, Inc. 25,200 1,448,244
Quest Diagnostics, Inc. 26,200 1,223,802
Sierra Health Services, Inc. (a) 29,600 2,220,000
V WellChoice, Inc. (a) 33,200 2,511,580
-------------
21,374,724
-------------
HOTELS, RESTAURANTS & LEISURE (2.9%)
Boyd Gaming Corp. 40,700 1,678,875
Las Vegas Sands Corp. (a)(b) 15,000 514,500
Penn National Gaming, Inc. (a) 53,300 1,575,015
-------------
3,768,390
-------------
HOUSEHOLD DURABLES (14.4%)
Centex Corp. (b) 26,900 1,731,015
V D.R. Horton, Inc. 79,766 2,448,019
Garmin Ltd. (b) 28,900 1,659,727
Harman International Industries, Inc. 13,600 1,358,096
</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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
HOUSEHOLD DURABLES (CONTINUED)
Hovnanian Enterprises, Inc. Class A (a) 32,200 $ 1,448,678
KB HOME (b) 36,900 2,411,415
Lennar Corp. Class A 28,000 1,556,240
M.D.C. Holdings, Inc. 25,208 1,729,269
Mohawk Industries, Inc. (a) 18,100 1,412,705
Ryland Group, Inc. 23,600 1,588,280
Stanley Works (The) 28,300 1,356,419
-------------
18,699,863
-------------
INSURANCE (1.2%)
LandAmerica Financial Group, Inc. 24,300 1,534,788
-------------
INTERNET SOFTWARE & SERVICES (1.2%)
VeriSign, Inc. (a) 64,400 1,521,772
-------------
IT SERVICES (0.8%)
Affiliated Computer Services, Inc. Class A (a) 18,200 984,802
-------------
MACHINERY (3.9%)
Oshkosh Truck Corp. 40,400 1,759,824
Terex Corp. (a)(b) 32,800 1,803,016
Toro Co. (The) 42,300 1,544,373
-------------
5,107,213
-------------
METALS & MINING (1.0%)
Commercial Metals Co. 42,300 1,344,717
-------------
OIL, GAS & CONSUMABLE FUELS (12.4%)
V Arch Coal, Inc. (b) 46,800 3,606,876
Bois d'Arc Energy, Inc. (a)(b) 63,800 922,548
Holly Corp. 22,900 1,319,040
Massey Energy Co. 48,100 1,927,367
V Newfield Exploration Co. (a) 53,500 2,425,155
V Peabody Energy Corp. 42,700 3,337,432
V Tesoro Corp. 41,300 2,525,495
-------------
16,063,913
-------------
PHARMACEUTICALS (1.3%)
Endo Pharmaceuticals Holdings, Inc. (a) 63,400 1,706,728
-------------
REAL ESTATE (1.5%)
St. Joe Co. (The) 30,500 2,011,475
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.6%)
Altera Corp. (a) 46,300 770,895
-------------
SOFTWARE (4.8%)
Activision, Inc. (a) 105,421 1,662,489
Amdocs Ltd. (a) 23,000 608,810
Autodesk, Inc. 45,400 2,048,902
FactSet Research Systems, Inc. 52,600 1,844,682
-------------
6,164,883
-------------
</Table>
<Table>
<Caption>
SHARES VALUE
SPECIALTY RETAIL (5.4%)
American Eagle Outfitters, Inc. 67,600 $ 1,591,980
V Chico's FAS, Inc. (a) 61,900 2,447,526
Michaels Stores, Inc. 45,300 1,498,524
Sherwin-Williams Co. (The) 35,700 1,519,035
-------------
7,057,065
-------------
TEXTILES, APPAREL & LUXURY GOODS (1.6%)
Coach, Inc. (a) 66,300 2,133,534
-------------
THRIFTS & MORTGAGE FINANCE (1.6%)
Fremont General Corp. (b) 19,300 418,617
IndyMac Bancorp, Inc. 44,900 1,676,117
-------------
2,094,734
-------------
Total Common Stocks
(Cost $94,248,522) 127,331,307
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (19.0%)
- ------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.7%)
Skandinaviska Enskilda Banken AB 4.082%, due
2/22/06 (c)(d) $ 838,443 838,443
-------------
Total Certificate of Deposit
(Cost $838,443) 838,443
-------------
COMMERCIAL PAPER (2.5%)
Compass Securitization 3.993%, due 11/22/05 (c) 598,888 598,888
Falcon Asset Securitization Corp. 4.026%, due
12/2/05 (c) 359,333 359,333
Silver Tower U.S. Funding 3.932%, due 11/15/05 (c) 355,551 355,551
UBS Finance Delaware LLC 4.00%, due 11/1/05 1,940,000 1,940,000
-------------
Total Commercial Paper (Cost $3,253,772) 3,253,772
-------------
<Caption>
SHARES
INVESTMENT COMPANY (4.2%)
BGI Institutional Money
Market Fund (c) 5,462,054 5,462,054
-------------
Total Investment Company (Cost $5,462,054) 5,462,054
-------------
</Table>
12 MainStay Mid Cap Growth 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)
- ------------------------------------------------------------------------------
TIME DEPOSITS (11.6%)
Bank of the West (The) 4.02%, due 12/8/05 (c) $2,275,775 $ 2,275,775
Barclays
3.92%, due 12/5/05 (c) 958,221 958,221
3.94%, due 11/28/05 (c) 1,077,999 1,077,999
Credit Suisse First Boston Corp. 3.74%, due
11/1/05 (c) 838,443 838,443
Deutsche Bank
3.95%, due 12/2/05 (c) 958,221 958,221
First Tennessee National Corp. 3.88%, due 11/14/05
(c) 958,221 958,221
Fortis Bank
4.00%, due 12/12/05 (c) 1,077,998 1,077,998
Halifax Bank of Scotland
3.75%, due 11/1/05 (c) 958,221 958,221
Keybank
4.00%, due 11/1/05 (c) 1,071,482 1,071,482
Marshall & Ilsley Bank
3.97%, due 12/29/05 (c) 958,221 958,221
Societe Generale
3.77%, due 11/1/05 (c) 2,036,220 2,036,220
UBS AG
4.01%, due 12/13/05 (c) 958,221 958,221
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (CONTINUED)
Wells Fargo & Co.
4.00%, due 11/25/05 (c) $ 958,221 $ 958,221
-------------
Total Time Deposits (Cost $15,085,464) 15,085,464
-------------
Total Short-Term Investments (Cost $24,639,733) 24,639,733
-------------
Total Investments (Cost $118,888,255) (e) 117.1% 151,971,040(f)
Liabilities in Excess of
Cash and Other Assets (17.1) (22,195,269)
---------- -------------
Net Assets 100.0% $ 129,775,771
========== =============
</Table>
<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) Floating rate. Rate shown is the rate in effect at
October 31, 2005.
(e) The cost for federal income tax purposes is
$119,100,118.
(f) At October 31, 2005 net unrealized appreciation was
$32,870,922, 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 $34,789,315 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $1,918,393.
</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, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $118,888,255) including
$22,009,555 market value of securities
loaned $151,971,040
Cash 9,223
Receivables:
Fund shares sold 1,048,666
Dividends and interest 44,847
Other assets 24,472
-------------
Total assets 153,098,248
-------------
LIABILITIES:
Securities lending collateral 22,699,733
Payables:
Investment securities purchased 188,910
Transfer agent 120,648
Fund shares redeemed 92,787
NYLIFE Distributors 73,038
Manager 65,101
Shareholder communication 41,046
Professional 24,923
Custodian 2,235
Accrued expenses 14,056
-------------
Total liabilities 23,322,477
-------------
Net assets $129,775,771
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 42,644
Class B 57,168
Class C 12,908
Class I 3,680
Additional paid-in capital 99,393,447
Accumulated net realized loss on investments (2,816,861)
Net unrealized appreciation on investments 33,082,785
-------------
Net assets $129,775,771
=============
CLASS A
Net assets applicable to outstanding shares $ 48,597,288
=============
Shares of beneficial interest outstanding 4,264,405
=============
Net asset value per share outstanding $ 11.40
Maximum sales charge (5.50% of offering price) 0.66
-------------
Maximum offering price per share outstanding $ 12.06
=============
CLASS B
Net assets applicable to outstanding shares $ 62,792,375
=============
Shares of beneficial interest outstanding 5,716,793
=============
Net asset value and offering price per share
outstanding $ 10.98
=============
CLASS C
Net assets applicable to outstanding shares $ 14,181,060
=============
Shares of beneficial interest outstanding 1,290,809
=============
Net asset value and offering price per share
outstanding $ 10.99
=============
CLASS I
Net assets applicable to outstanding shares $ 4,205,048
=============
Shares of beneficial interest outstanding 368,033
=============
Net asset value and offering price per share
outstanding $ 11.43
=============
</Table>
14 MainStay Mid Cap Growth 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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 557,985
Interest 64,393
Income from securities loaned--net 48,281
------------
Total income 670,659
------------
EXPENSES:
Manager 828,019
Transfer agent--Classes A, B and C 440,779
Transfer agent--Class I 1,989
Distribution--Class B 381,758
Distribution--Class C 53,606
Distribution/Service--Class A 128,899
Service--Class B 127,253
Service--Class C 17,869
Professional 63,049
Registration 52,390
Shareholder communication 52,159
Recordkeeping 37,707
Custodian 19,715
Trustees 10,496
Miscellaneous 21,334
------------
Total expenses before reimbursement 2,237,022
Expense reimbursement from Manager (144,183)
------------
Net expenses 2,092,839
------------
Net investment loss (1,422,180)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 7,771,775
Net change in unrealized appreciation on
investments 15,714,290
------------
Net realized and unrealized gain on investments 23,486,065
------------
Net increase in net assets resulting from
operations $22,063,885
============
</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 YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
INCREASE IN NET ASSETS:
Operations:
Net investment loss $ (1,422,180) $ (1,012,631)
Net realized gain on
investments 7,771,775 4,810,758
Net change in unrealized
appreciation on investments 15,714,290 2,792,206
---------------------------
Net increase in net assets
resulting from operations 22,063,885 6,590,333
---------------------------
Capital share transactions:
Net proceeds from sale of
shares:
Class A 29,925,427 17,554,380
Class B 25,818,352 16,592,995
Class C 11,154,690 1,999,365
Class I 4,306,166 --
---------------------------
71,204,635 36,146,740
Cost of shares redeemed:
Class A (38,926,734) (10,661,357)
Class B (8,421,676) (4,547,932)
Class C (1,660,218) (814,633)
Class I (7,898) --
---------------------------
(49,016,526) (16,023,922)
Increase in net assets
derived from capital share
transactions 22,188,109 20,122,818
---------------------------
Net increase in net assets 44,251,994 26,713,151
NET ASSETS:
Beginning of year 85,523,777 58,810,626
---------------------------
End of year $129,775,771 $ 85,523,777
===========================
</Table>
16 MainStay Mid Cap Growth 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 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
---------------------------------------------------------------------------------
JANUARY 1, JANUARY 2,
2003** 2001*
YEAR ENDED YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003 2002 2001
Net asset value at beginning
of period $ 9.09 $ 8.23 $ 5.86 $ 8.25 $ 10.00
----------- ----------- ----------- ------------ ------------
Net investment loss (a) (0.10) (0.09) (0.07) (0.09) (0.09)
Net realized and unrealized
gain (loss) on investments 2.41 0.95 2.44 (2.30) (1.66)
----------- ----------- ----------- ------------ ------------
Total from investment
operations 2.31 0.86 2.37 (2.39) (1.75)
----------- ----------- ----------- ------------ ------------
Net asset value at end of
period $ 11.40 $ 9.09 $ 8.23 $ 5.86 $ 8.25
=========== =========== =========== ============ ============
Total investment return (b) 25.41% 10.45% 40.44%(c) (28.97%) (17.50%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (0.91%) (0.99%) (1.21%)+ (1.22%) (1.01%)
Net expenses 1.50% 1.50% 1.50% + 1.50% 1.50%
Expenses (before
reimbursement) 1.63% 1.69% 1.95% + 1.81% 1.87%
Portfolio turnover rate 44% 52% 42% 188% 127%
Net assets at end of period
(in 000's) $48,597 $46,234 $35,473 $18,523 $22,965
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------------
JANUARY 1, JANUARY 2,
2003** 2001*
YEAR ENDED YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003 2002 2001
Net asset value at beginning
of period $ 8.82 $ 8.05 $ 5.77 $ 8.18 $ 10.00
----------- ----------- ----------- ------------ ------------
Net investment loss (a) (0.17) (0.15) (0.11) (0.13) (0.14)
Net realized and unrealized
gain (loss) on investments 2.34 0.92 2.39 (2.28) (1.68)
----------- ----------- ----------- ------------ ------------
Total from investment
operations 2.17 0.77 2.28 (2.41) (1.82)
----------- ----------- ----------- ------------ ------------
Net asset value at end of
period $ 10.99 $ 8.82 $ 8.05 $ 5.77 $ 8.18
=========== =========== =========== ============ ============
Total investment return (b) 24.60% 9.57% 39.51%(c) (29.46%) (18.20%)
Ratios (to average net
assets)/Supplemental Data:
Net investment loss (1.66%) (1.74%) (1.96%)+ (1.97%) (1.76%)
Net expenses 2.25% 2.25% 2.25% + 2.25% 2.25%
Expenses (before
reimbursement) 2.38% 2.44% 2.70% + 2.56% 2.62%
Portfolio turnover rate 44% 52% 42% 188% 127%
Net assets at end of period
(in 000's) $14,181 $3,580 $2,148 $ 871 $ 258
</Table>
<Table>
* Commencement of operations.
** 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. Class I is not subject to sales
charges.
(c) Total return is not annualized.
</Table>
18 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.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
---------------------------------------------------------------------------------
JANUARY 1, JANUARY 2,
2003** 2001*
YEAR ENDED YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003 2002 2001
$ 8.82 $ 8.05 $ 5.77 $ 8.18 $10.00
----------- ----------- ----------- ------------ ------------
(0.17) (0.15) (0.11) (0.13) (0.14)
2.33 0.92 2.39 (2.28) (1.68)
----------- ----------- ----------- ------------ ------------
2.16 0.77 2.28 (2.41) (1.82)
----------- ----------- ----------- ------------ ------------
$ 10.98 $ 8.82 $ 8.05 $ 5.77 $ 8.18
=========== =========== =========== ============ ============
24.49% 9.57% 39.51%(c) (29.46%) (18.20%)
(1.66%) (1.74%) (1.96%)+ (1.97%) (1.76%)
2.25% 2.25% 2.25% + 2.25% 2.25%
2.38% 2.44% 2.70% + 2.56% 2.62%
44% 52% 42% 188% 127%
$62,792 $35,710 $21,189 $7,899 $5,299
</Table>
<Table>
<Caption>
CLASS I
- ---------------
MARCH 29,
2005*
THROUGH
OCTOBER 31,
2005
$10.45
-----------
(0.03)
1.01
-----------
0.98
-----------
$11.43
===========
9.38%(c)
(0.51%)+
1.10% +
1.23% +
44%
$4,205
</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 nineteen 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 four 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. Distribution of Class I shares commenced on
March 29, 2005. 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 investment objective is to seek long-term growth of capital.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America 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 normally taken from the principal 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 in good faith by 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 principal
market is temporarily closed at a time when under normal conditions it would be
open. The Fund did not hold securities at October 31, 2005, 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 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 accounting principles generally accepted in
the United States of America. 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.
20 MainStay Mid Cap Growth Fund
The following table discloses the current year reclassifications between net
investment loss and additional paid-in-capital arising from permanent
differences; net assets at October 31, 2005, are not affected.
<Table>
<Caption>
ADDITIONAL PAID-IN
NET INVESTMENT LOSS CAPITAL
$1,422,180 $(1,422,180)
- ---------------------------------------------------
</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 transfer agent expenses and 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.
(H) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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 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 percentage of the Fund's
average daily net assets as follows: 0.75% on assets up to $500 million and
0.70% on assets in excess of $500 million. Effective August 1, 2005, the Manager
has entered into a written expense limitation agreement, under which the Manager
has agreed to reimburse the expenses of the Fund so that the total operating
expenses (excluding taxes, interest, litigation, extraordinary expenses, and
brokerage and other transaction expenses relating to the purchase or sale of
portfolio investments) do not exceed, on an annualized basis, 1.50% of the
average daily net assets of the Class A shares. An equivalent reimbursement, in
an equal amount of basis points, will be applied to the other share classes. The
Manager, within three years of incurring such expenses, may recoup the amount of
any management fee waiver or expense reimbursement from the Fund pursuant to
this agreement if such recoupment does not cause the Fund to exceed the expense
limitations. At October 31, 2005, the Fund had $64,788 of recoupment available.
This amount is available until October 31, 2008. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. Prior to
August 1, 2005, the Manager had voluntarily agreed to reimburse the expenses of
the Fund so that total operating expenses would not exceed, on an annualized
basis, 1.50%, of the average daily net assets of the Class A shares, and such
that there would be an equivalent reduction for the other classes of shares. For
the year ended October 31, 2005, the Manager earned fees from the Fund in the
amount of $828,019 and waived its fees and/or reimbursed expenses in the amount
of $144,183.
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
0.375%
www.MAINSTAYfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 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 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 $74,749 for the year ended
October 31, 2005. 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 $5,797, $58,470 and $2,789, respectively, for the year ended October
31, 2005.
(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 incurred by the Fund, for the year ended
October 31, 2005, amounted to $442,768.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(F) OTHER. Pursuant to the Management Agreement, 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
$3,024 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $37,707 for the year ended
October 31, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, The Bank of New York acted as custodian for the Fund.
NOTE 5--FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED TOTAL
CAPITAL AND UNREALIZED ACCUMULATED
OTHER LOSSES APPRECIATION LOSS
$(2,604,998) $32,870,922 $30,265,924
- ----------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale loss deferrals.
At October 31, 2005, for federal income tax purposes, capital loss carryforwards
of $2,604,998 were available as shown in the table below, to the extent provided
by the regulations to offset future realized gains of the Fund
22 MainStay Mid Cap Growth 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 $2,605
- ---------------------------------------------------
</Table>
The Fund utilized $7,836,185 of capital loss carryforwards during the year ended
October 31, 2005.
NOTE 6--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $65,773 and $47,319, respectively.
NOTE 7--PORTFOLIO SECURITIES LOANED:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $22,009,555. The Fund received $22,699,733 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, 2005.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C CLASS I*
Shares sold 2,745 2,475 1,044 369
- --------------------------------------------------------------------------------
Shares redeemed (3,570) (806) (159) (1)
- --------------------------------------------------------------------------------
Net increase (decrease) (825) 1,669 885 368
- --------------------------------------------------------------------------------
</Table>
<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>
* Commenced operations on March 29, 2005.
</Table>
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review in December 2005, NYLIM made payments totaling
$5.9 million to nine MainStay funds. No payment was made with respect to the
MainStay Mid Cap Growth Fund. NYLIM has also agreed to reimburse or pay all
expenses relating to the Board of Trustees' review of this matter and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
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 Mid Cap Growth Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2005, and
the related statement of operations for the year then ended, and the statements
of changes in net assets and financial highlights for each of the years in the
two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the
results of its operations for the year then ended, and the changes in its net
assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
24 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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
www.MAINSTAYfunds.com 25
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
26 MainStay Mid Cap Growth Fund
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 27
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's top decile performance over
recent time periods and its top quartile performance since inception when
compared with funds concluded by Trustees to be peers of the Fund.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund, with the expectation that the Manager intended, over time, to
implement measures designed to reduce the Trust's transfer agency fees. The
Trustees considered certain benefits expected for, and risks borne by, the
Manager and its affiliates, including benefits from soft dollar arrangements.
The Trustees considered the services provided to the Fund by affiliates of the
Manager, NYLIFE Distributors and NYLIM Service, under other agreements, and the
benefits to the Manager and its affiliates from those relationships. The
information provided to the Trustees indicated that the profitability to the
Manager and its affiliates arising directly from those other agreements was not
excessive. The Trustees acknowledged certain benefits to the reputation of the
Manager and its affiliates, as well to that of the Trust, from their association
with each other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distributing shares
of various series of the Trust. They noted the Manager's willingness to
implement contractual
28 MainStay Mid Cap Growth Fund
breakpoints, and that the contractual breakpoints in place for the management
fee were intended to provide that the Fund's shareholders would share in
benefits from economies of scale arising from the growth of Fund assets. The
Trustees acknowledged that the Fund had not yet reached the asset level at which
breakpoints would reduce the contractual management fee to which the Fund is
subject. Acknowledging the difficulty of forecasting economies of scale, the
Trustees generally expressed an intention to monitor the Manager's profitability
and consider the application of fee breakpoints or other appropriate measures as
the Board may determine from time to time. The Trustees reviewed historical
information about changes in the Fund's expense and asset levels over time, as
well as information about certain Fund expenses that would remain fixed even as
Fund assets increase and, therefore, provide the Fund with benefits from
economies of scale as the Fund grows. The Trustees noted that, to the extent the
Fund's gross expenses currently are higher than its net expenses, economies of
scale achieved through an increase in the Fund's assets might not directly
benefit the Fund through lower net expenses. The Trustees considered various
information about transfer agency expenses, including information showing that
transfer agency fees of the Fund were among the highest of The MainStay Funds,
and that transfer agency fees of a significant number of series of the Trust
(although not every such series or with respect to every share class of each
series) tended to be high, when aggregated and expressed as a percentage of the
assets of certain series, compared to the mutual fund industry average according
to certain studies reviewed by the Board and, therefore, adversely affected
gross expense ratios. The Board received information about potential effects on
the Manager were it to subsidize certain portions of the Trust's transfer agency
fees. The Trustees noted that a significant number of shareholders of the
Trust's series had small amounts invested in the series, and have considered
measures intended to increase average shareholder account size and/or otherwise
reduce the Trust's transfer agency fees and expenses, including steps that the
Manager has taken to encourage shareholders to consolidate or close small
accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated expense ratios, and various components of that expense ratio, in
comparison to other funds in comparison groupings prepared by outside data
providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
30 MainStay Mid Cap Growth 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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
www.MAINSTAYfunds.com 31
(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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A08036 (RECYCLE LOGO) MS475-05
MSMG11-12/05
11
(MAINSTAY LOGO)
MAINSTAY
MONEY MARKET FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay Money Market Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/s/ Christopher O. Blunt
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- --------------------------------------------------------------------------------
Investment and Performance Comparison 4
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 7
- --------------------------------------------------------------------------------
Portfolio of Investments 8
- --------------------------------------------------------------------------------
Financial Statements 11
- --------------------------------------------------------------------------------
Notes to Financial Statements 16
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 20
- --------------------------------------------------------------------------------
Trustees and Officers 21
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 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 (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
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.
CLASS A SHARES(1)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------
2.20% 1.82% 3.43%
7-DAY CURRENT YIELD: 3.16%
</Table>
<Table>
</Table>
CLASS B SHARES(1)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------
2.20% 1.82% 3.43%
7-DAY CURRENT YIELD: 3.16%
</Table>
<Table>
</Table>
CLASS C SHARES(1)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------
2.20% 1.82% 3.43%
7-DAY CURRENT YIELD: 3.16%
</Table>
<Table>
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Average Lipper money market fund(2) 2.02% 1.67% 3.35%
</Table>
Performance tables 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 contractual and may be modified or terminated only with the
approval of the Board of Trustees. 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. As of 10/31/05, MainStay Money Market Fund had an effective 7-day yield of
3.23% and a 7-day current yield of 3.16% 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 would have been 2.97% and the
current 7-day yield would have been 2.91%. The fee waivers and/or expense
limitations are contractual and may be modified or terminated only with the
approval of the Board of Trustees. The current yield is more reflective of
the Fund's earnings than the total return.
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 Money Market Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MONEY MARKET FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1,
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT ENDING ACCOUNT
VALUE (BASED VALUE (BASED
BEGINNING ON ACTUAL EXPENSES ON HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,013.70 $3.55 $1,021.50 $3.57
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,013.70 $3.55 $1,021.50 $3.57
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,013.70 $3.55 $1,021.50 $3.57
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(0.70% for Class A and for Class B and for Class C) multiplied by the average
account value over the period, divided by 365, multiplied by 184 (to reflect
the one-half year period).
www.MAINSTAYfunds.com 5
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
FOREIGN ASSET-
CORPORATE FEDERAL MEDIUM CERTIFICATES GOVERNMENT BACKED
COMMERCIAL PAPER BONDS AGENCIES TERM NOTES OF DEPOSIT BONDS SECURITY
- ---------------- --------- -------- ---------- ------------ ---------- --------
53.7 14.7 13.2 11.3 5 2.1 1.2
<Caption>
LIABILITIES IN
EXCESS OF
CASH AND
OTHER
COMMERCIAL PAPER ASSETS
- ---------------- --------------
53.7 (1.2)
</Table>
See Portfolio of Investments on page 8 for specific holdings within these
categories.
6 MainStay Money Market Fund
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 dollar-weighted average
maturity of the Fund's investment portfolio will not exceed 90 days. 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, which consists of short-term, unsecured loans to
corporations; corporate debt securities; loans to U.S. and foreign issuers and
securities of foreign branches of U.S. and foreign banks, such as negotiable
CDs, also known as Eurodollars; time deposits; and repurchase agreements. 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 AND INTEREST-RATE ENVIRONMENT DURING THE REPORTING PERIOD?
According to recent data, the U.S. economy grew at an average rate of 3.7%
during the four quarters ended September 30, 2005. Despite damage to the Gulf
Coast states from hurricanes Katrina and Rita in the late summer and early
autumn, the economy managed to grow at a seasonally adjusted annual rate of 4.3%
during the third calendar quarter of 2005, according to preliminary estimates
from the Bureau of Economic Analysis.
The Federal Open Market Committee met eight times during the 12 months ended
October 31, 2005, and raised the targeted federal funds rate 25 basis points at
each meeting. (A basis point is one-hundredth of a percentage point.) These
eight rate hikes brought the targeted federal funds rate to 3.75% at the end of
October 2005. From October 29, 2004, to October 31, 2005, three-month
Treasury-bill yields rose from 1.89% to 3.89%, while three-month LIBOR increased
from 2.17% to 4.26%.(1)
HOW DID THE FUND INVEST DURING THE REPORTING PERIOD?
The Fund performed well relative to its peers for the 12 months ended October
31, 2005. Details of the Fund's performance and appropriate disclosure can be
found on page 4 of this report.
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. As of October 31, 2005, the
average maturity of the Fund was approximately 54 days.
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. Source: Bloomberg--Historical yield curve data. The London Interbank Offered
Rate (LIBOR) is an interest rate at which banks can borrow funds, in
marketable size, from other banks in the London interbank market. It is
widely used as a base rate in bank, corporate, and government lending
agreements.
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, 2005
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (101.2%)+
- ------------------------------------------------------------------------------
ASSET-BACKED SECURITY (1.2%)
USAA Auto Owner Trust Series 2005-3, Class A1
4.17%, due 11/9/06 $ 5,500,000 $ 5,500,000
------------
CERTIFICATES OF DEPOSIT (5.0%)
Barclays Bank PLC
3.735%, due 11/14/05 5,000,000 5,000,027
Deutsche Bank AG
3.88%, due 12/21/05 5,000,000 4,999,848
4.175%, due 4/3/06 5,000,000 4,997,866
HSBC Bank USA
3.415%, due 11/21/05 3,450,000 3,449,990
Lloyds TSB Bank PLC
3.69%, due 12/13/05 5,000,000 4,999,688
------------
23,447,419
------------
COMMERCIAL PAPER (53.7%)
Abbey National North America
3.79%, due 11/21/05 5,000,000 4,989,472
ABN-Amro N.A. Finance, Inc.
3.75%, due 11/30/05 3,000,000 2,990,937
3.98%, due 11/30/05 1,800,000 1,794,229
Allianz Finance Corp.
3.69%, due 11/2/05 (a) 5,450,000 5,449,442
4.175%, due 2/3/06 (a) 5,000,000 4,946,073
American General Finance Corp.
3.57%, due 11/14/05 2,875,000 2,871,293
4.08%, due 1/23/06 5,000,000 4,952,967
ANZ Delaware, Inc. 3.40%, due 12/2/05 4,000,000 3,988,289
3.95%, due 12/27/05 3,225,000 3,205,184
Barclays U.S. Funding Corp.
3.81%, due 11/28/05 4,000,000 3,988,570
3.81%, due 12/14/05 4,550,000 4,529,294
BP Amoco Capital PLC
4.00%, due 1/20/06 6,925,000 6,863,444
Dexia Delaware LLC
3.79%, due 11/4/05 2,650,000 2,649,163
3.86%, due 12/23/05 5,000,000 4,972,122
4.14%, due 1/31/06 4,800,000 4,749,768
General Electric Capital Corp.
3.85%, due 12/5/05 5,800,000 5,778,911
Goldman Sachs Group, Inc.
3.29%, due 11/2/05 5,000,000 4,999,542
3.41%, due 11/22/05 5,000,000 4,990,054
</Table>
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
COMMERCIAL PAPER (CONTINUED)
HBOS Treasury Services
3.665%, due 11/9/05 $ 4,200,000 $ 4,196,579
3.70%, due 11/15/05 6,000,000 5,991,367
3.73%, due 11/14/05 3,400,000 3,395,420
ING Funding LLC
3.70%, due 11/17/05 3,700,000 3,693,916
4.01%, due 12/28/05 5,000,000 4,968,254
4.06%, due 1/18/06 2,800,000 2,775,369
KfW International Finance
3.83%, due 2/14/06 (a) 5,000,000 4,944,145
4.04%, due 1/5/06 5,000,000 4,963,528
Merck & Co., Inc.
4.00%, due 12/2/05 4,425,000 4,409,758
Minnesota Mining & Manufacturing Co.
3.62%, due 11/22/05 4,000,000 3,991,553
Morgan Stanley Dean Witter
3.79%, due 11/7/05 4,950,000 4,946,873
3.98%, due 12/19/05 2,000,000 1,989,387
National Australia Funding Delaware, Inc.
3.97%, due 11/8/05 4,100,000 4,096,835
Nationwide Building Society 3.70%, due 11/17/05
(a) 1,675,000 1,672,245
3.83%, due 12/6/05 (a) 5,000,000 4,981,382
4.11%, due 1/24/06 5,000,000 4,952,050
Nestle Capital Corp.
3.56%, due 11/3/05 (a) 6,975,000 6,973,621
4.02%, due 1/31/06 5,900,000 5,840,046
Private Export Funding Corp.
4.18%, due 3/23/06 5,000,000 4,917,561
4.25%, due 4/18/06 4,700,000 4,606,783
Prudential Funding LLC
3.95%, due 12/22/05 4,750,000 4,723,420
3.99%, due 12/12/05 5,000,000 4,977,279
Rabobank USA Financial Corp.
4.03%, due 12/30/05 3,100,000 3,079,525
Royal Bank of Canada
3.65%, due 11/3/05 5,500,000 5,498,885
4.015%, due 1/17/06 3,450,000 3,420,373
San Paolo IMI U.S. Financial Co.
3.71%, due 11/28/05 4,000,000 3,988,870
3.80%, due 11/23/05 4,475,000 4,464,608
Shell International Finance B.V.
3.95%, due 1/4/06 5,000,000 4,964,889
4.07%, due 1/17/06 4,000,000 3,965,179
Societe Generale North America
3.73%, due 11/25/05 5,000,000 4,987,567
4.00%, due 12/30/05 1,700,000 1,688,856
4.05%, due 1/27/06 5,200,000 5,149,105
+ 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)
- ------------------------------------------------------------------------------
COMMERCIAL PAPER (CONTINUED)
Svenska Handelsbanken, Inc.
3.90%, due 12/7/05 $ 5,000,000 $ 4,980,500
4.01%, due 1/11/06 5,000,000 4,960,457
Swiss Re Financial Products
3.50%, due 11/1/05 (a) 3,500,000 3,500,000
3.86%, due 2/1/06 (a) 5,000,000 4,950,678
Toyota Motor Credit Corp.
4.04%, due 1/17/06 3,550,000 3,519,324
UBS Finance Delaware LLC 3.64%, due 11/7/05 5,000,000 4,996,967
3.87%, due 12/8/05 5,000,000 4,980,113
Wal-Mart Stores, Inc.
3.88%, due 12/20/05 3,475,000 3,456,648
------------
253,268,669
------------
CORPORATE BONDS (14.7%)
Bank of America Corp.
7.125%, due 9/15/06 5,000,000 5,112,898
Bank One Corp.
6.50%, due 2/1/06 5,800,000 5,839,528
Citigroup, Inc.
3.935%, due 5/19/06 (b) 5,000,000 5,004,102
4.015%, due 3/20/06 (b) 4,500,000 4,502,920
Metropolitan Life Global Funding I
4.14%, due 10/27/06 (a)(b) 6,000,000 6,000,000
Pharmacia Corp.
5.75%, due 12/1/05 8,500,000 8,512,858
Royal Bank of Canada
4.035%, due 3/16/06 5,000,000 4,999,527
SLM Corp., Series A
4.07%, due 9/15/06 5,000,000 5,008,633
Unilever Capital Corp.
6.875%, due 11/1/05 5,000,000 5,000,000
Wachovia Corp.
4.95%, due 11/1/06 5,000,000 5,021,057
Wal-Mart Stores, Inc.
3.734%, due 3/16/06 (b) 5,000,000 4,998,086
Wells Fargo & Co.
3.861%, due 3/3/06 (b) 4,500,000 4,502,128
3.96%, due 9/15/06 (b) 5,000,000 5,005,715
------------
69,507,452
------------
FOREIGN GOVERNMENT BONDS (2.1%)
Quebec Province
5.50%, due 4/11/06 5,000,000 5,026,012
6.50%, due 1/17/06 5,000,000 5,028,597
------------
10,054,609
------------
</Table>
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
MEDIUM TERM NOTES (11.3%)
American Express Credit Corp.
3.96%, due 11/5/06 (b) $ 6,000,000 $ 6,000,000
4.137%, due 9/19/06 (b) 4,800,000 4,807,256
Bank One Corp.
Series C
3.90%, due 8/11/06 (b) 5,650,000 5,657,414
General Electric Capital Corp.
4.016%, due 9/18/06 (b) 5,000,000 5,007,356
HSBC Finance Corp.
4.266%, due 10/27/06 (b) 6,300,000 6,304,526
Merrill Lynch & Co., Inc.
4.086%, due 3/7/06 (b) 4,500,000 4,505,572
4.086%, due 9/18/06 (b) 5,000,000 5,009,931
Morgan Stanley Group, Inc.
4.25%, due 3/27/06 (b) 5,000,000 5,005,888
SLM Corp.
4.40%, due 1/25/06 (b) 6,000,000 6,003,180
Toyota Motor Credit Corp.
3.864%, due 6/12/06 (b) 5,000,000 5,001,333
------------
53,302,456
------------
FEDERAL AGENCIES (13.2%)
Federal Home Loan Banks (Discount Notes)
3.55%, due 11/4/05 2,800,000 2,799,172
3.58%, due 11/4/05 5,000,000 4,998,508
Federal Home Loan Mortgage
Corporation (Discount Notes)
3.29%, due 11/8/05 5,800,000 5,796,290
3.34%, due 11/22/05 2,500,000 2,495,129
3.43%, due 11/1/05 6,000,000 6,000,000
3.53%, due 11/10/05 4,000,000 3,996,470
3.58%, due 11/8/05 5,175,000 5,171,398
3.59%, due 11/15/05 5,000,000 4,993,019
3.60%, due 12/6/05 4,175,000 4,160,388
3.615%, due 12/12/05 4,800,000 4,780,238
Federal National Mortgage
Association (Discount Notes)
3.30%, due 11/2/05 4,900,000 4,899,551
3.54%, due 11/23/05 5,825,000 5,812,398
3.55%, due 11/16/05 5,700,000 5,691,568
3.62%, due 11/16/05 625,000 624,058
------------
62,218,187
------------
Total Short-Term Investments
(Amortized Cost $477,298,792) (c) 101.2% 477,298,792
Liabilities in Excess of Cash and Other Assets (1.2) (5,613,868)
----------- ------------
Net Assets 100.0% $471,684,924
=========== ============
</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, 2005 (CONTINUED)
<Table>
(a) May be sold to institutional investors only.
(b) Floating rate. Rate shown is the rate in effect at
October 31, 2005.
(c) The cost stated also represents the aggregate cost for
federal income tax purposes.
</Table>
The table below sets forth the diversification of the Money Market Fund
investments by industry.
<Table>
<Caption>
AMORTIZED
COST PERCENT+
INDUSTRY DIVERSIFICATION
Auto Finance $ 5,500,000 1.2%
Banks # 216,081,179 45.9
Diversified Financial Services 112,436,209 23.8
Federal Agencies 62,218,187 13.2
Food & Staple Retailing 13,454,734 2.9
Insurance 24,846,193 5.3
Manufacturing 3,991,553 0.8
Oil & Gas 15,793,512 3.3
Pharmaceuticals 12,922,616 2.7
Regional Government 10,054,609 2.1
------------ ----------
477,298,792 101.2
Liabilities in Excess of
Cash and Other Assets (5,613,868) (1.2)
------------ ----------
Net Assets $471,684,924 100.0%
============ ==========
</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, 2005
<Table>
ASSETS:
Investment in securities, at value
(amortized cost $477,298,792) $477,298,792
Cash 18,370
Receivables:
Fund shares sold 1,390,663
Interest 1,358,180
Other assets 55,273
-------------
Total assets 480,121,278
-------------
LIABILITIES:
Payables:
Investment securities purchased 4,946,073
Fund shares redeemed 2,678,732
Transfer agent 428,520
Manager 161,928
Shareholder communication 96,720
Professional 40,122
Custodian 4,705
Accrued expenses 23,417
Dividend payable 56,137
-------------
Total liabilities 8,436,354
-------------
Net assets $471,684,924
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 2,051,556
Class B 2,461,051
Class C 204,264
Additional paid-in capital 466,973,106
Accumulated net realized loss on investments (5,053)
-------------
Net assets $471,684,924
=============
CLASS A
Net assets applicable to outstanding shares $205,154,405
=============
Shares of beneficial interest outstanding 205,155,575
=============
Net asset value per share outstanding $ 1.00
=============
CLASS B
Net assets applicable to outstanding shares $246,104,167
=============
Shares of beneficial interest outstanding 246,105,123
=============
Net asset value and offering price per share
outstanding $ 1.00
=============
CLASS C
Net assets applicable to outstanding shares $ 20,426,352
=============
Shares of beneficial interest outstanding 20,426,379
=============
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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Interest $13,995,945
------------
EXPENSES:
Manager 2,328,595
Transfer agent 1,924,785
Shareholder communication 126,664
Professional 125,890
Registration 99,817
Recordkeeping 75,081
Custodian 38,340
Trustees 35,807
Portfolio pricing 3,971
Miscellaneous 10,939
------------
Total expenses before reimbursement 4,769,889
Expense reimbursement from Manager (1,379,735)
------------
Net expenses 3,390,154
------------
Net investment income 10,605,791
------------
REALIZED LOSS ON INVESTMENTS:
Net realized loss on investments (5,053)
------------
Net increase in net assets resulting
from operations $10,600,738
============
</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 YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 10,605,791 $ 2,997,216
Net realized gain (loss) on
investments (5,053) 1,567
-----------------------------
Net increase in net assets
resulting from operations 10,600,738 2,998,783
-----------------------------
Dividends and distributions to
shareholders:
From net investment income:
Class A (4,221,699) (1,068,534)
Class B (6,009,713) (1,761,806)
Class C (374,379) (166,876)
From net realized gain on
investments:
Class A (606) (3,186)
Class B (918) (6,353)
Class C (43) (182)
-----------------------------
Total dividends and distributions
to shareholders (10,607,358) (3,006,937)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 291,874,794 363,227,648
Class B 186,570,959 247,003,398
Class C 48,715,706 69,985,669
Net asset value of shares issued
to shareholders in reinvestment
of dividends and distributions:
Class A 4,012,463 1,007,768
Class B 5,339,159 1,629,596
Class C 325,068 141,425
-----------------------------
536,838,149 682,995,504
Cost of shares redeemed:
Class A (288,043,004) (340,901,067)
Class B (241,762,842) (306,879,438)
Class C (59,887,177) (55,811,227)
-----------------------------
(589,693,023) (703,591,732)
Decrease in net assets derived
from capital share
transactions (52,854,874) (20,596,228)
-----------------------------
Net decrease in net assets (52,861,494) (20,604,382)
NET ASSETS:
Beginning of year 524,546,418 545,150,800
-----------------------------
End of year $ 471,684,924 $ 524,546,418
=============================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
--------------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ----------- -------- -------- --------
Net investment income 0.02 0.01 0.00 (b) 0.01 0.04 0.06
Net realized and unrealized
gain on investments 0.00 (b) 0.00 (b) -- 0.00 (b) -- --
-------- -------- ----------- -------- -------- --------
Total from investment
operations 0.02 0.01 0.00 (b) 0.01 0.04 0.06
-------- -------- ----------- -------- -------- --------
Less dividends and
distributions:
From net investment income (0.02) (0.01) (0.00)(b) (0.01) (0.04) (0.06)
From net realized gain on
investments -- (0.00)(b) -- (0.00)(b) -- --
-------- -------- ----------- -------- -------- --------
Total dividends and
distributions (0.02) (0.01) (0.00)(b) (0.01) (0.04) (0.06)
-------- -------- ----------- -------- -------- --------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== =========== ======== ======== ========
Total investment return 2.20% 0.54% 0.44%(a) 1.22% 3.72% 5.87%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 2.21% 0.54% 0.53%+ 1.20% 3.59% 5.71%
Net expenses 0.70% 0.70% 0.70%+ 0.70% 0.70% 0.70%
Expenses (before
reimbursement) 0.99% 1.02% 1.01%+ 0.94% 0.90% 0.89%
Net assets at end of period
(in 000's) $205,154 $197,310 $173,978 $221,106 $223,807 $167,720
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ----------- ------- ------- -------
Net investment income 0.02 0.01 0.00 (b) 0.01 0.04 0.06
Net realized and unrealized
gain on investments 0.00 (b) 0.00 (b) -- 0.00 (b) -- --
------- ------- ----------- ------- ------- -------
Total from investment
operations 0.02 0.01 0.00 (b) 0.01 0.04 0.06
------- ------- ----------- ------- ------- -------
Less dividends and
distributions:
From net investment income (0.02) (0.01) (0.00)(b) (0.01) (0.04) (0.06)
From net realized gain on
investments -- (0.00)(b) -- (0.00)(b) -- --
------- ------- ----------- ------- ------- -------
Total dividends and
distributions (0.02) (0.01) (0.00)(b) (0.01) (0.04) (0.06)
------- ------- ----------- ------- ------- -------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= =========== ======= ======= =======
Total investment return 2.20% 0.54% 0.44%(a) 1.22% 3.72% 5.87%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 2.21% 0.54% 0.53%+ 1.20% 3.59% 5.71%
Net expenses 0.70% 0.70% 0.70%+ 0.70% 0.70% 0.70%
Expenses (before
reimbursement) 0.99% 1.02% 1.01%+ 0.94% 0.90% 0.89%
Net assets at end of period
(in 000's) $20,426 $31,273 $16,958 $11,207 $16,706 $ 9,364
</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>
CLASS B
---------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ----------- -------- -------- --------
0.02 0.01 0.00 (b) 0.01 0.04 0.06
0.00(b) 0.00 (b) -- 0.00 (b) -- --
-------- -------- ----------- -------- -------- --------
0.02 0.01 0.00 (b) 0.01 0.04 0.06
-------- -------- ----------- -------- -------- --------
(0.02) (0.01) (0.00)(b) (0.01) (0.04) (0.06)
-- (0.00)(b) -- (b) (0.00)(b) -- --
-------- -------- ----------- -------- -------- --------
(0.02) (0.01) (0.00) (0.01) (0.04) (0.06)
-------- -------- ----------- -------- -------- --------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== =========== ======== ======== ========
2.20% 0.54% 0.44%(a) 1.22% 3.72% 5.87%
2.21% 0.54% 0.53%+ 1.20% 3.59% 5.71%
0.70% 0.70% 0.70%+ 0.70% 0.70% 0.70%
0.99% 1.02% 1.01%+ 0.94% 0.90% 0.89%
$246,104 $295,963 $354,215 $429,488 $439,927 $408,275
</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 nineteen 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 distributions 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 credit worthiness 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 accounting
principles generally accepted in the United States of America 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 or excise tax provision is
required.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. Dividends are declared daily and paid monthly
and capital gain distributions, if any, annually. Income dividends and capital
gain distributions are determined in accordance with federal income tax
regulations, which may differ from generally accepted accounting principles.
(E) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily and discounts and premiums on securities purchased for the Fund
are accreted and amortized, respectively, on the straight line method.
Investment income and realized and unrealized gains and losses on investments
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 transfer agent expenses and 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.
(H) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred.
16 MainStay Money Market Fund
Based on experience, management is of the view that the risk of loss in
connection with these potential indemnification obligations is remote; however,
there can be no assurance that material liabilities related to such obligations
will not arise in the future that could adversely impact the 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 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 percentage of the Fund's
average daily net assets as follows: 0.50% on assets up to $300 million, 0.45%
on assets from $300 million to $700 million, 0.40% on assets from $700 million
to $1.0 billion and 0.35% on assets in excess of $1.0 billion. Effective August
1, 2005, the Manager has entered into a written expense limitation agreement,
under which the Manager has agreed to reimburse the expenses of the Fund so that
the total operating expenses (excluding taxes, interest, litigation,
extraordinary expenses, and brokerage and other transaction expenses relating to
the purchase or sale of portfolio investments) do not exceed, on an annualized
basis, 0.70% of the average daily net assets of the Class A shares. An
equivalent reimbursement, in an equal amount of basis points, will be applied to
the other share classes. The Manager, within three years of incurring such
expenses, may recoup the amount of any management fee waiver or expense
reimbursement from the Fund pursuant to this agreement if such recoupment does
not cause the Fund to exceed the expense limitations. At October 31, 2005, the
Fund had $232,330 of recoupment available. This amount is available until
October 31, 2008. This expense limitation may be modified or terminated only
with the approval of the Board of Trustees. Prior to August 1, 2005, the Manager
had agreed to voluntarily reimburse the expenses of the Fund so that total
annual fund operating expenses do not exceed on an annualized basis 0.70% of the
average daily net assets of each class of shares of the Fund. For the year ended
October 31, 2005, the Manager earned from the Fund $2,328,595, and waived its
fees and/or reimbursed expenses in the amount of $1,379,735.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager pays the Subadvisor a monthly fee at an annual rate of the
Fund's average daily net assets of 0.25% on assets 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 were 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, 2005, in the
amount of $1,340,992.
(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, 2005,
amounted to $1,924,785.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
www.MAINSTAYfunds.com 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(E) OTHER. Pursuant to the Management Agreement, 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
$12,749 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $75,081 for the year ended
October 31, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, State Street Bank and Trust Company acted as custodian for
the Fund.
NOTE 5--FEDERAL INCOME TAX:
At October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED OTHER TOTAL
ORDINARY NET REALIZED TEMPORARY ACCUMULATED
INCOME LOSS DIFFERENCES LOSS
$56,142 $ (5,053) $(56,142) $(5,053)
--------------------------------------------------------
</Table>
At October 31, 2005, for federal income tax purposes capital loss carryforwards
of $5,053 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)
2013 $5
- ------------------------------------------------
</Table>
Dividends to shareholders from net investment income and distributions from net
realized gains shown in the Statement of Changes in Net Assets represent tax
basis distributions of ordinary income.
NOTE 6--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C
Shares sold 291,875 186,571 48,715
- -----------------------------------------------------------------------
Shares issued in reinvestment of
dividend and distributions 4,013 5,339 325
- -----------------------------------------------------------------------
295,888 191,910 49,040
- -----------------------------------------------------------------------
Shares redeemed (288,043) (241,763) (59,887)
- -----------------------------------------------------------------------
Net increase (decrease) 7,845 (49,853) (10,847)
- -----------------------------------------------------------------------
</Table>
<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 dividend 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>
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to agreements with certain registered
representatives of broker-dealers relating to the level of trading by clients of
those registered representatives in shares of certain funds of the Trust. All
such arrangements were terminated by the fourth quarter of 2003. NYLIM and the
Trustees of the Trust have reviewed the possible dilutive effects that
transactions under those arrangements and certain other levels of trading by
fund shareholders over the period from 1999 to 2003 may have had on the funds.
As a result of this review, in December 2005, NYLIM made payments totaling $5.9
million to nine MainStay funds. No payment was made with respect to the MainStay
Money Market Fund. NYLIM has also agreed to reimburse or pay all expenses
relating to the Board of Trustees' review of this matter, and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
18 MainStay Money Market Fund
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
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 Money Market Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2005, and
the related statement of operations for the year then ended, and the statements
of changes in net assets and financial highlights for each of the years in the
two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the
results of its operations for the year then ended, and the changes in its net
assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
20 MainStay Money Market 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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
www.MAINSTAYfunds.com 21
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
22 MainStay Money Market Fund
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 23
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's mid-range performance over
various periods of time relative to funds concluded by Trustees to be peers of
the Fund.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund, with the expectation that the Manager intended, over time, to
implement measures designed to reduce the Trust's transfer agency fees, with the
expectation that the Manager intended, over time, to implement measures designed
to reduce the Trust's transfer agency fees. The Trustees considered certain
benefits expected for, and risks borne by, the Manager and its affiliates,
including benefits from soft dollar arrangements. The Trustees considered the
services provided to the Fund by affiliates of the Manager, NYLIFE Distributors
and NYLIM Service, under other agreements, and the benefits to the Manager and
its affiliates from those relationships. The information provided to the
Trustees indicated that the profitability to the Manager and its affiliates
arising directly from those other agreements was not excessive. The Trustees
acknowledged certain benefits to the reputation of the Manager and its
affiliates, as well to that of the Trust, from their association with each
other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distributing shares
of various series of the Trust. They noted the
24 MainStay Money Market Fund
Manager's willingness to implement contractual breakpoints, and that the
contractual breakpoints in place for the management fee were intended to provide
that the Fund's shareholders would share in benefits from economies of scale
arising from the growth of Fund assets. The Trustees noted that the Fund's
contractual management fee had been reduced in accordance with the terms of the
breakpoint schedule applicable to the Fund. Acknowledging the difficulty of
forecasting economies of scale, the Trustees generally expressed an intention to
monitor the Manager's profitability and consider the application of fee
breakpoints or other appropriate measures as the Board may determine from time
to time. The Trustees reviewed historical information about changes in the
Fund's expense and asset levels over time, as well as information about certain
Fund expenses that would remain fixed even as Fund assets increase and,
therefore, provide the Fund with benefits from economies of scale as the Fund
grows. The Trustees noted that, to the extent the Fund's gross expenses
currently are higher than its net expenses, economies of scale achieved through
an increase in the Fund's assets might not directly benefit the Fund through
lower net expenses. The Trustees considered various information about transfer
agency expenses, including information showing that transfer agency fees of the
Fund and a significant number of series of the Trust (although not every such
series or with respect to every share class of each series) tended to be high,
when aggregated and expressed as a percentage of the assets of certain series,
compared to the mutual fund industry average according to certain studies
reviewed by the Board and, therefore, adversely affected gross expense ratios.
The Board received information about potential effects on the Manager were it to
subsidize certain portions of the Trust's transfer agency fees. The Trustees
noted that a significant number of shareholders of the Trust's series had small
amounts invested in the series, and have considered measures intended to
increase average shareholder account size and/or otherwise reduce the Trust's
transfer agency fees and expenses, including steps that the Manager has taken to
encourage shareholders to consolidate or close small accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated gross and net expense ratios, and various components of that expense
ratio, in comparison to other funds in comparison groupings prepared by outside
data providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
26 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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
www.MAINSTAYfunds.com 27
(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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A08034 (RECYCLE SYMBOL) MS475-05 MSMM11-12/05
12
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TAX FREE BOND FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay Tax Free Bond Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/s/ Christopher O. Blunt
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- ----------------------------------------------------
Investment and Performance Comparison 4
- ----------------------------------------------------
Portfolio Management Discussion and Analysis 8
- ----------------------------------------------------
Portfolio of Investments 10
- ----------------------------------------------------
Financial Statements 15
- ----------------------------------------------------
Notes to Financial Statements 20
- ----------------------------------------------------
Report of Independent Registered Public
Accounting Firm 25
Trustees and Officers 26
- ----------------------------------------------------
Board Consideration and Approval of Management
and Subadvisory Agreements 29
- ----------------------------------------------------
Federal Income Tax Information 31
- ----------------------------------------------------
Proxy Voting Policies and Procedures 31
- ----------------------------------------------------
Shareholder Reports and Quarterly Portfolio
Disclosure 31
- ----------------------------------------------------
MainStay Funds 32
</Table>
www.MAINSTAYfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------------------------------------
With sales charges -2.81% 3.70% 3.96%
Excluding sales charges 1.77 4.66 4.44
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY TAX FREE BOND TAX FREE BOND LEHMAN BROTHERS
FUND COMPOSITE INDEX MUNICIPAL BOND INDEX
---------------------- --------------- --------------------
10/31/95 9550 10000 10000
10031 10570 10570
10868 11476 11468
11604 12424 12387
10852 12126 12168
11744 13220 13203
12954 14651 14590
13486 15533 15446
13841 16358 16236
14492 17360 17216
10/31/05 14749 17791 17652
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------------------------------------
With sales charges -3.47% 4.06% 4.19%
Excluding sales charges 1.41 4.40 4.19
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY TAX FREE BOND TAX FREE BOND LEHMAN BROTHERS
FUND COMPOSITE INDEX MUNICIPAL BOND INDEX
---------------------- --------------- --------------------
10/31/95 10000 10000 10000
10481 10570 10570
11334 11476 11468
12076 12424 12387
11267 12126 12168
12150 13220 13203
13370 14651 14590
13882 15533 15446
14212 16358 16236
14858 17360 17216
10/31/05 15068 17791 17652
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------------------------------------
With sales charges 0.44% 4.40% 4.19%
Excluding sales charges 1.41 4.40 4.19
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY TAX FREE BOND TAX FREE BOND LEHMAN BROTHERS
FUND COMPOSITE INDEX MUNICIPAL BOND INDEX
---------------------- --------------- --------------------
10/31/95 10000 10000 10000
10481 10570 10570
11334 11476 11468
12076 12424 12387
11267 12126 12168
12150 13220 13203
13370 14651 14590
13882 15533 15446
14212 16358 16236
14858 17360 17216
10/31/05 15068 17791 17652
</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%.
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 contractual and may be modified or terminated only with the
approval of the Board of Trustees. 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 THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Tax Free Bond Fund
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -----------------------------------------------------------------------------
Lehman Brothers(R) Municipal Bond Index(1) 2.54% 5.98% 5.85%
Tax Free Bond Composite Index(2) 2.48 6.12 5.93
Average Lipper general municipal debt fund(3) 2.07 5.16 4.92
</Table>
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. The Lehman
Brothers(R) Municipal 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. 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. Results assume that all income and capital gains are
reinvested in the index or indices that produce them. An investment cannot be
made directly into an index or a composite.
3. 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 PREVIOUS PAGE ARE AN INTEGRAL PART OF THE
TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.MAINSTAYfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY TAX FREE BOND FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT
VALUE
ENDING ACCOUNT (BASED ON
VALUE (BASED HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% RETURN EXPENSES
ACCOUNT RETURNS AND PAID AND ACTUAL PAID
VALUE EXPENSES) DURING EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,001.75 $4.49 $1,020.55 $4.53
- --------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,000.50 $5.75 $1,019.30 $5.80
- --------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,000.50 $5.75 $1,019.30 $5.80
- --------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(0.89% for Class A and 1.14% for Class B and Class C) multiplied by the
average account value over the period, divided by 365, multiplied by 184 (to
reflect the one-half year period).
6 MainStay Tax Free Bond Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(COMPOSITION PIE CHART)
<Table>
Long-Term Municipal Bonds 90.8
Cumulative Preferred Stock 3.6
Short-Term Investment 3.5
Purchased Call Option 0.0*
Cash and Other Assets Less Liabilities 2.1
</Table>
* Less than one tenth of a percent.
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Puerto Rico Public Buildings Authority Revenue
Guaranteed Government Facilities Series I 5.00%,
due 7/1/36
2. Charter Mac Equity Issuer Trust Series A-1
7.10%, due 6/30/09
3. New York, NY Series C 5.00%, due 8/1/26
4. New Jersey Economic Development Authority
Revenue Transportation Project Series A 5.875%,
due 5/1/14
5. North Carolina Municipal Power Agency N1 Catawba
Electric Revenue Series B 6.50%, due 1/1/20
6. Allegheny County Pennsylvania Sanitary Authority
Sewer Revenue Series A 5.00%, due 12/1/23
7. Seattle Washington Municipal Light & Power
Revenue 6.00%, due 10/1/15
8. Los Angeles California Unified School District
Series D 5.75%, due 7/1/16
9. Salt River Project, Arizona, Agriculture
Improvement & Power District, 5.00%, due 1/1/35
10. Clark County Nevada Bond Bank 5.50%, due 7/1/14
</Table>
www.MAINSTAYfunds.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers John Fitzgerald and Laurie Walters of
MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally invests 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. The Fund
normally invests at least 80% of its net assets in municipal bonds. In
implementing this strategy, we use a combined approach to investing that
analyzes economic trends and factors pertinent to particular issuers and
securities.
WHAT ECONOMIC FORCES AFFECTED THE BOND MARKET DURING THE 12 MONTHS ENDED OCTOBER
31, 2005?
Throughout the reporting period, the bond market was torn on the question of how
higher energy costs would affect the economy as a whole. Either high energy
costs would raise inflation expectations or such costs would tend to reduce
aggregate demand. Toward the end of the reporting period, the consensus appeared
to shift toward the former opinion. In mid-September, the Federal Open Market
Committee's commentary crystallized this view. At the same time, the FOMC raised
the targeted federal funds rate to 3.75% in its eighth 25-basis-point move
during the reporting period. (A basis point is one-hundredth of a percentage
point.)
Despite widespread concern that hurricanes Katrina and Rita might derail trend
growth in the economy, the Federal Reserve saw rebuilding activity as
potentially stimulative. As a result, we anticipate additional interest-rate
hikes from the Federal Open Market Committee through the first quarter of 2006.
At the end of October, the Eurodollar futures market was evenly split,
anticipating either a 4.25% or a 4.50% targeted federal funds rate by March 31,
2006.
HOW DID THESE FACTORS AFFECT MUNICIPAL BONDS?
Inflation is the bane of the bond market, so not surprisingly, municipal yields
rose during the 12-month reporting period. Two-year municipal yields rose from
2.7% to 3.1%, five-year municipals advanced from 3.1% to 3.4%, 10-year
municipals climbed from 3.6% to 3.9%, and 30-year municipal yields rose from
4.4% to 4.6%. Federal Reserve policy directives hastened this fairly substantial
move.
As these changes imply, the municipal yield curve did not shift uniformly.
Instead, the yield curve flattened as the spread(1) between two-year and 30-
year municipal bond yields narrowed 20 basis points.
WHAT WAS THE FUND'S DURATION STRATEGY DURING THE REPORTING PERIOD?
From November 2004 through July 2005, we kept the Fund's duration shorter than
that of the Lehman Brothers(R) Municipal Bond Index.(2) Our positioning
expressed our bearish interest-rate outlook amid firm economic data and the
Federal Open Market Committee's resolve to steadily move targeted federal funds
rate higher. In August 2005, we lengthened the Fund's duration to a neutral
position relative to the benchmark as yields rose to more attractive levels.
WHAT POSITIONING DECISIONS SIGNIFICANTLY AFFECTED THE FUND'S PERFORMANCE?
An overweighted position in the housing sector helped the Fund's performance
during the reporting period as yield-starved investors gravitated toward sectors
that offered attractive yields relative to high-grade municipal bonds. The
housing-revenue-bond component of the Lehman Brothers(R) Municipal Bond Index
outperformed the Index as a whole by 91 basis points.
On the other hand, the Fund's underweighted exposure to the
tobacco-settlement-bond component of the Lehman Brothers(R) Municipal Bond Index
detracted from performance because the tobacco-settlement-bond component of the
Lehman Brothers(R) Municipal Bond Index outperformed the Index by 1,778 basis
points (or 17.78 percentage points). The Fund's tobacco-sector weighting at the
start of the reporting period was 1.0%, which we reduced to 0% in February 2005.
Two-percent of the Lehman Brothers(R) Municipal Bond Index is made up of
tobacco-sector bonds. Relative to high-grade municipals, tobacco spreads
tightened to their narrowest risk premiums in two years. We expect this trend to
reverse, since several issuers want to take advantage
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.
1. The terms "spread" and "yield spread" may refer to the difference in yield
between a specific security or type of security and comparable U.S. Treasury
issues. The terms may also refer to the difference in yield between two
specific securities or types of securities at a given time.
2. See footnote on page 5 for more information on the Lehman Brothers(R)
Municipal Bond Index.
8 MainStay Tax Free Bond Fund
of the narrow risk spreads and have announced plans to market new issues.
During the reporting period, several of the Fund's holdings were prerefunded in
Treasury securities. Such transactions may allow issuers to reduce overall
borrowing costs by issuing new securities at current market rates and retiring
old, higher-coupon issues.(3) These refundings helped the Fund's performance.
While many of the Fund's eligible securities have already been refunded, we have
maintained the Fund's positions in several other issues that could also be
refunded if municipal yields were to revisit the low levels seen in February or
June of 2005.
ARE STATE BUDGET DEFICITS STILL AN ISSUE FOR THE MUNICIPAL MARKET?
An improving economy has continued to strengthen state finances. According to
the Rockefeller Institute of Government, state tax revenue grew 13.3% in the
second calendar quarter of 2005 compared to the first calendar quarter--the
fastest growth since the Institute began tracking revenues in 1991. This
broad-based increase was seen across all three major sources of revenue:
personal income tax, corporate income tax, and general sales tax.
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.
3. Advance refunding allows a bond issuer to float a second bond at a lower
interest rate and to invest the proceeds from the sale of the second bond
safely (usually in Treasury securities) to collateralize the first bond.
Since advance-refunded bonds become the equivalent of fully tax-exempt U.S.
Treasury securities and no longer represent the credit risk profile of the
original borrower, they often increase in value--sometimes significantly.
INFORMATION ON THIS PAGE AND THE PRECEDING PAGES HAS NOT BEEN AUDITED.
www.MAINSTAYfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM MUNICIPAL BONDS (90.8%)+
- --------------------------------------------------------------------------------
ALABAMA (4.3%)
Huntsville Alabama Health
Care Authority
Series A
5.00%, due 6/1/34 $ 1,000,000 $ 1,030,140
Series A
5.75%, due 6/1/31 2,500,000 2,617,525
Jefferson County Alabama Limited Obligation School
Warrants
Series A
5.25%, due 1/1/14 1,345,000 1,440,737
University of Alabama-Birmingham University
Revenues
6.00%, due 10/1/16 (a)(b) 2,910,000 3,184,617
6.00%, due 10/1/17 (a)(b) 3,085,000 3,376,131
------------
11,649,150
------------
ARIZONA (2.3%)
V Salt River Project, Arizona, Agriculture
Improvement & Power District
5.00%, due 1/1/35 6,000,000 6,210,060
------------
CALIFORNIA (6.7%)
California State Economic Recovery
Series A
5.00%, due 7/1/17 2,000,000 2,145,140
California State Various Purposes
5.25%, due 4/1/34 2,040,000 2,126,537
Golden State Tobacco Securitization Corp.
5.00%, due 6/1/45 5,000,000 5,016,800
Los Angeles California
Unified School District
Series D
5.625%, due 7/1/17 (a) 2,000,000 2,199,040
V 5.75%, due 7/1/16 6,000,000 6,845,280
------------
18,332,797
------------
DELAWARE (0.9%)
Delaware State Economic Development Authority
Revenue Pollution Control Delmarva Power
Series C
4.90%, due 5/1/26 2,250,000 2,367,022
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FLORIDA (5.2%)
Capital Trust Agency Florida Multi-Family Revenue
Housing Shadow Run Project
Series A
5.15%, due 11/1/30 $ 2,190,000 $ 2,291,287
Highlands County Florida Health Facilities
Authority Revenue Hospital Adventist Health
Systems D
5.375%, due 11/15/35 5,000,000 5,157,800
Meadow Pointe III Community Development District
of Florida Capital Improvement Revenue
Series B
5.25%, due 11/1/07 1,165,000 1,170,988
Miami-Dade County Florida Solid Waste System
Revenue
5.00%, due 10/1/19 1,735,000 1,832,871
Oakstead Florida
Community Development
District Capital
Improvement Revenue
Series B
5.90%, due 5/1/07 380,000 384,693
Orange County Florida Health Facilities Authority
Revenue Hospital Adventist Health Systems
5.625%, due 11/15/32 3,000,000 3,157,680
Waterchase Community Development District of
Florida Capital Improvement Revenue
Series B
5.90%, due 5/1/08 200,000 201,428
------------
14,196,747
------------
</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.
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)
- --------------------------------------------------------------------------------
ILLINOIS (8.3%)
Chicago Illinois
Board of Education
5.875%, due 12/1/14 (a) $ 3,130,000 $ 3,468,259
Chicago Illinois Water Revenue
6.50%, due 11/1/15 3,005,000 3,596,715
Illinois Finance Authority Solid Waste Revenue
Disposal Waste
Management, Inc. Project
Series A
5.05%, due 8/1/29 (c) 1,000,000 989,280
Illinois Health Facilities Authority Revenue Lake
Forest Hospital
Series A
5.75%, due 7/1/29 2,000,000 2,090,340
Illinois Health Facilities Authority Revenue OSF
Healthcare System
6.25%, due 11/15/29 (a) 4,000,000 4,452,840
Illinois State Sales Tax Revenue
Second Series
5.50%, due 6/15/17 4,000,000 4,468,280
Kane McHenry Cook & De Kalb Counties Unit School
District No. 300
5.00%, due 12/1/20 3,500,000 3,673,775
------------
22,739,489
------------
LOUISIANA (1.5%)
State of Louisiana Offshore Terminal Authority
Deepwater Port Revenue
Series C
5.25%, due 9/1/16 3,970,000 4,073,498
------------
MASSACHUSETTS (1.0%)
Massachusetts Bay Transportation Authority Revenue
Assessment
Series A
5.75%, due 7/1/18 (a) 2,290,000 2,512,519
5.75%, due 7/1/18 210,000 228,331
------------
2,740,850
------------
NEBRASKA (0.2%)
Nebraska Investment Finance Authority, Single
Family Housing Revenue
Series C
6.30%, due 9/1/28 600,000 604,314
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
NEVADA (3.2%)
V Clark County Nevada Bond Bank
5.50%, due 7/1/14 $ 5,460,000 $ 5,887,081
Clark County Nevada Industrial Development,
Southern Gas Co.
4.85%, due 10/1/35 1,000,000 981,830
Clark County Nevada Pollution Control Revenue
Nevada Power Co. Project
Series B
6.60%, due 6/1/19 1,925,000 1,936,916
------------
8,805,827
------------
NEW JERSEY (4.7%)
V New Jersey Economic Development Authority
Revenue Transportation Project
Series A
5.875%, due 5/1/14 (a)(b) 8,000,000 8,637,200
New Jersey State Trust Fund Transportation
Authority System
Series C
5.50%, due 12/15/17 3,810,000 4,266,933
------------
12,904,133
------------
NEW MEXICO (1.0%)
New Mexico Finance Authority State Transportation
Revenue Series Lien
Series A
5.00%, due 6/15/22 2,750,000 2,884,310
------------
NEW YORK (17.8%)
Liberty, NY, Development Corp., Goldman Sachs
Group, Inc.
5.25%, due 10/1/35 5,000,000 5,486,150
Long Island Power Authority New York Electric
System Revenue
Series A
5.50%, due 12/1/12 2,470,000 2,740,663
Metropolitan Transportation Authority of New York
Revenue
Series A
5.00%, due 11/15/25 1,500,000 1,559,835
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM MUNICIPAL BONDS (CONTINUED)
- --------------------------------------------------------------------------------
NEW YORK (CONTINUED)
New York City
General Obligation
Series E
5.875%, due 8/1/13 (b) $ 5,300,000 $ 5,478,663
New York State Dormitory Authority Lease Revenue
Court Facilities City of New York
5.75%, due 5/15/30 (a) 2,000,000 2,213,720
7.375%, due 5/15/10 4,720,000 5,143,101
7.50%, due 5/15/11 4,065,000 4,634,277
New York State Environmental Facilities Corp.
Pollution Control Revenue, State Water Revolving
Fund
Series B
7.50%, due 3/15/11 30,000 30,112
Series A
7.50%, due 6/15/12 240,000 257,014
New York State Thruway Authority Highway & Bridge
Trust Fund
Series B
5.00%, due 4/1/21 4,000,000 4,219,040
Series B-1
5.75%, due 4/1/16 (a) 100,000 103,159
New York University Dormitory Authority
Series A
6.00%, due 7/1/19 3,700,000 4,372,105
V New York, NY
Series C
5.00%, due 8/1/26 8,500,000 8,727,120
Triborough Bridge & Tunnel Authority New York
Revenues
5.00%, due 11/15/32 3,500,000 3,592,820
------------
48,557,779
------------
NORTH CAROLINA (5.5%)
North Carolina Eastern Municipal Power Agency
Systems Revenue
Series A
5.50%, due 1/1/12 2,000,000 2,152,780
Series D
6.75%, due 1/1/26 2,000,000 2,206,120
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
NORTH CAROLINA (CONTINUED)
North Carolina Housing Finance Agency
Home Ownership
Series 13-A
4.25%, due 1/1/28 $ 2,910,000 $ 2,925,016
V North Carolina Municipal
Power Agency N1 Catawba Electric Revenue
Series B
6.50%, due 1/1/20 (b) 7,000,000 7,674,940
------------
14,958,856
------------
OHIO (0.9%)
Lorain County Ohio Hospital Revenue Catholic
Healthcare
5.375%, due 10/1/30 2,300,000 2,397,566
------------
PENNSYLVANIA (7.0%)
V Allegheny County Pennsylvania Sanitary
Authority Sewer Revenue
Series A
5.00%, due 12/1/23 7,000,000 7,324,310
Allegheny County Port Authority Special Revenue
Transportation
6.25%, due 3/1/16 (a)(b) 3,750,000 4,123,913
6.375%, due 3/1/15 (a)(b) 3,120,000 3,443,294
Pennsylvania Economic Development Financing
Authority Solid Waste Disposal Revenue Waste
Management, Inc. Project
Series A
5.10%, due 10/1/27 (c) 1,000,000 1,004,390
Philadelphia Pennsylvania School District
Series A
5.75%, due 2/1/11 3,000,000 3,295,320
------------
19,191,227
------------
</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)
- --------------------------------------------------------------------------------
PUERTO RICO (5.4%)
Puerto Rico Commonwealth Infrastructure Financing
Special Authority
Series A
5.50%, due 10/1/17 $ 1,500,000 $ 1,642,395
Puerto Rico Electric Power Authority Revenue
Series HH
5.25%, due 7/1/29 2,750,000 2,933,700
V Puerto Rico Public
Buildings Authority
Revenue Guaranteed
Government Facilities
Series I
5.00%, due 7/1/36 10,000,000 10,050,300
------------
14,626,395
------------
SOUTH CAROLINA (2.7%)
Charleston County
South Carolina
Public Improvement
6.125%, due 9/1/11 2,425,000 2,671,865
South Carolina Jobs Economic Development Authority
Revenue Bon Secours Health
Systems Inc.
5.625%, due 11/15/30 4,500,000 4,712,580
------------
7,384,445
------------
TEXAS (7.7%)
Dallas Fort Worth
Texas International
Airport Facilities
Improvement Revenue
Series A
6.00%, due 11/1/28 (c) 4,000,000 4,298,360
Harris County Texas Health Facilities Development
Hospital Corp.
Memorial Hermann Healthcare
Series A
6.375%, due 6/1/29 (a) 1,500,000 1,709,805
Saint Luke's Episcopal Hospital
Series A
5.375%, due 2/15/26 (a) 3,500,000 3,802,785
Jefferson County Texas Health Facility Development
Corp. Texas Baptist Hospitals
5.20%, due 8/15/21 1,095,000 1,139,205
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
TEXAS (CONTINUED)
San Antonio Texas
Electric & Gas
Series 2000
5.00%, due 2/1/17 (b) $ 5,040,000 $ 5,392,145
Tarrant Regional Water District Texas Water
Revenue
5.25%, due 3/1/17 2,500,000 2,678,725
Texas State College
Student Loan
5.50%, due 8/1/10 (c) 1,760,000 1,886,984
------------
20,908,009
------------
WASHINGTON (2.6%)
V Seattle Washington Municipal Light & Power
Revenue
6.00%, due 10/1/15 (a)(b) 6,500,000 7,167,810
------------
WEST VIRGINIA (0.5%)
Kanawha Mercer Nicholas Counties West Virginia
Single Family Mortgage Revenue
(zero coupon), due 2/1/15 (a)(d) 2,230,000 1,405,123
------------
WISCONSIN (1.4%)
State of Wisconsin
Series F
5.50%, due 5/1/13 (a) 1,030,000 1,134,875
State of Wisconsin
Health & Education
Facilities Authority
Revenue Wheaton
Franciscan Services
5.75%, due 8/15/25 2,500,000 2,662,075
------------
3,796,950
------------
Total Long-Term
Municipal Bonds
(Cost $235,706,457) 247,902,357
------------
<Caption>
NUMBER OF
CONTRACTS (G)
PURCHASED CALL OPTION (0.0%)++
- --------------------------------------------------------------------------------
UNITED STATES (0.0%)++
U.S. Treasury 10 Year Note Future
Strike Price $113.00
Expires 11/22/05 50,000 7,812
------------
Total Purchased Call Option
(Cost $60,937) 7,812
------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
CUMULATIVE PREFERRED STOCK (3.6%)
- --------------------------------------------------------------------------------
V Charter Mac Equity
Issuer Trust
Series A-1
7.10%, due 6/30/09 (b)(e) 9,000,000 $ 9,764,640
------------
Total Cumulative
Preferred Stock
(Cost $9,015,739) 9,764,640
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT (3.5%)
- --------------------------------------------------------------------------------
IDAHO (3.5%)
Idaho Health
Facilities Authority
2.62%, due 7/1/30 (f) $ 9,525,000 9,525,000
------------
Total Short-Term Investment
(Cost $9,525,000) 9,525,000
------------
Total Investments
(Cost $254,308,133) (i) 97.9% 267,199,809(j)
Cash and Other Assets,
Less Liabilities 2.1 5,745,217
------------- ------------
Net Assets 100.0% $272,945,026
============= ============
</Table>
<Table>
<Caption>
CONTRACTS UNREALIZED
LONG DEPRECIATION (H)
FUTURES CONTRACTS (-0.3%)
- -----------------------------------------------------------------------------
United States Treasury Note
December 2005 (10 year) 200 $ (771,875)
-------------------
Total Futures Contracts
(Settlement Value $22,462,500) $ (771,875)
===================
</Table>
<Table>
++ Less than one tenth of a percent.
(a) 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.
(b) Segregated, partially segregated or designated as
collateral for futures contracts.
(c) Interest on these securities is subject to alternative
minimum tax.
(d) Non-income producing security.
(e) May be sold to institutional investors only.
(f) Variable rate securities that may be tendered back to
the issuer at any time prior to maturity at par.
(g) One contract relates to 100 shares.
(h) Represents the difference between the value of the
contracts at the time they were opened and the value at
October 31, 2005
(i) The cost stated also represents the aggregate cost for
federal income tax purposes.
(j) At October 31, 2005 net unrealized appreciation for
securities was $12,891,676, 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
$13,755,073 and aggregate gross unrealized depreciation
for all investments on which there was an excess of cost
over market value of $863,397.
</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, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $254,308,133) $267,199,809
Cash 42,225
Receivables:
Interest 4,126,455
Investment securities sold 2,334,056
Fund shares sold 48,175
Variation margin on futures contracts 6,250
Other assets 20,275
-------------
Total assets 273,777,245
-------------
LIABILITIES:
Payables:
Fund shares redeemed 165,809
NYLIFE Distributors 108,826
Manager 82,653
Transfer agent 70,508
Shareholder communication 49,972
Professional 36,663
Custodian 4,285
Accrued expenses 20,000
Dividend payable 293,503
-------------
Total liabilities 832,219
-------------
Net assets $272,945,026
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 40,021
Class B 237,140
Class C 6,474
Additional paid-in capital 292,085,135
Distributions in excess of net investment
income (262,474)
Accumulated net realized loss on investments
and futures transactions (31,281,071)
Net unrealized appreciation on investments and
futures contracts 12,119,801
-------------
Net assets $272,945,026
=============
CLASS A
Net assets applicable to outstanding shares $ 38,507,926
=============
Shares of beneficial interest outstanding 4,002,103
=============
Net asset value per share outstanding $ 9.62
Maximum sales charge (4.50% of offering price) 0.45
-------------
Maximum offering price per share outstanding $ 10.07
=============
CLASS B
Net assets applicable to outstanding shares $228,206,151
=============
Shares of beneficial interest outstanding 23,713,999
=============
Net asset value and offering price per share
outstanding $ 9.62
=============
CLASS C
Net assets applicable to outstanding shares $ 6,230,949
=============
Shares of beneficial interest outstanding 647,436
=============
Net asset value and offering price per share
outstanding $ 9.62
=============
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 13,950,590
-------------
EXPENSES:
Manager 1,740,637
Distribution/Service--Class A 95,886
Service--Class B 613,583
Service--Class C 15,796
Distribution--Class B 613,583
Distribution--Class C 15,796
Transfer agent 289,465
Professional 90,678
Shareholder communication 61,152
Recordkeeping 55,677
Registration 40,955
Custodian 24,397
Trustees 22,798
Miscellaneous 35,854
-------------
Total expenses before waiver/reimbursement 3,716,257
Expense waiver/reimbursement from Manager (504,934)
-------------
Net expenses 3,211,323
-------------
Net investment income 10,739,267
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on:
Security transactions 3,354,974
Futures transactions 1,148,970
-------------
Net realized gain on investments and futures
transactions 4,503,944
-------------
Net change in unrealized appreciation
(depreciation) on:
Security transactions (10,263,059)
Futures transactions (471,875)
-------------
Net change in unrealized appreciation
(depreciation) on investments and futures
transactions (10,734,934)
-------------
Net realized and unrealized loss on
investments and futures transactions (6,230,990)
-------------
Net increase in net assets resulting from
operations $ 4,508,277
=============
</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 YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 10,739,267 $ 11,870,823
Net realized gain on investments
and futures transactions 4,503,944 394,480
Net change in unrealized
appreciation (depreciation) on
investments and futures
transactions (10,734,934) 2,037,118
----------------------------
Net increase in net assets
resulting from operations 4,508,277 14,302,421
----------------------------
Dividends to shareholders:
From net investment income:
Class A (1,540,417) (1,429,015)
Class B (9,181,448) (9,458,140)
Class C (237,572) (206,425)
----------------------------
Total dividends to shareholders (10,959,437) (11,093,580)
----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 9,015,292 8,876,885
Class B 2,697,162 7,514,402
Class C 1,495,256 2,753,234
Net asset value of shares issued
to shareholders in reinvestment
of dividends:
Class A 1,028,049 876,910
Class B 6,225,273 6,318,515
Class C 169,857 149,746
----------------------------
20,630,889 26,489,692
Cost of shares redeemed:
Class A (8,585,569) (14,876,471)
Class B (36,917,542) (52,455,683)
Class C (1,285,982) (2,821,719)
----------------------------
(46,789,093) (70,153,873)
Decrease in net assets derived
from capital share
transactions (26,158,204) (43,664,181)
----------------------------
Net decrease in net assets (32,609,364) (40,455,340)
NET ASSETS:
Beginning of year 305,554,390 346,009,730
----------------------------
End of year $ 272,945,026 $305,554,390
============================
Distributions in excess of net
investment income at end of year $ (262,474) $ (42,304)
============================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
-----------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 9.84 $ 9.75 $ 10.02 $ 9.62 $ 9.68 $ 9.08
----------- ----------- ----------- -------- -------- --------
Net investment income 0.38 0.38 0.30 0.41 0.45 0.47
Net realized and unrealized
gain (loss) on investments (0.21) 0.07 (0.25) 0.40 (0.06) 0.60
----------- ----------- ----------- -------- -------- --------
Total from investment
operations 0.17 0.45 0.05 0.81 0.39 1.07
----------- ----------- ----------- -------- -------- --------
Less dividends:
From net investment income (0.39) (0.36) (0.32) (0.41) (0.45) (0.47)
----------- ----------- ----------- -------- -------- --------
Net asset value at end of
period $ 9.62 $ 9.84 $ 9.75 $ 10.02 $ 9.62 $ 9.68
=========== =========== =========== ======== ======== ========
Total investment return (a) 1.77% 4.71% 0.54%(b) 8.61% 4.04% 12.15%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.92% 3.88% 3.64%+ 4.19% 4.59% 5.05%
Net expenses 0.89% 1.02% 1.04%+ 1.03% 1.03% 1.03%
Expenses (before
waiver/reimbursement) 1.06% 1.06% -- -- -- --
Portfolio turnover rate 26% 18% 34% 39% 57% 56%
Net assets at end of period
(in 000's) $38,508 $37,936 $42,712 $46,131 $39,760 $22,495
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 9.85 $ 9.75 $10.02 $ 9.62 $ 9.68 $ 9.09
----------- ----------- ----------- -------- -------- --------
Net investment income 0.36 0.36 0.28 0.39 0.42 0.45
Net realized and unrealized
gain (loss) on investments (0.22) 0.08 (0.25) 0.40 (0.06) 0.59
----------- ----------- ----------- -------- -------- --------
Total from investment
operations 0.14 0.44 0.03 0.79 0.36 1.04
----------- ----------- ----------- -------- -------- --------
Less dividends:
From net investment income (0.37) (0.34) (0.30) (0.39) (0.42) (0.45)
----------- ----------- ----------- -------- -------- --------
Net asset value at end of
period $ 9.62 $ 9.85 $ 9.75 $10.02 $ 9.62 $ 9.68
=========== =========== =========== ======== ======== ========
Total investment return (a) 1.41% 4.55% 0.32%(b) 8.34% 3.79% 11.75%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 3.67% 3.63% 3.39%+ 3.94% 4.34% 4.80%
Net expenses 1.14% 1.27% 1.29%+ 1.28% 1.28% 1.28%
Expenses (before
waiver/reimbursement) 1.31% 1.31% -- -- -- --
Portfolio turnover rate 26% 18% 34% 39% 57% 56%
Net assets at end of period
(in 000's) $6,231 $5,992 $5,840 $7,555 $1,586 $1,130
</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>
CLASS B
-----------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 9.85 $ 9.75 $ 10.02 $ 9.62 $ 9.68 $ 9.09
----------- ----------- ----------- -------- -------- --------
0.36 0.36 0.28 0.39 0.42 0.45
(0.22) 0.08 (0.25) 0.40 (0.06) 0.59
----------- ----------- ----------- -------- -------- --------
0.14 0.44 0.03 0.79 0.36 1.04
----------- ----------- ----------- -------- -------- --------
(0.37) (0.34) (0.30) (0.39) (0.42) (0.45)
----------- ----------- ----------- -------- -------- --------
$ 9.62 $ 9.85 $ 9.75 $ 10.02 $ 9.62 $ 9.68
=========== =========== =========== ======== ======== ========
1.41% 4.55% 0.32%(b) 8.34% 3.79% 11.75%
3.67% 3.63% 3.39%+ 3.94% 4.34% 4.80%
1.14% 1.27% 1.29%+ 1.28% 1.28% 1.28%
1.31% 1.31% -- -- -- --
26% 18% 34% 39% 57% 56%
$228,206 $261,626 $297,458 $323,349 $314,867 $321,230
</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 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 nineteen 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 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 accounting
principles generally accepted in the United States of America 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. 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 in good faith by 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 principal market is temporarily closed at a time when
under normal conditions it would be open. At October 31, 2005, the Fund did not
hold securities that were valued in such a 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
effect 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) 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 and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options which expire are
20 MainStay Tax Free Bond Fund
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, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the market price of the underlying security or foreign
currency increase but, as long as the obligation as a writer continues, have
retained the risk of loss should the price of the underlying security decline.
By writing a covered put option, the Fund, in exchange for the premium, accepts
the risk of decline in the market value of the underlying security or foreign
currency below the exercise price. After writing a put option, the Fund may
incur a loss equal to the difference between the exercise price of the option
and the sum of the market value of the underlying security plus the premium
received from the sale of the option. 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) 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 non-taxable income to the shareholders of the
Fund within the allowable time limits. Therefore, no federal income or excise
tax provision is required.
(E) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly and capital gain distributions, if any, annually. Income dividends and
capital gain distributions are determined in accordance with federal income tax
regulations, which may differ from accounting principles generally accepted in
the United States of America. 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. 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.
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 transfer agent expenses and 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.
(I) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the Fund.
www.MAINSTAYfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
the "Manager"), an indirect wholly-owned subsidiary of New York Life Insurance
Company ("New York Life"), serves as the Fund's manager. The Manager provides
offices, conducts clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Fund. The Manager also
pays the salaries and expenses of all personnel affiliated with the Fund and all
the operational expenses that are not the responsibility of the Fund. MacKay
Shields LLC (the "Subadvisor"), a registered investment advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual percentage of the Fund's
average daily net assets as follows: 0.60% on assets up to $1.0 billion and
0.55% on assets in excess of $1.0 billion. NYLIM has agreed to waive its
management fee by 0.15% to 0.45% (effective August 1, 2004). Effective August 1,
2005, the Manager has entered into a written expense limitation agreement, under
which the Manager has agreed to reimburse the expenses of the Fund so that the
total operating expenses (excluding taxes, interest, litigation, extraordinary
expenses, and brokerage and other transaction expenses relating to the purchase
or sale of portfolio investments) do not exceed, on an annualized basis, 0.89%
of the average daily net assets of the Class A shares. An equivalent
reimbursement, in an equal amount of basis points, will be applied to the other
share classes. The Manager, within three years of incurring such expenses, may
recoup the amount of any management fee waiver or expense reimbursement from the
Fund pursuant to this agreement if such recoupment does not cause the Fund to
exceed the expense limitations. At October 31, 2005, the Fund had $30,280 of
recoupment available. This amount is available until October 31, 2008. This
expense limitation may be modified or terminated only with the approval of the
Board of Trustees. Prior to August 1, 2005 and after December 1, 2004, NYLIM
agreed to voluntarily reimburse the expenses of the Fund so that total annual
fund operating expenses would not exceed on an annualized basis 0.89% of the
average daily net assets of the Class A shares, and such that there would be an
equivalent reduction for the other classes of shares. For the year ended October
31, 2005, the Manager earned fees from the Fund in the amount of $1,740,637 and
waived its fee and/or reimbursed expenses in the amount of $504,934.
Pursuant to the terms of a Sub-Advisory Agreement between the 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. 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 0.25% of the average daily net
assets of the Fund's Class B and Class C shares. The 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 $32,113 for the year ended
October 31, 2005. 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 $423, $72,168 and $1,263, respectively, for the year ended October 31,
2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $289,465.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage
22 MainStay Tax Free Bond Fund
and Expense Committee, Operations Committee and Performance Committee each
receive an additional $1,000 for each meeting of the Brokerage and Expense
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 Fund only pays a
portion of the fees identified above.
(F) OTHER. Pursuant to the Management Agreement, 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
$7,443 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $55,677 for the year ended
October 31, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, State Street Bank and Trust Company acted as custodian for
the Fund.
NOTE 5--FEDERAL INCOME TAX:
The Fund has maintained a year end of December 31 for federal income tax
purposes.
At October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED OTHER TOTAL
TAX EXEMPT CAPITAL TEMPORARY UNREALIZED ACCUMULATED
INCOME LOSSES DIFFERENCES APPRECIATION LOSS
$31,029 $ (32,045,133) $(293,503) $12,883,864 $(19,423,743)
-------------------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to the tax treatment of futures transactions.
At October 31, 2005, for federal income tax purposes, capital loss carryforwards
of $32,045,133 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 AMOUNTS
AVAILABLE THROUGH (000'S)
2007 $ 7,997
2008 15,453
2011 8,117
2012 478
-------------------------------------------
$32,045
-------------------------------------------
</Table>
Dividends to shareholders from net investment income, shown in the Statement of
Changes in Net Assets, represents tax-based distributions of tax exempt income.
NOTE 6--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $73,754 and $90,910, 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, 2005.
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
OCTOBER 31, 2005
CLASS A CLASS B CLASS C
Shares sold 921 275 152
- ---------------------------------------------------------------------
Shares issued in reinvestment of
dividends 105 637 17
- ---------------------------------------------------------------------
1,026 912 169
- ---------------------------------------------------------------------
Shares redeemed (877) (3,768) (131)
- ---------------------------------------------------------------------
Net increase (decrease) 149 (2,856) 38
- ---------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<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>
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.9 million to nine MainStay funds. The amount paid to the MainStay
Tax Free Bond Fund was $50,000. NYLIM has also agreed to reimburse or pay all
expenses relating to the Board of Trustees' review of this matter and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance at this time as to the
outcome of these efforts.
24 MainStay Tax Free 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 Tax Free Bond Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2005, and
the related statement of operations for the year then ended, and the statements
of changes in net assets and financial highlights for each of the years in the
two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the
results of its operations for the year then ended, and the changes in its net
assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
26 MainStay Tax Free Bond Fund
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 27
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
28 MainStay Tax Free Bond Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's underperformance when compared
over several time periods with funds concluded by Trustees to be peers of the
Fund, and the Manager's and Subadvisor's agreement to monitor performance
closely in consultation with the Board.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund. The Trustees considered certain benefits expected for, and risks borne
by, the Manager and its affiliates, including benefits from soft dollar
arrangements. The Trustees considered the services provided to the Fund by
affiliates of the Manager, NYLIFE Distributors and NYLIM Service, under other
agreements, and the benefits to the Manager and its affiliates from those
relationships. The information provided to the Trustees indicated that the
profitability to the Manager and its affiliates arising directly from those
other agreements was not excessive. The Trustees acknowledged certain benefits
to the reputation of the Manager and its affiliates, as well to that of the
Trust, from their association with each other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distributing shares
of various series of the Trust. They noted the Manager's willingness to
implement contractual breakpoints, and that the contractual breakpoints in place
for the management fee were intended to provide that the Fund's shareholders
would share in benefits from econo-
www.MAINSTAYfunds.com 29
mies of scale arising from the growth of Fund assets. The Trustees acknowledged
that the Fund had not yet reached the asset level at which breakpoints would
reduce the contractual management fee to which the Fund is subject.
Acknowledging the difficulty of forecasting economies of scale, the Trustees
generally expressed an intention to monitor the Manager's profitability and
consider the application of fee breakpoints or other appropriate measures as the
Board may determine from time to time. The Trustees reviewed historical
information about changes in the Fund's expense and asset levels over time, as
well as information about certain Fund expenses that would remain fixed even as
Fund assets increase and, therefore, provide the Fund with benefits from
economies of scale as the Fund grows. The Trustees noted that, to the extent the
Fund's gross expenses currently are higher than its net expenses, economies of
scale achieved through an increase in the Fund's assets might not directly
benefit the Fund through lower net expenses. The Trustees considered various
information about transfer agency expenses and received information about
potential effects on the Manager were it to subsidize certain portions of the
transfer agency fees of the other series of the Trust.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated gross and net expense ratios, and various components of that expense
ratio, in comparison to other funds in comparison groupings prepared by outside
data providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
30 MainStay Tax Free Bond Fund
FEDERAL INCOME TAX INFORMATION--UNAUDITED
For Federal individual income tax purposes, the fund hereby designates 100% of
the ordinary income dividends paid during its fiscal year ended October 31, 2005
as attributable to interest income from Tax Exempt Municipal Bonds. Such
dividends are currently exempt from Federal income taxes under section 103 (a)
of the Internal Revenue Code.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
www.MAINSTAYfunds.com 31
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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
32 MainStay Tax Free Bond Fund
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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO8032 (RECYCLE LOGO) MS475-05 MST11-12/05
13
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TOTAL RETURN FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay Total Return Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/s/ Christopher O. Blunt
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- --------------------------------------------------------------------------------
Investment and Performance Comparison 4
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 8
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 21
- --------------------------------------------------------------------------------
Notes to Financial Statements 26
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 32
Trustees and Officers 33
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 36
- --------------------------------------------------------------------------------
Federal Income Tax Information 38
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures 38
- --------------------------------------------------------------------------------
Shareholder Reports and Quarterly Portfolio Disclosure 38
- --------------------------------------------------------------------------------
MainStay Funds 39
</Table>
www.MAINSTAYfunds.com 3
INVESTMENT AND PERFORMANCE COMPARISON (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 2.47% -3.42% 5.57%
Excluding sales charges 8.43 -2.32 6.17
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN GROWTH TOTAL RETURN CORE
RETURN FUND COMPOSITE INDEX COMPOSITE INDEX S&P 500 INDEX
-------------- ------------------- ----------------- -------------
10/31/95 9450 10000 10000 10000
10734 11547 11591 12410
12707 14058 14190 16394
14550 16736 16483 20000
17520 20084 18980 25134
19331 21924 20616 26665
15246 17319 18283 20024
13366 15674 17135 16999
15238 18044 19773 20535
15855 18825 21327 22470
10/31/05 17192 19920 22769 24429
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 2.66% -3.36% 5.45%
Excluding sales charges 7.66 -3.04 5.45
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN GROWTH TOTAL RETURN CORE
RETURN FUND COMPOSITE INDEX COMPOSITE INDEX S&P 500 INDEX
-------------- ------------------- ----------------- -------------
10/31/95 10000 10000 10000 10000
11310 11547 11591 12410
13328 14058 14190 16394
15139 16736 16483 20000
18098 20084 18980 25134
19843 21924 20616 26665
15540 17319 18283 20024
13512 15674 17135 16999
15293 18044 19773 20535
15792 18825 21327 22470
10/31/05 17002 19920 22769 24429
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 6.60% -3.05% 5.45%
Excluding sales charges 7.60 -3.05 5.45
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN GROWTH TOTAL RETURN CORE
RETURN FUND COMPOSITE INDEX COMPOSITE INDEX S&P 500 INDEX
-------------- ------------------- ----------------- -------------
10/31/95 10000 10000 10000 10000
11310 11547 11591 12410
13328 14058 14190 16394
15139 16736 16483 20000
18098 20084 18980 25134
19843 21924 20616 26665
15540 17319 18283 20024
13512 15674 17135 16999
15293 18044 19773 20535
15792 18825 21327 22470
10/31/05 16993 19920 22769 24429
</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. 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 contractual and
may be modified or terminated only with the approval of the Board of Trustees.
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, 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 THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Total Return Fund
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
9.51% -1.93% 6.59%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN GROWTH TOTAL RETURN CORE
RETURN FUND COMPOSITE INDEX COMPOSITE INDEX S&P 500 INDEX
-------------- ------------------- ----------------- -------------
10/31/95 10000 10000 10000 10000
11424 11547 11591 12410
13600 14058 14190 16394
15606 16736 16483 20000
18842 20084 18980 25134
20864 21924 20616 26665
16505 17319 18283 20024
14490 15674 17135 16999
16574 18044 19773 20535
17283 18825 21327 22470
10/31/05 18927 19920 22769 24429
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- ---------------------------------------------------------------------------------
Total Return Growth Composite Index(1) 5.82% -1.90% 7.13%
Total Return Core Composite Index(2) 6.76 2.01 8.58
S&P 500(R) Index(3) 8.72 -1.74 9.34
Average Lipper balanced fund(4) 6.81 1.80 7.28
</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
$150 million. The Index is comprised of the Lehman Brothers(R)
Government/Corporate, Mortgage-Back Securities, and Asset-Backed Securities
Indices. Results assume that all income and capital gains are reinvested in
the index or indices that produce them. An investment cannot be made directly
into an index.
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 or indices that produce 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 THE
TABLES AND 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
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. The hypothetical account values and expenses
may not be used to estimate the actual ending account balances or expenses you
paid for the six-month period shown. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT ENDING ACCOUNT
VALUE (BASED VALUE (BASED
BEGINNING ON ACTUAL EXPENSES ON HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,057.55 $ 6.17 $1,019.05 $6.06
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,053.70 $10.04 $1,015.30 $9.85
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,053.10 $10.04 $1,015.30 $9.85
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,066.10 $ 4.48 $1,020.70 $4.38
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.19% for Class A and 1.94%, for Class B and Class C, and 0.86% for Class I)
multiplied by the average account value over the period, divided by 365,
multiplied by 184 (to reflect the one-half year period).
6 MainStay Total Return Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
U.S. Common Stocks 70.8
U.S. Government & Federal Agencies 18.2
Short-Term Investments (collateral from securities lending 13.3
is 5.4%)
U.S. Corporate Bonds 5.0
Asset- and Mortgage-Backed Securities 2.5
Foreign Bonds 1.1
Convertible Preferred Stocks 0.4
Purchased Put Options 0.2
Loan Assignments & Participations 0.2
Municipal Bonds 0.1
Yankee Bonds 0.1
Preferred Stock 0.1
Convertible Bonds 0.0*
Liabilities in Excess of Cash and Other Assets (12.0)
</Table>
* Less than one-tenth of one percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Federal National Mortgage Association (Mortgage
Pass-Through Securities) 5.50%, due 12/1/20 TBA
2. Federal National Mortgage Association (Mortgage
Pass-Through Securities) 6.00%, due 12/1/35 TBA
3. Transocean, Inc.
4. ENSCO International, Inc.
5. Federal National Mortgage Association (Mortgage
Pass-Through Securities) 5.50%, due 12/1/35 TBA
6. Citigroup, Inc.
7. Pride International, Inc.
8. Rowan Cos., Inc.
9. Motorola, Inc.
10. Sprint Nextel Corp.
</Table>
www.MAINSTAYfunds.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Rudolph C. Carryl, Edmund C. Spelman,
Richard A. Rosen, Gary Goodenough, and Christopher Harms of MacKay Shields LLC
CAN YOU BRIEFLY DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund normally 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. In addition to holding investment-grade bonds, 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. The stock and bond portions of the Fund's
portfolio may both take a flexible approach by investing in a variety of
securities, industries, and issues.
WHAT MAJOR FACTORS AFFECTED THE STOCK MARKET DURING THE 12 MONTHS ENDED OCTOBER
31, 2005?
During the 12 months ended October 31, 2005, stocks generally advanced, with
value stocks outperforming growth stocks at all capitalization levels. Arguably
the biggest factor influencing the equity market during the reporting period was
the substantial rise in the price of crude oil, which continued an upward trend
that began in the previous year. Major hurricanes affected supply-and-demand
dynamics by damaging oil rigs and petrochemical plants. The price of gasoline
rose to more than $3 a gallon, which threatened to slow consumer spending.
Despite these setbacks, recent gross-domestic-product data suggest that the
overall economy has remained resilient. On the geopolitical front, negative
headlines about progress in Iraq also weighed heavily on investors' minds
throughout the reporting period.
WHAT MAJOR DECISIONS AFFECTED PERFORMANCE IN THE EQUITY PORTION OF THE FUND'S
PORTFOLIO?
The Fund invests in growth and value stocks. The growth-equity component of the
Fund's portfolio benefited from effective health care stock selection and from
overweighted positions in energy and consumer discretionary stocks. Energy
stocks also made positive contributions in value-equity component of the Fund's
portfolio. Value-oriented financial holdings showed strength, while
growth-oriented financial stocks were neutral. In the growth-equity component,
industrial stocks detracted from performance. And while the Fund owned no
telecommunication services growth stocks, the equity portion of the Fund's
portfolio did well with its value holdings in the sector.
WHICH INDIVIDUAL STOCKS PROVIDED STRONG PERFORMANCE DURING THE REPORTING PERIOD?
Among the Fund's growth equities, strong performers included coal provider
Peabody Energy, which rose on strong demand; Apple Computer, which advanced on
the popularity of the iPod; pharmacy benefit manager Caremark Rx, which
generated higher earnings; UnitedHealth Group, which saw strong demand and
pricing power in the health services sector; and biotechnology company
Genentech, which advanced on strong earnings and a dynamic new product pipeline.
Among the Fund's value stocks, energy-related holdings Transocean, Pride
International, ENSCO International, and Rowan all advanced on higher energy
prices and strong demand. We trimmed several of these positions as the stocks
approached our price targets. Among value-oriented financial stocks, operating
improvements at Prudential Financial led to excellent returns, and the Fund saw
strong results from Hartford Financial Securities Group, St. Paul Travelers, and
AFLAC. During the reporting period Motorola, Texas Instruments, Kroger, and
Cadbury Schweppes were among the Fund's other strong value holdings.
WHICH STOCKS DETRACTED FROM THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
In the Fund's growth-equity component, Maxim Integrated Products, an
integrated-circuit manufacturer, declined on heightened competition and a shift
in the company's product focus. Internet-auction giant eBay fell on slowing
growth in European markets and softening volume in the United States. Shares of
Brunswick, known for its boats, marine engines, and equipment for fitness,
billiards, and bowling, fell when the company lowered earnings estimates. Harman
International Industries, whose audio product sales are tied to automotive
markets, provided disappointing earnings guidance and faced competitive
challenges. Motorcycle manufacturer Harley-Davidson lowered production guidance
for the first time in the company's history. Sales, earnings, and profit
projections were also adjusted, which took a toll on the company's shares.
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.
8 MainStay Total Return Fund
Among the Fund's value stocks, The Gap's shares declined when the fall season
got off to a slower-than-expected start. Pharmaceutical giant Pfizer suffered
from pending generic-drug litigation and weaker-than-expected guidance for 2006.
Nevertheless, we like the stock and have hedged nearly all of the Fund's
position using protective put contracts to limit downside exposure. Aluminum
manufacturer Alcoa faced contracting margins, and glass manufacturer
Owens-Illinois was hurt by higher costs. We sold the Fund's entire positions in
these stocks. Verizon Communications faced stronger competition but continued to
provide a high dividend yield. We used the stock's lower valuation to add to the
Fund's position late in the reporting period.
WERE THERE ANY OTHER SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
In the spring of 2005, we sold the Fund's entire positions in several
growth-oriented technology stocks, including Applied Materials, KLA Tencor,
Cisco Systems, and Hewlett-Packard, and we redeployed the proceeds in other
information technology names, including Corning, EMC, Apple Computer, Intel, and
Texas Instruments.
In the value-equity component, we purchased Molson Coors Brewing but later sold
the position when the company was unable to overcome merger-integration
difficulties and the price continued to decline. Although we bought shares of
printer manufacturer Lexmark at a price that we felt was low, operating problems
and inventory issues led us to sell the Fund's position at a loss in late
October.
WHAT ECONOMIC FORCES AFFECTED THE BOND MARKET DURING THE REPORTING PERIOD?
Debate over the lasting effects of higher energy costs continued, with aggregate
demand and inflation among the key concerns. Noting that "higher energy and
other costs have the potential to add to inflation pressures," the Federal Open
Market Committee raised the targeted federal funds rate to 3.75% on September
20, 2005. The move was the FOMC's eighth 25-basis-point increase during the
12-month reporting period. (A basis point is one-hundredth of a percentage
point.)
HOW DID THE TREASURY YIELD CURVE CHANGE DURING THE REPORTING PERIOD?
From October 29, 2004, to October 31, 2005, the two-year Treasury yield advanced
from 2.56% to 4.38%. Over the same period, five-year Treasury yields increased
from 3.29% to 4.45% and 10-year Treasury yields rose from 4.03% to 4.56%. On the
other hand, 30-year Treasury yields, declined from 4.79% to 4.75%.(1) Strong
inflows from Asian central banks helped support prices among longer-dated
Treasurys and resulted in a substantial flattening of the yield curve during the
reporting period. We have positioned the bond portion of the Fund to take
advantage of this flattening trend.
WHAT ELSE DID YOU DO TO POSITION THE BOND PORTION OF THE FUND IN THIS
ENVIRONMENT?
During the 12-month reporting period, the bond portion of the Fund sought to
benefit from the yield advantages of positions in moderate- and lower-quality
securities. Specifically, we sought exposure to issuers in oil-rich emerging
economies. We also used rigorous credit analysis to help reduce the chances that
the bond portion of the Fund's portfolio would fall prey to negative credit
events.
We positioned the bond portion of the Fund's portfolio quite differently than we
did a year ago, when we were seeking credit risk to increase incremental
returns. The new positioning sought a better balance between interest-rate risk
and credit risk, particularly since compensation for taking on additional credit
risk remained modest.
HOW HAS THE MAKEUP OF THE BOND PORTION OF THE FUND'S PORTFOLIO CHANGED DURING
THE REPORTING PERIOD?
During the reporting period, the bond portion of the Fund reduced its allocation
to investment-grade and high-yield corporate bonds to acknowledge their
relatively low yields. The proceeds were split among Treasurys, agency
debentures, mortgage-backed securities, and cash equivalents.
HOW WAS THE BOND PORTION OF THE FUND INVESTED AT THE END OF THE REPORTING
PERIOD?
As of October 31, 2005, we positioned the bond portion of the Fund's portfolio
with a larger-than-usual cash position. The cash was needed to balance the
Fund's longer-duration securities, which reflected our yield-curve flattening
bias. In addition, the duration of the bond portion of the Fund's portfolio was
close to--but slightly shorter than--the duration of the Lehman Brothers(R)
Aggregate Bond Index. With a shorter duration, the Fund should be less sensitive
than the Index to changes in interest rates. (The Lehman Brothers(R) Aggregate
Bond Index is the bond component of the Fund's custom benchmark.)
1. Source: Bloomberg -- Historical yield curve data.
www.MAINSTAYfunds.com 9
At the end of October, the bond portion of the Fund's portfolio was overweighted
relative to the Lehman Brothers Aggregate Bond Index in high-yield corporate
bonds, asset-backed securities, mortgage-backed securities, and cash
equivalents. The bond portion of the Fund was underweighted relative to the
Index in Treasurys, investment-grade corporate bonds, and agency debentures.
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.
10 MainStay Total Return Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS (27.2%)+
ASSET-BACKED SECURITIES (1.0%)
- ------------------------------------------------------------------------------
CONSUMER FINANCE (0.6%)
BMW Vehicle Owner Trust
Series 2003-A, Class A3
1.94%, due 2/25/07 $ 67,446 $ 67,327
Harley-Davidson Motorcycle Trust
Series 2004-1, Class A2
2.53%, due 11/15/11 2,675,000 2,586,886
Volkswagen Auto Loan
Enhanced Trust
Series 2003-2, Class A3
2.27%, due 10/22/07 1,593,040 1,579,913
------------
4,234,126
------------
CONSUMER LOANS (0.2%)
Atlantic City Electric Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 1,600,000 1,644,660
------------
DIVERSIFIED FINANCIAL SERVICES (0.1%)
Capital One Master Trust
Series 2001-5, Class A
5.30%, due 6/15/09 910,000 914,038
------------
ELECTRIC (0.1%)
AES Eastern Energy, L.P.
Series 1999-A
9.00%, due 1/2/17 125,196 144,601
Public Service New Hampshire Funding LLC
Pass-Through Certificates
Series 2002-1, Class A
4.58%, due 2/1/10 973,105 971,120
------------
1,115,721
------------
THRIFTS & MORTGAGE FINANCE (0.0%)++
Vanderbilt Mortgage Finance Series 1999-B, Class
1A4
6.545%, due 4/7/18 143,575 144,193
------------
Total Asset-Backed Securities
(Cost $8,141,850) 8,052,738
------------
CONVERTIBLE BONDS (0.0%)++
- ------------------------------------------------------------------------------
HEALTH CARE--SERVICES (0.0%)++
Laboratory Corp. of America Holdings
(zero coupon), due 9/11/21 100,000 73,750
Lincare Holdings, Inc.
3.00%, due 6/15/33 (a) 45,000 45,169
3.00%, due 6/15/33 115,000 115,431
------------
Total Convertible Bonds
(Cost $235,931) 234,350
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (5.0%)
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.1%)
Sequa Corp.
8.875%, due 4/1/08 $ 95,000 $ 97,375
United Technologies Corp.
5.40%, due 5/1/35 655,000 636,655
------------
734,030
------------
AIRLINES (0.1%)
Delta Air Lines, Inc.
8.30%, due 12/15/29 (b) 40,000 7,100
10.375%, due 12/15/22 (b) 100,000 17,500
Southwest Airlines Co.
5.125%, due 3/1/17 800,000 735,572
------------
760,172
------------
AUTO PARTS & EQUIPMENT (0.0%)++
Collins & Aikman Products Co.
12.875%, due 8/15/12 (a)(b) 90,000 10,800
Goodyear Tire & Rubber Co. (The)
12.75%, due 3/1/11 (a) 80,000 88,400
------------
99,200
------------
AUTOMOBILES (0.2%)
DaimlerChrysler N.A.
Holding Corp.
6.50%, due 11/15/13 1,170,000 1,212,856
------------
CHEMICALS (0.3%)
Cargill, Inc.
5.00%, due 11/15/13 (a) 1,630,000 1,602,489
Equistar Chemicals, L.P.
7.55%, due 2/15/26 (c) 90,000 85,387
Lyondell Chemical Co.
9.50%, due 12/15/08 255,000 267,112
10.50%, due 6/1/13 260,000 294,775
</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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ------------------------------------------------------------------------------
CHEMICALS (CONTINUED)
Millennium America, Inc.
7.625%, due 11/15/26 $ 110,000 $ 103,675
Terra Capital, Inc.
12.875%, due 10/15/08 60,000 70,800
------------
2,424,238
------------
COMPUTERS (0.0%)++
SunGard Data Systems, Inc.
3.75%, due 1/15/09 55,000 50,325
8.525%, due 8/15/13 (a)(c)(d) 10,000 10,250
10.25%, due 8/15/15 (a) 50,000 49,562
------------
110,137
------------
DIVERSIFIED FINANCIAL SERVICES (1.4%)
American Real Estate
Partners, L.P.
8.125%, due 6/1/12 95,000 97,612
Bear Stearns Cos., Inc. (The)
4.00%, due 1/31/08 1,080,000 1,060,766
Citigroup, Inc.
5.00%, due 9/15/14 1,115,000 1,091,907
FGIC Corp.
6.00%, due 1/15/34 (a) 830,000 831,692
General Motors
Acceptance Corp.
5.625%, due 5/15/09 50,000 47,277
6.75%, due 12/1/14 (c) 45,000 43,031
8.00%, due 11/1/31 (c) 115,000 118,719
Goldman Sachs Group, Inc. (The)
6.345%, due 2/15/34 40,000 40,111
Goldman Sachs Group, L.P.
5.00%, due 10/1/14 1,585,000 1,536,458
HSBC Finance Corp.
4.125%, due 11/16/09 1,165,000 1,125,209
4.75%, due 4/15/10 760,000 750,292
5.00%, due 6/30/15 1,325,000 1,276,431
J Paul Getty Trust
Series 2003
5.875%, due 10/1/33 755,000 765,972
Morgan Stanley
3.625%, due 4/1/08 740,000 718,973
OMX Timber Finance Investments LLC
Series 1
5.42%, due 1/29/20 (a) 350,000 346,629
Rainbow National Services LLC
8.75%, due 9/1/12 (a) 75,000 78,750
Residential Capital Corp.
6.375%, due 6/30/10 (a) 740,000 751,651
------------
10,681,480
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%)
MCI, Inc.
6.908%, due 5/1/07 401,000 405,010
Qwest Corp.
7.125%, due 11/15/43 20,000 17,100
------------
422,110
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
ELECTRIC (0.3%)
AES Corp. (The)
9.00%, due 5/15/15 (a) $ 255,000 $ 276,675
Calpine Corp.
8.50%, due 7/15/10 (a)(c) 63,000 44,100
Kiowa Power Partners LLC Series B
5.737%, due 3/30/21 (a) 780,000 772,052
NiSource Finance Corp.
5.45%, due 9/15/20 420,000 401,681
Tenaska Virginia Partners, LP
6.119%, due 3/30/24 (a) 496,402 511,344
------------
2,005,852
------------
ELECTRIC UTILITIES (0.1%)
PSE&G Power LLC
6.875%, due 4/15/06 890,000 898,324
------------
ELECTRICAL EQUIPMENT (0.1%)
Emerson Electric Co.
6.00%, due 8/15/32 970,000 1,023,403
------------
ELECTRONICS (0.0%)++
Fisher Scientific International, Inc.
6.75%, due 8/15/14 125,000 129,062
------------
ENVIRONMENTAL CONTROL (0.0%)++
Geo Sub Corp.
11.00%, due 5/15/12 50,000 48,875
------------
HEALTH CARE PROVIDERS & SERVICES (0.1%)
Ameripath, Inc.
10.50%, due 4/1/13 50,000 52,000
HCA, Inc.
8.75%, due 9/1/10 135,000 147,703
Quest Diagnostics, Inc.
5.45%, due 11/1/15 (a) 310,000 309,054
------------
508,757
------------
HOME BUILDERS (0.1%)
Beazer Homes USA, Inc.
6.875%, due 7/15/15 (c) 450,000 412,875
------------
</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)
- ------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE (0.0%)++
Starwood Hotel & Resorts
7.375%, due 11/15/15 $ 60,000 $ 63,600
------------
INSURANCE (0.1%)
Crum & Forster Holdings Corp.
10.375%, due 6/15/13 60,000 64,200
Fund American Cos., Inc. 5.875%, due 5/15/13 960,000 953,102
------------
1,017,302
------------
IRON & STEEL (0.0%)++
United States Steel Corp.
9.75%, due 5/15/10 100,000 109,000
------------
LODGING (0.0%)++
MGM Mirage, Inc.
8.50%, due 9/15/10 115,000 123,337
------------
MEDIA (0.3%)
Clear Channel
Communications, Inc.
5.50%, due 9/15/14 800,000 751,322
Houghton Mifflin Co.
7.20%, due 3/15/11 75,000 77,625
Reed Elsevier Capital, Inc.
4.625%, due 6/15/12 540,000 518,004
Time Warner Entertainment Co., L.P.
8.375%, due 3/15/23 10,000 11,754
10.15%, due 5/1/12 765,000 943,471
Ziff Davis Media, Inc.
9.69%, due 5/1/12 (d) 70,000 68,250
------------
2,370,426
------------
OIL & GAS (0.2%)
Enterprise Products
Operating, L.P.
Series B
6.65%, due 10/15/34 720,000 720,886
Gazprom International S.A.
7.201%, due 2/1/20 (a) 625,000 664,844
Pride International, Inc.
7.375%, due 7/15/14 35,000 37,712
------------
1,423,442
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
PACKAGING & CONTAINERS (0.0%)++
Owens-Brockway Glass Container, Inc.
7.75%, due 5/15/11 $ 65,000 $ 66,625
Owens-Illinois, Inc.
8.10%, due 5/15/07 (c) 65,000 65,975
------------
132,600
------------
PAPER & FOREST PRODUCTS (0.0%)++
Georgia-Pacific Corp.
8.875%, due 2/1/10 35,000 38,325
9.375%, due 2/1/13 160,000 176,400
Pope & Talbot, Inc.
8.375%, due 6/1/13 65,000 50,700
------------
265,425
------------
PERSONAL PRODUCTS (0.1%)
Estee Lauder Cos., Inc. (The)
5.75%, due 10/15/33 963,000 968,313
------------
PHARMACEUTICALS (0.2%)
Eli Lilly & Co.
6.77%, due 1/1/36 275,000 323,296
Medco Health Solutions, Inc.
7.25%, due 8/15/13 1,180,000 1,278,011
------------
1,601,307
------------
PIPELINES (0.2%)
ANR Pipeline Co.
9.625%, due 11/1/21 55,000 66,628
El Paso Production Holding Co.
7.75%, due 6/1/13 75,000 77,250
Energy Transfer Partners, L.P.
5.95%, due 2/1/15 805,000 784,841
Pacific Energy Partners, L.P.
7.125%, due 6/15/14 50,000 52,000
Williams Cos., Inc.
7.875%, due 9/1/21 95,000 102,481
------------
1,083,200
------------
REAL ESTATE (0.1%)
CB Richard Ellis Services, Inc.
9.75%, due 5/15/10 134,000 146,730
iStar Financial, Inc.
6.50%, due 12/15/13 700,000 709,073
Omega Healthcare Investors, Inc.
7.00%, due 4/1/14 75,000 75,375
------------
931,178
------------
RETAIL (0.6%)
CVS Corp.
5.298%, due 1/11/27 (a) 638,293 616,349
5.789%, due 1/10/26 (a) 330,185 331,634
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ------------------------------------------------------------------------------
RETAIL (CONTINUED)
Dayton Hudson Co.
8.60%, due 1/15/12 $ 675,000 $ 796,546
Kohl's Corp.
6.00%, due 1/15/33 1,690,000 1,611,572
Toys "R" Us, Inc.
7.625%, due 8/1/11 60,000 49,500
Wal-Mart Stores, Inc.
4.50%, due 7/1/15 50,000 47,523
5.25%, due 9/1/35 1,095,000 1,027,608
------------
4,480,732
------------
SEMICONDUCTORS (0.1%)
MagnaChip Semiconductor S.A.
7.12%, due 12/15/11 (d) 225,000 221,063
8.00%, due 12/15/14 180,000 164,700
------------
385,763
------------
SOFTWARE (0.0%)++
Computer Associates International, Inc.
4.75%, due 12/1/09 (a) 225,000 218,502
------------
TELECOMMUNICATIONS (0.2%)
Ameritech Capital Funding Corp.
6.25%, due 5/18/09 320,000 330,164
Dobson Cellular Systems
8.375%, due 11/1/11 35,000 36,488
9.00%, due 11/1/11 (d) 35,000 36,313
PanAmSat Corp.
9.00%, due 8/15/14 37,000 38,943
Qwest Communications International, Inc.
7.25%, due 2/15/11 (c) 70,000 68,075
Qwest Corp.
7.25%, due 9/15/25 45,000 42,525
8.875%, due 3/15/12 30,000 32,925
Qwest Services Corp.
13.50%, due 12/15/10 60,000 68,550
SBC Communications, Inc.
4.125%, due 9/15/09 615,000 592,141
Triton PCS, Inc.
8.50%, due 6/1/13 (c) 45,000 42,075
------------
1,288,199
------------
TEXTILES (0.0%)++
Invista
9.25%, due 5/1/12 (a) 80,000 85,900
------------
TRANSPORTATION (0.0%)++
Gulfmark Offshore, Inc.
7.75%, due 7/15/14 50,000 52,500
------------
Total Corporate Bonds
(Cost $38,614,928) 38,072,097
------------
FOREIGN BONDS (1.1%)
- ------------------------------------------------------------------------------
BEVERAGES (0.1%)
Coca-Cola HBC Finance BV
5.125%, due 9/17/13 430,000 427,769
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
DIVERSIFIED FINANCIAL SERVICES (0.0%)++
Tengizchevroil Finance Co.
6.124%, due 11/15/14 (a) $ 350,000 $ 350,875
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (0.1%)
Telefonos de Mexico S.A. de C.V.
4.50%, due 11/19/08 750,000 733,768
5.50%, due 1/27/15 330,000 317,969
------------
1,051,737
------------
ELECTRIC UTILITIES (0.1%)
SP PowerAssets, Ltd.
5.00%, due 10/22/13 (a) 625,000 620,574
------------
FOREIGN SOVEREIGN (0.1%)
United Mexican States
8.125%, due 12/30/19 495,000 592,020
------------
HOTELS, RESTAURANTS & LEISURE (0.1%)
Royal Caribbean Cruises, Ltd. 6.875%, due 12/1/13 500,000 517,500
------------
INDUSTRIAL CONGLOMERATES (0.0%)++
Stena AB
9.625%, due 12/1/12 45,000 48,600
------------
INSURANCE (0.0%)++
Nippon Life Insurance Co.
4.875%, due 8/9/10 (a) 340,000 333,298
------------
MEDIA (0.2%)
BSKYB Finance UK PLC
5.625%, due 10/15/15 (a) 755,000 743,467
6.50%, due 10/15/35 (a) 375,000 368,432
CanWest Media, Inc.
8.00%, due 9/15/12 105,000 109,988
------------
1,221,887
------------
</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 BONDS (CONTINUED)
- ------------------------------------------------------------------------------
METALS & MINING (0.2%)
Alcan, Inc.
5.00%, due 6/1/15 $ 670,000 $ 642,397
Corporacion Nacional del Cobre-Codelco, Inc.
5.50%, due 10/15/13 (a) 1,000,000 1,002,583
------------
1,644,980
------------
PACKAGING & CONTAINERS (0.0%)++
Crown European Holdings S.A.
10.875%, due 3/1/13 130,000 153,075
------------
REGIONAL GOVERNMENT (0.2%)
Province of Quebec
5.00%, due 7/17/09 1,720,000 1,731,601
------------
TELECOMMUNICATIONS (0.0%)++
Millicom International
Cellular S.A.
10.00%, due 12/1/13 65,000 66,950
------------
Total Foreign Bonds
(Cost $8,791,648) 8,760,866
------------
MORTGAGE-BACKED SECURITIES (1.5%)
- ------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS (COLLATERALIZED MORTGAGE OBLIGATIONS) (1.5%)
Banc of America Commercial Mortgage, Inc.
Series 2001-PB1, Class A1
4.907%, due 5/11/35 305,962 305,915
Series 2005-5, Class A2
5.001%, due 9/10/10 1,175,000 1,166,155
Citigroup Commercial
Mortgage Trust
Series 2004-C2, Class A5
4.733%, due 10/15/41 1,110,000 1,068,162
Citigroup/Deutsche Bank Commercial Mortgage Trust
Series 2005-C1, Class A4
5.225%, due 9/15/20 890,000 890,231
LB-UBS Commercial
Mortgage Trust
Series 2004-C2, Class A2
3.246%, due 3/15/29 1,555,000 1,474,809
Series 2004-C7, Class A1
3.625%, due 10/15/29 1,364,334 1,329,241
Series 2005-C7, Class A4
5.197%, due 11/15/30 925,000 920,088
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL MORTGAGE LOANS (CONTINUED)
Merrill Lynch Mortgage Trust Series 2004-MKB1,
Class A1
3.563%, due 2/12/42 $ 1,229,324 $ 1,197,059
Series 2004-BPC1, Class A5
4.855%, due 10/12/41 2,240,000 2,170,818
Morgan Stanley Capital I
Series 2003-IQ5, Class A1
3.02%, due 4/15/38 863,519 837,157
Wachovia Bank Commercial Mortgage Trust
Series 2004-C14, Class A1
3.477%, due 8/15/41 479,975 467,397
------------
Total Mortgage-Backed Securities
(Cost $12,116,466) 11,827,032
------------
MUNICIPAL BOND (0.1%)
- ------------------------------------------------------------------------------
UNITED STATES (0.1%)
Harris County Texas Industrial Development Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 (d) 660,000 659,960
------------
Total Municipal Bond
(Cost $660,000) 659,960
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (18.2%)
- ------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (MORTGAGE PASS-THROUGH SECURITIES)
(0.9%)
3.00%, due 8/1/10 (e) 674,250 638,072
4.338%, due 3/1/35 (d) 2,037,795 2,001,322
5.00%, due 8/1/33 (e) 1,819,034 1,756,624
5.00%, due 11/1/35 TBA (f) 1,125,000 1,082,109
5.50%, due 12/1/35 TBA (f) 1,685,000 1,660,778
------------
7,138,905
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (4.6%)
4.00%, due 9/2/08 (c) 3,500,000 3,428,499
4.625%, due 5/1/13 5,715,000 5,516,518
4.75%, due 1/2/07 5,760,000 5,766,538
5.125%, due 1/2/14 810,000 805,131
5.25%, due 8/1/12 2,425,000 2,442,943
5.50%, due 5/2/06 5,945,000 5,976,859
6.25%, due 2/1/11 7,165,000 7,548,908
6.625%, due 9/15/09 3,845,000 4,096,994
------------
35,582,390
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (COLLATERALIZED MORTGAGE OBLIGATION)
(0.1%)
Series 1998-M6, Class A2
6.32%, due 8/15/08 713,579 733,917
------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
- ------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (9.3%)
4.50%, due 4/1/18 (e) $ 1,511,170 $ 1,463,854
4.50%, due 7/1/18 (e) 5,448,202 5,277,614
4.50%, due 11/1/18 (e) 6,883,194 6,667,675
5.00%, due 12/1/35 TBA (f) 4,130,000 3,969,963
V 5.50%, due 12/1/20 TBA (f) 16,340,000 16,426,798
5.50%, due 11/1/33 (e) 2,140,945 2,115,497
5.50%, due 12/1/33 (e) 1,813,768 1,792,209
V 5.50%, due 12/1/35 TBA (f) 12,930,000 12,736,050
V 6.00%, due 12/1/35 TBA (f) 15,700,000 15,812,852
6.50%, due 6/1/31 (e) 918,466 944,585
6.50%, due 8/1/31 (e) 747,368 768,621
6.50%, due 10/1/31 (e) 440,613 453,143
7.00%, due 2/1/32 (e) 946,185 989,830
7.50%, due 8/1/31 (e) 1,764,872 1,863,748
------------
71,282,439
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (0.9%)
6.00%, due 4/15/29 (e) 1,774,944 1,808,871
6.00%, due 8/15/32 (e) 2,805,469 2,855,578
7.50%, due 12/15/23 239,133 254,931
7.50%, due 11/15/28 (e) 558,709 592,728
7.50%, due 12/15/28 (e) 1,171,002 1,242,862
------------
6,754,970
------------
UNITED STATES TREASURY BONDS (1.2%)
6.00%, due 2/15/26 2,430,000 2,793,550
6.25%, due 8/15/23 1,870,000 2,182,421
6.25%, due 5/15/30 3,075,000 3,715,464
8.75%, due 8/15/20 2,000 2,830
------------
8,694,265
------------
UNITED STATES TREASURY NOTES (1.2%)
3.375%, due 2/15/08 (c) 8,815,000 8,618,038
3.875%, due 9/15/10 830,000 808,277
4.375%, due 5/15/07 1,000 1,000
------------
9,427,315
------------
Total U.S. Government & Federal Agencies (Cost
$141,317,042) 139,614,201
------------
LOAN ASSIGNMENTS & PARTICIPATIONS (0.2%)
- ------------------------------------------------------------------------------
AUTO PARTS & EQUIPMENT (0.1%)
Goodyear Tire & Rubber Co. (The)
7.06%, due 4/30/10 (d)(g) 265,000 267,043
------------
REAL ESTATE (0.1%)
LNR Property Corp.
Series B
6.73%, due 2/3/08 (d)(g) 979,970 984,870
------------
Total Loan Assignments & Participations
(Cost $1,244,970) 1,251,913
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (0.1%) (H)
- ------------------------------------------------------------------------------
INSURANCE (0.1%)
Fairfax Financial Holdings, Ltd.
7.375%, due 4/15/18 (c) $ 25,000 $ 20,369
7.75%, due 4/26/12 (c) 65,000 59,803
8.30%, due 4/15/26 (c) 25,000 20,720
Montpelier Re Holdings, Ltd.
6.125%, due 8/15/13 391,000 383,236
------------
484,128
------------
OIL & GAS SERVICES (0.0%)++
Petroleum Geo-Services ASA
10.00%, due 11/5/10 90,000 99,450
------------
Total Yankee Bonds
(Cost $610,601) 583,578
------------
Total Long-Term Bonds
(Cost $211,733,436) 209,056,735
------------
<Caption>
SHARES
COMMON STOCKS (70.8%)
- ------------------------------------------------------------------------------
ADVERTISING (0.5%)
Omnicom Group, Inc. 47,200 3,915,712
------------
AEROSPACE & DEFENSE (2.4%)
L-3 Communications
Holdings, Inc. (c) 63,400 4,933,788
Northrop Grumman Corp. 99,300 5,327,445
Raytheon Co. 82,300 3,040,985
United Technologies Corp. 98,600 5,056,208
------------
18,358,426
------------
APPAREL (1.4%)
Coach, Inc. (i) 176,300 5,673,334
NIKE, Inc. Class B 60,300 5,068,215
------------
10,741,549
------------
BANKS (3.3%)
Bank of America Corp. 210,904 9,224,941
PNC Financial Services
Group, Inc. 58,000 3,521,180
State Street Corp. 91,600 5,059,068
</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>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
BANKS (CONTINUED)
U.S. Bancorp 109,500 $ 3,239,010
Wachovia Corp. 92,300 4,662,996
------------
25,707,195
------------
BEVERAGES (0.4%)
PepsiCo, Inc. 55,000 3,249,400
------------
BIOTECHNOLOGY (1.3%)
Amgen, Inc. (i) 76,200 5,772,912
Genentech, Inc. (i) 48,700 4,412,220
------------
10,185,132
------------
BUILDING MATERIALS (0.6%)
American Standard Cos., Inc. 117,000 4,450,680
------------
CAPITAL MARKETS (0.1%)
Ameriprise Financial, Inc. (i) 17,020 633,484
------------
CHEMICALS (0.9%)
Air Products & Chemicals, Inc. 16,500 944,460
Praxair, Inc. 114,200 5,642,622
------------
6,587,082
------------
COAL (0.5%)
Peabody Energy Corp. 52,200 4,079,952
------------
COMPUTERS (3.5%)
Apple Computer, Inc. (i) 98,400 5,666,856
Computer Sciences Corp. (i) 117,800 6,037,250
Dell, Inc. (i) 92,000 2,932,960
EMC Corp. (i) 225,200 3,143,792
International Business
Machines Corp. 106,100 8,687,468
Research In Motion, Ltd. (i) 12,300 756,327
------------
27,224,653
------------
DIVERSIFIED FINANCIAL SERVICES (4.9%)
American Express Co. 84,700 4,215,519
Capital One Financial Corp. 55,600 4,245,060
V Citigroup, Inc. 275,400 12,607,812
Goldman Sachs Group, Inc. (The) 31,600 3,993,292
JPMorgan Chase & Co. 133,544 4,890,381
Merrill Lynch & Co., Inc. 76,200 4,933,188
Morgan Stanley 43,700 2,377,717
------------
37,262,969
------------
</Table>
<Table>
<Caption>
SHARES VALUE
ELECTRONICS (0.6%)
Fisher Scientific International, Inc. (i) 75,600 $ 4,271,400
------------
FOOD (2.1%)
Cadbury Schweppes PLC ADR (j) 149,300 5,925,717
General Mills, Inc. (c) 103,500 4,994,910
Kroger Co. (The) (i) 264,600 5,265,540
------------
16,186,167
------------
HEALTH CARE--SERVICES (3.4%)
Coventry Health Care, Inc. (i) 51,750 2,793,983
HCA, Inc. (c) 42,900 2,067,351
Quest Diagnostics, Inc. 90,700 4,236,597
UnitedHealth Group, Inc. 158,700 9,187,143
WellPoint, Inc. (i) 101,100 7,550,148
------------
25,835,222
------------
HOME BUILDERS (1.9%)
Centex Corp. (c) 72,900 4,691,115
D.R. Horton, Inc. 157,533 4,834,688
Lennar Corp. Class A (c) 86,100 4,785,438
------------
14,311,241
------------
HOME FURNISHINGS (0.5%)
Harman International
Industries, Inc. 36,700 3,664,862
------------
HOUSEHOLD PRODUCTS & WARES (0.7%)
Kimberly-Clark Corp. 97,900 5,564,636
------------
INSURANCE (3.2%)
AFLAC, Inc. 75,200 3,593,056
Allstate Corp. (The) 78,400 4,138,736
Hartford Financial Services Group, Inc. (The) (c) 58,000 4,625,500
PMI Group, Inc. (The) 119,400 4,761,672
Prudential Financial, Inc. 53,200 3,872,428
St. Paul Travelers Cos., Inc. (The) 82,061 3,695,207
------------
24,686,599
------------
INTERNET (0.3%)
eBay, Inc. (i) 49,600 1,964,160
------------
LEISURE TIME (1.2%)
Brunswick Corp. 61,500 2,344,995
Carnival Corp. 57,200 2,841,124
Harley-Davidson, Inc. (c) 87,600 4,338,828
------------
9,524,947
------------
MEDIA (1.1%)
Gannett Co., Inc. 41,900 2,625,454
Time Warner, Inc. 342,800 6,112,124
------------
8,737,578
------------
</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, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- ------------------------------------------------------------------------------
MINING (1.4%)
Alcoa, Inc. 171,500 $ 4,165,735
Inco, Ltd. (c) 157,500 6,334,650
------------
10,500,385
------------
MISCELLANEOUS--MANUFACTURING (2.4%)
3M Co. 55,700 4,232,086
Danaher Corp. (c) 88,200 4,595,220
General Electric Co. 146,700 4,974,597
Illinois Tool Works, Inc. 52,300 4,432,948
------------
18,234,851
------------
OIL & GAS (7.6%)
ConocoPhillips 71,400 4,668,132
V ENSCO International, Inc. 282,300 12,870,057
Kerr-McGee Corp. 29,595 2,516,759
V Pride International, Inc. (i) 430,200 12,075,714
V Rowan Cos., Inc. 363,700 11,998,463
V Transocean, Inc. (i) 253,500 14,573,715
------------
58,702,840
------------
OIL & GAS SERVICES (2.0%)
Baker Hughes, Inc. 90,500 4,973,880
BJ Services Co. (c) 162,600 5,650,350
Weatherford International, Ltd. (i) 81,400 5,095,640
------------
15,719,870
------------
OIL, GAS & CONSUMABLE FUELS (0.6%)
Apache Corp. 24,600 1,570,218
ExxonMobil Corp. 60,000 3,368,400
------------
4,938,618
------------
PACKAGING & CONTAINERS (0.8%)
Owens-IIlinois, Inc. (i) 335,400 6,386,016
------------
PHARMACEUTICALS (4.0%)
Bristol-Myers Squibb Co. 113,900 2,411,263
Caremark Rx, Inc. (i) 116,900 6,125,560
Gilead Sciences, Inc. (i) 91,400 4,318,650
Johnson & Johnson 78,200 4,896,884
Pfizer, Inc. 448,600 9,752,564
Teva Pharmaceutical Industries Ltd. ADR (c)(j) 19,200 731,904
Wyeth 60,000 2,673,600
------------
30,910,425
------------
RETAIL (5.0%)
Bed Bath & Beyond, Inc. (i) 118,000 4,781,360
Best Buy Co., Inc. 105,250 4,658,365
CVS Corp. 136,900 3,341,729
</Table>
<Table>
<Caption>
SHARES VALUE
RETAIL (CONTINUED)
Gap, Inc. (The) (c) 368,700 $ 6,371,136
Kohl's Corp. (i) 95,600 4,601,228
Lowe's Cos., Inc. 80,700 4,904,139
Target Corp. 88,500 4,928,565
Walgreen Co. 106,100 4,820,123
------------
38,406,645
------------
ROAD & RAIL (0.3%)
Norfolk Southern Corp. 53,100 2,134,620
------------
SAVINGS & LOANS (0.4%)
Washington Mutual, Inc. 73,200 2,898,720
------------
SEMICONDUCTORS (2.0%)
Analog Devices, Inc. 41,000 1,425,980
Intel Corp. 268,500 6,309,750
Linear Technology Corp. (c) 85,600 2,842,776
Maxim Integrated Products, Inc. 46,900 1,626,492
Texas Instruments, Inc. 99,300 2,835,015
------------
15,040,013
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (0.2%)
National Semiconductor Corp. 79,600 1,801,348
------------
SOFTWARE (0.9%)
BMC Software, Inc. (i) 74,300 1,455,537
Microsoft Corp. 63,600 1,634,520
Oracle Corp. (i)(c) 275,700 3,495,876
------------
6,585,933
------------
SPECIALTY RETAIL (0.8%)
Home Depot, Inc. (The) 55,600 2,281,824
Wal-Mart Stores, Inc. 78,100 3,694,911
------------
5,976,735
------------
TELECOMMUNICATIONS (7.0%)
Alltel Corp. 70,900 4,385,874
BellSouth Corp. (c) 97,200 2,529,144
Corning, Inc. (i) 298,600 5,998,874
Lucent Technologies, Inc. (i) 788,700 2,247,795
V Motorola, Inc. 501,500 11,113,240
Nokia Oyj ADR (j) 407,100 6,847,422
QUALCOMM, Inc. 49,600 1,972,096
SBC Communications, Inc. 141,500 3,374,775
V Sprint Nextel Corp. 429,800 10,018,638
Verizon Communications, Inc. 165,100 5,202,301
------------
53,690,159
------------
TRANSPORTATION (0.6%)
FedEx Corp. 51,500 4,734,395
------------
Total Common Stocks
(Cost $466,220,927) 543,804,619
------------
</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
CONVERTIBLE PREFERRED STOCKS (0.4%)
- ------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (0.4%)
Goldman Sachs Group, Inc. (The)
Series BSKT 2.125% (i) 30,000 $ 3,001,950
------------
SOFTWARE (0.0%)++
QuadraMed Corp.
5.50% (a)(g) 10,700 208,650
------------
Total Convertible
Preferred Stocks
(Cost $3,267,500) 3,210,600
------------
PREFERRED STOCK (0.1%)
- ------------------------------------------------------------------------------
RETAIL (0.1%)
Sovereign Real Estate Investment Corp.
12.00% (a) 100 144,250
------------
Total Preferred Stock
(Cost $147,000) 144,250
------------
<Caption>
NUMBER OF
CONTRACTS (N)
PURCHASED PUT OPTIONS (0.2%)
- --------------------------------------------------------------------------------
PHARMACEUTICALS (0.2%)
Pfizer, Inc., Strike price $25.00 Expire 12/17/05 2,923 1,023,050
Expire 1/21/06 828 314,640
------------
Total Purchased Put Options
(Premium $385,072) 1,337,690
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (13.3%)
- --------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.2%)
Skandinaviska Enskilda
Banken AB
4.082%, due 2/22/06 (d)(k) $ 1,536,980 1,536,980
------------
Total Certificate of Deposit
(Cost $1,536,980) 1,536,980
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
COMMERCIAL PAPER (7.3%)
American General Finance Corp.
3.84%, due 11/15/05 (e) $ 7,000,000 $ 6,989,547
3.85%, due 11/9/05 (e) 2,000,000 1,998,289
Compass Securitization
3.993%, due 11/22/05 (k) 1,097,843 1,097,843
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (k) 658,706 658,706
General Electric Capital Corp.
3.86%, due 11/9/05 665,000 664,430
Goldman Sachs Group, Inc. (The)
3.98%, due 11/21/05 (e) 1,900,000 1,895,799
ING US Funding LLC
4.04%, due 12/27/05 (e) 2,475,000 2,459,446
International Business
Machines Corp.
3.77%, due 11/9/05 (e) 3,355,000 3,352,189
Merck & Co., Inc.
3.74%, due 11/1/05 3,080,000 3,080,000
Merrill Lynch & Co., Inc.
3.84%, due 11/14/05 (e) 4,475,000 4,468,795
Metlife Funding, Inc.
4.03%, due 1/18/06 (e) 1,320,000 1,308,474
Morgan Stanley
3.85%, due 11/7/05 5,640,000 5,636,381
Silver Tower U.S. Funding
3.932%, due 11/15/05 (k) 651,772 651,772
Toyota Motor Credit Corp.
3.81%, due 11/8/05 3,250,000 3,247,592
UBS Finance Delaware LLC
4.00%, due 11/1/05 10,000,000 10,000,000
Wells Fargo & Co.
3.79%, due 11/7/05 8,640,000 8,634,542
------------
Total Commercial Paper
(Cost $56,143,805) 56,143,805
------------
FEDERAL AGENCIES (0.9%)
Federal Home Loan Bank
3.72%, due 11/2/05 4,000,000 3,999,587
Federal National Mortgage Association (Discount
Note)
3.73%, due 11/14/05 2,875,000 2,871,127
------------
Total Federal Agencies
(Cost $6,870,714) 6,870,714
------------
<Caption>
SHARES VALUE
INVESTMENT COMPANY (1.3%)
BGI Institutional Money Market Fund (k) 10,012,681 $ 10,012,681
------------
Total Investment Company
(Cost $10,012,681) 10,012,681
------------
<Caption>
PRINCIPAL
AMOUNT
TIME DEPOSITS (3.6%)
Bank of the West (The)
4.02%, due 12/8/05 (k) $ 4,171,802 4,171,802
</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, 2005 (CONTINUED)
<Table>
<Caption>
VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- ------------------------------------------------------------------------------
Barclays
3.92%, due 12/5/05 (k) $ 1,756,548 $ 1,756,548
3.94%, due 11/28/05 (k) 1,976,117 1,976,117
Credit Suisse First Boston Corp.
3.74%, due 11/1/05 (k) 1,536,980 1,536,980
Deutsche Bank
3.95%, due 12/2/05 (k) 1,756,548 1,756,548
First Tennessee National Corp.
3.88%, due 11/14/05 (k) 1,756,548 1,756,548
Fortis Bank
4.00%, due 12/12/05 (k) 1,976,117 1,976,117
Halifax Bank of Scotland
3.75%, due 11/1/05 (k) 1,756,548 1,756,548
Keybank
4.00%, due 11/1/05 (k) 1,964,172 1,964,172
Marshall & Ilsley Bank
3.97%, due 12/29/05 (k) 1,756,548 1,756,548
Societe Generale
3.77%, due 11/1/05 (k) 3,732,665 3,732,665
UBS AG
4.01%, due 12/13/05 (k) 1,756,548 1,756,548
Wells Fargo & Co.
4.00%, due 11/25/05 (k) 1,756,548 1,756,548
------------
Total Time Deposits
(Cost $27,653,689) 27,653,689
------------
Total Short-Term Investments
(Cost $102,217,869) 102,217,869
------------
Total Investments
(Cost $783,971,804) (l) 112.0% $859,771,763(m)
Liabilities in Excess of Cash and Other Assets (12.0) (91,822,410)
----------- ------------
Net Assets 100.0% $767,949,353
=========== ============
</Table>
<Table>
++ Less than one tenth of a percent.
(a) May be sold to institutional investors only.
(b) Issue in default.
(c) Represents security, or a portion thereof, which is out
on loan.
(d) Floating rate. Rate shown is the rate in effect at
October 31, 2005.
(e) Segregated, partially segregated or designated as
collateral for TBA's.
(f) 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 market value of these
securities at October 31, 2005 is $51,688,550.
(g) Restricted security. (See Note 7.)
(h) Yankee Bond--dollar-denominated bond issued in the
United States by a foreign bank or corporation.
(i) Non-income producing security.
(j) ADR--American Depositary Receipt.
(k) Represents security, or a portion thereof, purchased
with cash collateral received for securities on loan.
(l) The cost for federal income tax purposes is
$788,755,283.
(m) At October 31, 2005, net unrealized appreciation was
$71,016,480 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 $90,390,177 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $19,373,697.
(n) One contract relates to 100 shares.
</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.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $783,971,804) including
$40,365,398 market value of securities
loaned $859,771,763
Cash 14,631
Receivables:
Investment securities sold 4,480,712
Dividends and interest 2,126,812
Fund shares sold 164,255
Other assets 40,647
-------------
Total assets 866,598,820
-------------
LIABILITIES:
Securities lending collateral 41,611,671
Payables:
Investment securities purchased 53,976,787
Fund shares redeemed 1,159,578
Transfer agent 661,350
NYLIFE Distributors 589,434
Manager 355,263
Custodian 12,899
Accrued expenses 282,485
-------------
Total liabilities 98,649,467
-------------
Net assets $767,949,353
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 51,884
Class B 351,423
Class C 2,035
Class I 4
Additional paid-in capital 665,252,898
Accumulated undistributed net investment
income 662,525
Accumulated net realized gain on investments
and foreign currency transactions 25,828,625
Net unrealized appreciation on investments 75,799,959
-------------
Net assets $767,949,353
=============
CLASS A
Net assets applicable to outstanding shares $ 98,179,722
=============
Shares of beneficial interest outstanding 5,188,357
=============
Net asset value per share outstanding $ 18.92
Maximum sales charge (5.50% of offering price) 1.10
-------------
Maximum offering price per share outstanding $ 20.02
=============
CLASS B
Net assets applicable to outstanding shares $665,908,415
=============
Shares of beneficial interest outstanding 35,142,317
=============
Net asset value and offering price per share
outstanding $ 18.95
=============
CLASS C
Net assets applicable to outstanding shares $ 3,853,750
=============
Shares of beneficial interest outstanding 203,513
=============
Net asset value and offering price per share
outstanding $ 18.94
=============
CLASS I
Net assets applicable to outstanding shares $ 7,466
=============
Shares of beneficial interest outstanding 393
=============
Net asset value and offering price per share
outstanding $ 18.98
=============
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Interest $11,207,877
Dividends (a) 7,674,685
Income from securities loaned--net 98,980
------------
Total income 18,981,542
------------
EXPENSES:
Distribution--Class B 5,379,228
Distribution--Class C 31,657
Manager 5,168,565
Transfer agent--Classes A, B and C 2,805,350
Transfer agent--Class I 12
Distribution/Service--Class A 266,595
Service--Class B 1,793,076
Service--Class C 10,552
Shareholder communication 221,863
Professional 190,400
Recordkeeping 109,476
Custodian 88,618
Trustees 59,395
Registration 56,699
Miscellaneous 59,015
------------
Total expenses before reimbursement 16,240,501
Expense reimbursement from Manager (975,313)
------------
Net expenses 15,265,188
------------
Net investment income 3,716,354
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS, FOREIGN
CURRENCIES AND WRITTEN OPTIONS:
Net realized gain on:
Security transactions 30,768,385
Written option transactions 9,292
Foreign currency transactions 7,495
------------
Net realized gain on investments, written
options and foreign currency transactions 30,785,172
------------
Net change in unrealized appreciation on:
Security transactions 29,581,320
Translation of other assets and liabilities
in foreign currencies (155)
------------
Net change in unrealized appreciation on
investments and foreign currency transactions 29,581,165
------------
Net realized and unrealized gain on
investments, foreign currencies and written
options transactions 60,366,337
------------
Net increase in net assets resulting from
operations $64,082,691
============
</Table>
(a) Dividends recorded net of foreign withholding taxes of $66,010.
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 CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 3,716,354 $ 2,730,893
Net realized gain on investments,
written options and foreign
currency transactions 30,785,172 46,152,950
Net change in unrealized
appreciation (depreciation) on
investments, written options and
foreign currency transactions 29,581,165 (16,753,089)
-----------------------------
Net increase in net assets
resulting from operations 64,082,691 32,130,754
-----------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (1,173,938) (1,148,966)
Class B (2,457,930) (1,788,557)
Class C (14,284) (10,693)
Class I (72) (10)
From net realized gain on investments:
Class A (2,056,474) --
Class B (13,580,523) --
Class C (77,668) --
Class I (60) --
-----------------------------
Total dividends and distributions
to shareholders (19,360,949) (2,948,226)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 15,772,768 20,764,539
Class B 22,024,368 32,973,201
Class C 451,258 586,220
Class I 4,799 3,106
</Table>
<Table>
<Caption>
2005 2004
Net asset value of shares issued to shareholders
in reinvestment of dividends and distributions:
Class A $ 3,046,495 $ 1,078,925
Class B 15,688,823 1,741,322
Class C 88,351 9,944
Class I 91 4
-----------------------------
57,076,953 57,157,261
Cost of shares redeemed:
Class A (42,412,842) (49,094,585)
Class B (160,092,924) (138,738,732)
Class C (1,443,584) (1,053,024)
Class I (895) --
-----------------------------
(203,950,245) (188,886,341)
Decrease in net assets derived
from capital share
transactions (146,873,292) (131,729,080)
-----------------------------
Net decrease in net assets (102,151,550) (102,546,552)
NET ASSETS:
Beginning of year 870,100,903 972,647,455
-----------------------------
End of year $ 767,949,353 $ 870,100,903
=============================
Accumulated undistributed net
investment income at end of year $ 662,525 $ 518,433
=============================
</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
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS A
--------------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 17.96 $ 17.42 $ 15.29 $ 18.92 $ 22.14 $ 27.23
------- -------- ----------- -------- -------- --------
Net investment income 0.21 (f) 0.17 0.16 (c) 0.27 0.34 (d) 0.38
Net realized and unrealized
gain (loss) on investments 1.29 0.54 2.12 (3.62) (2.99)(d) (1.62)
------- -------- ----------- -------- -------- --------
Total from investment
operations 1.50 0.71 2.28 (3.35) (2.65) (1.24)
------- -------- ----------- -------- -------- --------
Less dividends and
distributions:
From net investment income (0.21) (0.17) (0.15) (0.28) (0.35) (0.39)
From net realized gain on
investments (0.33) -- -- -- (0.22) (3.46)
------- -------- ----------- -------- -------- --------
Total dividends and
distributions (0.54) (0.17) (0.15) (0.28) (0.57) (3.85)
------- -------- ----------- -------- -------- --------
Net asset value at end of
period $ 18.92 $ 17.96 $ 17.42 $ 15.29 $ 18.92 $ 22.14
======= ======== =========== ======== ======== ========
Total investment return (a) 8.43% 4.05% 15.02%(b) (17.75%) (11.92%) (4.48%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (f) 1.10% (f) 0.94% 1.21%+ 1.57% 1.74% (d) 1.42%
Net expenses 1.19% 1.30% 1.33%+ 1.30% 1.18% 1.13%
Expenses (before
reimbursement) 1.31% 1.30% 1.33%+ 1.31% 1.21% 1.15%
Portfolio turnover rate 77% (e) 103% 67% 96% 120% 123%
Net assets at end of period
(in 000's) $98,180 $115,877 $138,787 $140,298 $221,022 $231,649
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------------------------
JANUARY 1,
2003*
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $17.98 $17.45 $15.32 $ 18.95 $ 22.17 $ 27.23
------ ------ ----------- ------- ------- -------
Net investment income 0.07 (f) 0.04 0.06 (c) 0.14 0.20 (d) 0.18
Net realized and unrealized
gain (loss) on investments 1.28 0.53 2.13 (3.61) (3.00)(d) (1.60)
------ ------ ----------- ------- ------- -------
Total from investment
operations 1.35 0.57 2.19 (3.47) (2.80) (1.42)
------ ------ ----------- ------- ------- -------
Less dividends and
distributions:
From net investment income (0.06) (0.04) (0.06) (0.16) (0.20) (0.18)
From net realized gain on
investments (0.33) -- -- -- (0.22) (3.46)
------ ------ ----------- ------- ------- -------
Total dividends and
distributions (0.39) (0.04) (0.06) (0.16) (0.42) (3.64)
------ ------ ----------- ------- ------- -------
Net asset value at end of
period $18.94 $17.98 $17.45 $ 15.32 $ 18.95 $ 22.17
====== ====== =========== ======= ======= =======
Total investment return (a) 7.60% 3.27% 14.33%(b) (18.37%) (12.61%) (5.10%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.35% (f) 0.19% 0.46%+ 0.82% 0.99% (d) 0.67%
Net expenses 1.94% 2.05% 2.08%+ 2.05% 1.93% 1.88%
Expenses (before
reimbursement) 2.06% 2.05% 2.08%+ 2.06% 1.96% 1.90%
Portfolio turnover rate (e) 77% (e) 103% 67% 96% 120% 123%
Net assets at end of period
(in 000's) $3,854 $4,532 $4,845 $ 4,501 $ 7,528 $ 9,671
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Total Return is calculated exclusive of sales charge. Class I is not subject to sales
charges.
(b) Total return is 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 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>
<Table>
(e) The portfolio turnover rate not including mortgage dollar rolls for the year ending
October 31, 2005 is 38%.
(f) Net investment income includes $0.01 and there was no effect to the net income ratio, as a
result of a special one time dividend from Microsoft Corp.
</Table>
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.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
---------------------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 17.98 $ 17.45 $ 15.32 $ 18.95 $ 22.17 $ 27.23
----------- ----------- ----------- ------------ ------------ ------------
0.07 (f) 0.04 0.06 (c) 0.14 0.20 (d) 0.18
1.29 0.53 2.13 (3.61) (3.00)(d) (1.60)
----------- ----------- ----------- ------------ ------------ ------------
1.36 0.57 2.19 (3.47) (2.80) (1.42)
----------- ----------- ----------- ------------ ------------ ------------
(0.06) (0.04) (0.06) (0.16) (0.20) (0.18)
(0.33) -- -- -- (0.22) (3.46)
----------- ----------- ----------- ------------ ------------ ------------
(0.39) (0.04) (0.06) (0.16) (0.42) (3.64)
----------- ----------- ----------- ------------ ------------ ------------
$ 18.95 $ 17.98 $ 17.45 $ 15.32 $ 18.95 $ 22.17
=========== =========== =========== ============ ============ ============
7.66% 3.27% 14.33%(b) (18.37%) (12.61%) (5.10%)
0.35% (f) 0.19% 0.46%+ 0.82% 0.99% (d) 0.67%
1.94% 2.05% 2.08%+ 2.05% 1.93% 1.88%
2.06% 2.05% 2.08%+ 2.06% 1.96% 1.90%
77% (e) 103% 67% 96% 120% 123%
$665,908 $749,689 $829,016 $793,340 $1,143,755 $1,457,366
</Table>
<Table>
<Caption>
CLASS I
- --------------------------------
JANUARY 2,
2004**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
2005 2004
$17.92 $17.98
----------- -----------
0.26 (f) 0.15
1.42 (0.03)
----------- -----------
1.68 0.12
----------- -----------
(0.29) (0.18)
(0.33) --
----------- -----------
(0.62) (0.18)
----------- -----------
$18.98 $17.92
=========== ===========
9.51% 0.68%(b)
1.43% (f) 1.40%+
0.86% 0.84%+
0.98% 0.84%+
77% (e) 103%
$ 7 $ 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 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 nineteen 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
a 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 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. 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 accounting
principles generally accepted in the United States of America 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 normally are taken
from the principal 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 in good faith
by 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 principal market is temporarily closed at a
time when under normal conditions it would be open. The Fund did not hold
securities at October 31, 2005, 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) 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
26 MainStay Total Return Fund
acquire are included at market value in the portfolio of investments and
liabilities for such purchase commitments are included as payables for
investments purchased. During the roll period, a Fund forgoes principal and
interest on the securities. A Fund is compensated by the difference between the
current sales price and the forward price for the future purpose as well as by
the earnings on the cash proceeds of the initial sale. MDRs may be renewed
without physical delivery of the securities subject to the contract. 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) 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. (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 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.
(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 accounting principles generally accepted in
the United States of America. 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, accumulated net realized gain
and additional paid-in-capital, arising from permanent differences; net assets
at October 31, 2005 are not affected.
<Table>
<Caption>
ACCUMULATED NET
UNDISTRIBUTED NET REALIZED GAIN ON ADDITIONAL
INVESTMENT INCOME INVESTMENTS PAID-IN-CAPITAL
$73,962 $(73,963) $1
------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The reclassifications for the Fund are primarily due to real estate investment
trust investments, paydowns 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 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.
(I) 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 and
unrealized appreciation or depreciation is recorded 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, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the market price of the underlying security or foreign
currency increase but, as long as the obligation as a writer continues, have
retained the risk of loss should the price of the underlying security decline.
By writing a covered put option, the Fund, in exchange for the premium, accepts
the risk of decline in the market value of the underlying security or foreign
currency below the exercise price. After writing a put option, the Fund may
incur a loss equal to the difference between the exercise price of the option
and the sum of the market value of the underlying security plus the premium
received from the sale of the option. 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.
(J) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at
the mean between the buying and selling rates last quoted by any major U.S. bank
at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities are presented at the exchange rates and market values
at the close of the period. The realized and unrealized changes in net assets
arising from fluctuations in exchange rates and market prices of securities are
not separately presented. 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 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, are reflected in
unrealized foreign exchange gains or losses at period end exchange rates.
(K) 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 transfer agent expenses and 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.
(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.
28 MainStay Total Return Fund
(M) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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 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 percentage of the Fund's
average daily net assets as follows: 0.64% on assets up to $500 million and
0.60% on assets in excess of $500 million. Effective August 1, 2005, the Manager
has entered into a written expense limitation agreement, under which the Manager
has agreed to reimburse the expenses of the Fund so that the total operating
expenses (excluding taxes, interest, litigation, extraordinary expenses, and
brokerage and other transaction expenses relating to the purchase or sale of
portfolio investments) do not exceed, on an annualized basis, 1.19% of the
average daily net assets of the Class A shares. An equivalent reimbursement, in
an equal amount of basis points, will be applied to the other share classes. The
Manager, within three years of incurring such expenses, may recoup the amount of
any management fee waiver or expense reimbursement from the Fund pursuant to
this agreement if such recoupment does not cause the Fund to exceed the expense
limitations. At October 31, 2005, the Fund had $177,401 of recoupment available.
This amount is available until October 31, 2008. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. Prior to
August 1, 2005 and after December 1, 2004, NYLIM agreed to voluntarily reimburse
the expenses of the Fund so that total annual fund operating expenses would not
exceed on an annualized basis 1.19% of the average daily net assets of the Class
A and such that there would be an equivalent reduction for the other classes of
shares. For the year ended October 31, 2005, the Manager earned fees from the
Fund in the amount of $5,168,565 and waived its fees and/or reimbursed expenses
in the amount of $975,313.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and MacKay
Shields, the Manager pays the Subadvisor a monthly fee 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 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 $306,171 for the year
ended October 31, 2005. 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 $4,835, $363,647 and $370, respectively, for the year ended October
31, 2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $2,805,362.
(E) NON-INTERESTED TRUSTEES FEES. Non-Interested Trustees are paid an annual
retainer fee of $45,000, $2,000
www.MAINSTAYfunds.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and Compliance Committee Chairman
receives an additional $2,000 for each meeting of the Audit and Compliance
Committee attended and the Chairpersons of the Brokerage and Expense Committee,
Operations Committee and Performance Committee each receive an additional $1,000
for each meeting of the Brokerage and Expense 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 Fund only pays a portion of the fees identified
above.
(F) CAPITAL. At October 31, 2005 New York Life held shares of Class A and Class
I with net values of $5,360,090 and $1,090, respectively. This represents 5.5%
and 14.6% of Class A and Class I net assets, respectively and 0.7% of the Fund's
total net assets at October 31, 2005.
(G) OTHER. Pursuant to the Management Agreement, 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
$21,316 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $109,476 for the year ended
October 31, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, State Street Bank and Trust Company acted as custodian for
the Fund.
NOTE 5--FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL TOTAL
ORDINARY AND OTHER UNREALIZED ACCUMULATED
INCOME GAINS APPRECIATION GAIN
$2,494,629 $28,780,000 $71,016,480 $102,291,109
------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to premium amortization adjustments and wash sale loss deferrals.
The tax character of distributions paid during the years ended October 31, 2005
and 2004, shown in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
2005 2004
Distributions paid from:
Ordinary Income $ 3,635,097 $2,948,226
Long-term capital gains 15,725,852 --
- ---------------------------------------------------------------
$19,360,949 $2,948,226
- ---------------------------------------------------------------
</Table>
NOTE 6--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of U.S. Government
securities were $385,035 and $381,248, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $235,569 and $373,046, respectively.
NOTE 7--PORTFOLIO SECURITIES LOANED, RESTRICTED SECURITIES AND WRITTEN OPTIONS:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $40,365,398. The Fund received $41,611,671 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.
Restricted securities held at October 31, 2005:
<Table>
<Caption>
PRINCIPAL
DATE(S) OF AMOUNT/ 10/31/05 PERCENT OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
Goodyear Tire & Rubber Co.
2nd Lien Note
7.06%, due 4/30/10 6/24/05 265,000 $ 265,000 $ 267,043 0.1%
- ---------------------------------------------------------------------------------------------------------------------------------
LNR Property Corp.
Term Loan B
6.73%, due 2/3/08 2/10/2005 979,970 979,970 984,870 0.2%
- ---------------------------------------------------------------------------------------------------------------------------------
$1,244,970 $1,251,913 0.2%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
30 MainStay Total Return Fund
During the year ended October 31, 2005, Fund had the following transactions in
Written Options:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUMS
Options Outstanding at October 31, 2004 -- $ --
- ------------------------------------------------------------------------
Options Written (46) (9,292)
- ------------------------------------------------------------------------
Options Expired 46 9,292
- ------------------------------------------------------------------------
Options Outstanding at October 31, 2005 -- $ --
- ------------------------------------------------------------------------
</Table>
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, 2005.
NOTE 9--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C CLASS I
Shares sold 846 1,183 24 --(a)
- -------------------------------------------------------------------------------
Shares issued in reinvestment of
dividends and distributions 164 848 5 --(a)
- -------------------------------------------------------------------------------
1,010 2,031 29 --(a)
Shares redeemed (2,276) (8,590) (77) --(a)
- -------------------------------------------------------------------------------
Net decrease (1,266) (6,559) (48) --(a)
- -------------------------------------------------------------------------------
</Table>
<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) --(a)
- --------------------------------------------------------------------------------
Net decrease (1,513) (5,805) (26) --(a)
- --------------------------------------------------------------------------------
</Table>
* Commenced operations on January 2, 2004.
(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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.9 million to nine MainStay funds. The amount paid to the MainStay
Total Return Fund was $102,000. NYLIM has also agreed to reimburse or pay all
expenses relating to the Board of Trustees' review of this matter and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
www.MAINSTAYfunds.com 31
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, 2005, and
the related statement of operations for the year then ended, and the statements
of changes in net assets and financial highlights for each of the years in the
two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the
results of its operations for the year then ended, and the changes in its net
assets and financial highlights for each of the years in the two-year period
then ended, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
32 MainStay Total Return 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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
www.MAINSTAYfunds.com 33
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
34 MainStay Total Return Fund
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 35
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's underperformance when compared
over several time periods with funds concluded by Trustees to be peers of the
Fund, as well as changes to the Fund's investment process and its improving
investment performance relative to those funds.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund, with the expectation that the Manager intended, over time, to
implement measures designed to reduce the Trust's transfer agency fees. The
Trustees considered certain benefits expected for, and risks borne by, the
Manager and its affiliates, including benefits from soft dollar arrangements.
The Trustees considered the services provided to the Fund by affiliates of the
Manager, NYLIFE Distributors and NYLIM Service, under other agreements, and the
benefits to the Manager and its affiliates from those relationships. The
information provided to the Trustees indicated that the profitability to the
Manager and its affiliates arising directly from those other agreements was not
excessive. The Trustees acknowledged certain benefits to the reputation of the
Manager and its affiliates, as well to that of the Trust, from their association
with each other.
The Trustees, in considering economies of scale, reviewed information showing
that the asset size of the Fund had decreased in size over the past five years.
The Trustees discussed the extent to which economies of scale were
36 MainStay Total Return Fund
projected by the Manager to be realized were the Fund to grow, or as the Trust
grows overall, noting in particular the Manager's plans for marketing and
distributing shares of various series of the Trust. They noted the Manager's
willingness to implement contractual breakpoints, and that the contractual
breakpoints in place for the management fee were intended to provide that the
Fund's shareholders would share in benefits from economies of scale arising from
the growth of Fund assets. The Trustees noted that the Fund's contractual
management fee had been reduced in accordance with the terms of the breakpoint
schedule applicable to the Fund. Acknowledging the difficulty of forecasting
economies of scale, the Trustees generally expressed an intention to monitor the
Manager's profitability and consider the application of fee breakpoints or other
appropriate measures as the Board may determine from time to time. The Trustees
reviewed historical information about changes in the Fund's expense and asset
levels over time, as well as information about certain Fund expenses that would
remain fixed even as Fund assets increase and, therefore, provide the Fund with
benefits from economies of scale as the Fund grows. The Trustees noted that, to
the extent the Fund's gross expenses currently are higher than its net expenses,
economies of scale achieved through an increase in the Fund's assets might not
directly benefit the Fund through lower net expenses. The Trustees considered
various information about transfer agency expenses, including information
showing that transfer agency fees of the Fund and a significant number of series
of the Trust (although not every such series or with respect to every share
class of each series) tended to be high, when aggregated and expressed as a
percentage of the assets of certain series, compared to the mutual fund industry
average according to certain studies reviewed by the Board and, therefore,
adversely affected gross expense ratios. The Board received information about
potential effects on the Manager were it to subsidize certain portions of the
Trust's transfer agency fees. The Trustees noted that a significant number of
shareholders of the Trust's series had small amounts invested in the series, and
have considered measures intended to increase average shareholder account size
and/or otherwise reduce the Trust's transfer agency fees and expenses, including
steps that the Manager has taken to encourage shareholders to consolidate or
close small accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its
anticipated gross and net expense ratios, and various components of that expense
ratio, in comparison to other funds in comparison groupings prepared by outside
data providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
Manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
www.MAINSTAYfunds.com 37
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, 2005) 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 $15,725,852 on December 13,
2004.
The dividends paid by the Fund during the fiscal year ended October 31, 2005,
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 2006, 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 2005. 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, 2005.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
38 MainStay Total Return 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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
www.MAINSTAYfunds.com 39
(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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A08031 (RECYCLE SYMBOL) MS475-05 MSTR11-12/05
14
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
VALUE FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay Value Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/S/ CHRISTOPHER O. BLUNT
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- --------------------------------------------------------------------------------
Investment and Performance Comparison 4
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 8
- --------------------------------------------------------------------------------
Portfolio of Investments 10
- --------------------------------------------------------------------------------
Financial Statements 13
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 24
Trustees and Officers 25
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 28
- --------------------------------------------------------------------------------
Federal Income Tax Information 30
- --------------------------------------------------------------------------------
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 (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 4.07% 1.26% 6.44%
Excluding sales charges 10.13 2.41 7.04
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/95 9450 10000
11515 12374
14131 16480
14020 18923
14915 22051
16566 23267
15425 20508
12600 18453
15218 22674
16946 26178
10/31/05 18663 29283
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 4.27% 1.26% 6.29%
Excluding sales charges 9.27 1.64 6.29
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/95 10000 10000
12117 12374
14805 16480
14578 18923
15383 22051
16964 23267
15670 20508
12705 18453
15232 22674
16840 26178
10/31/05 18401 29283
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------
With sales charges 8.27% 1.64% 6.29%
Excluding sales charges 9.27 1.64 6.29
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/95 10000 10000
12117 12374
14805 16480
14578 18923
15383 22051
16964 23267
15670 20508
12705 18453
15232 22674
16840 26178
10/31/05 18401 29283
</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. 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 contractual and may be modified or terminated
only with the approval of the Board of Trustees. 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),
THE DISCLOSURE AND FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES
AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Value Fund
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
10.36% 2.65% 7.34%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/95 10000 10000
12241 12374
15100 16480
15017 18923
16000 22051
17813 23267
16610 20508
13598 18453
16466 22674
18400 26178
10/31/05 20306 29283
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
10.31% 2.57% 7.24%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/95 10000 10000
12224 12374
15072 16480
14966 18923
15928 22051
17725 23267
16514 20508
13507 18453
16336 22674
18241 26178
10/31/05 20122 29283
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
10.02% 2.31% 6.98%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY VALUE FUND RUSSELL 1000 VALUE INDEX
------------------- ------------------------
10/31/95 10000 10000
12197 12374
14998 16480
14861 18923
15785 22051
17516 23267
16280 20508
13287 18453
16027 22674
17849 26178
10/31/05 19636 29283
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
Russell 1000(R) Value Index(1) 11.86% 4.71% 11.34%
Average Lipper large-cap value fund(2) 9.75 2.40 9.01
</Table>
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.
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 THE
TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
www.MAINSTAYfunds.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY VALUE FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31, 2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT ENDING ACCOUNT
VALUE (BASED VALUE (BASED
BEGINNING ON ACTUAL EXPENSES ON HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,046.20 $ 6.29 $1,018.90 $ 6.21
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,042.55 $10.14 $1,015.15 $10.01
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,042.55 $10.14 $1,015.15 $10.01
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,047.35 $ 4.70 $1,020.45 $ 4.63
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,046.70 $ 5.16 $1,020.00 $ 5.09
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,044.55 $ 6.44 $1,018.75 $ 6.36
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.22% for Class A, 1.97% for Class B and Class C, 0.91% for Class I, 1.00%
for Class R1, and 1.25% for Class R2) multiplied by the average account value
over the period, divided by 365, multiplied by 184 (to reflect the one-half
year period).
6 MainStay Value Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(COMPOSITION PIE CHART)
<Table>
Common Stocks 92.8%
Short-Term Investments (Collateral from securities lending 13.6
is 7.0%)
Convertible Preferred Stocks 1.1
Purchase Put Options 0.7
Liabilities in Excess of Cash and Other Assets -8.2
</Table>
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Citigroup, Inc.
2. Pfizer, Inc.
3. Bank of America Corp.
4. Sprint Nextel Corp.
5. ExxonMobil Corp.
6. Nokia OYJ ADR
7. Transocean, Inc.
8. International Business Machines Corp.
9. Pride International, Inc.
10. Time Warner, Inc.
</Table>
www.MAINSTAYfunds.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio manager Richard A. Rosen 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 equity securities
and is not managed primarily to produce current income. In implementing this
strategy, the Fund normally invests in U.S. 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.
During the 12-month reporting period, all of the assets and liabilities of
MainStay Research Value Fund were transferred to MainStay Value Fund in exchange
for shares of MainStay Value Fund.
WHAT MAJOR FACTORS INFLUENCED THE STOCK MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2005?
During the 12-month reporting period, stocks generally advanced, despite
political events and energy price fluctuations. Value stocks outperformed growth
stocks at all capitalization levels. Crude-oil prices rallied to $69.81 per
barrel and natural-gas prices broke $14 per million Btu before backing off
somewhat. Major hurricanes affected supply-and-demand dynamics by damaging oil
rigs and petrochemical plants. The price of gasoline rose to more than $3 a
gallon, which threatened to slow consumer spending. Although hurricane-related
stocks--including retailers, insurers, and companies on the Gulf Coast--were
weakened, the long-term economic impact appeared to be manageable.
The Federal Open Market Committee raised the targeted federal funds rate eight
times during the 12-month reporting period, with a 25-basis-point increase on
each occasion. (A basis point is one-hundredth of a percentage point.) On
October 31, 2005, the federal funds target rate stood at 3.75%. During the
reporting period, the yield curve flattened to reflect concern over a potential
recession. Yet the most recent gross domestic product data suggests that the
overall economy has remained resilient.
WHICH FUND HOLDINGS WERE PARTICULARLY STRONG DURING THE REPORTING PERIOD?
We saw strong results from energy-related holdings Transocean, Pride
International, ENSCO International, and Rowen. Higher energy prices,
hurricane-related supply pressures, and higher day rates benefited these stocks.
We trimmed the Fund's positions in Transocean, ENSCO International, and Rowen as
the stocks approached our price targets.
HOW DID THE FUND'S FINANCIAL STOCKS PERFORM?
We saw positive results from our stock selection in the financials sector.
Operating improvements at Prudential Financial helped the company post strong
earnings gains. The company shed noncore insurance operations and made
cost-effective Asian acquisitions to help improve its return on equity. The
Hartford Financial Services Group, St. Paul Travelers, and AFLAC were other
insurance companies that showed strong results. The Goldman Sachs Group and
State Street are two capital markets stocks that helped the Fund's performance.
WERE THERE OTHER SUCCESS STORIES?
Motorola benefited from good handset sales, in-creased market share, and
excitement over a new product line-up. The company strengthened its balance
sheet under the leadership of a new CEO. We pared back the Fund's position as
the stock approached our price target. In the information technology sector,
Texas Instruments showed strength from the Fund's initial purchase in January
through the end of October. Wireless semiconductor sales and a share buyback
program accelerated during the reporting period. Among consumer-related stocks,
supermarket Kroger and food manufacturer Cadbury Schwepps were both strong.
WHICH STOCKS DETRACTED FROM THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
Clothing retailer The Gap clearly hit a weak spot in its sales recovery when the
fall season got off to a slower-than-expected start. Higher gasoline prices and
slipping consumer confidence also hurt the stock. We are optimistic about better
sales trends during the holiday season, and we believe that low valuations, a
share repurchase program, and a strong balance sheet make the stock attractive.
Shares of Molson Coors Brewing fell from our initial purchase in March until our
sale later in the reporting period. When sales slowed and the company showed
evidence of merger-integration difficulties, we sold the Fund's entire position
in the stock.
8 MainStay Value Fund
Pending generic-drug litigation and weaker-than-expected guidance for 2006 took
a toll on Pfizer. Nevertheless, we like the stock for its upside potential,
all-time low valuation, strong free cash flow, and 3% yield. We have hedged
nearly all of the Fund's position using protective put contracts to limit
downside exposure.
Although we purchased the stock at what looked like a low price, printer
manufacturer Lexmark continued to report operating problems and inventory
issues. We concluded that the company's downside risk outweighed its upside
potential, and we sold the Fund's entire position in late October 2005.
Alcoa faced contracting margins because of higher energy prices and weakness in
some end markets. Glass manufacturer Owens-Illinois was also hurt by higher
costs. We sold the Fund's entire position in both of these stocks. Verizon
Communications faced stronger competition in its wireline business, but
continued to provide a high dividend yield. We used lower valuations to add to
the Fund's position late in the reporting period.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
After selling many energy stocks that had reached our price targets, by October
31, 2005, the Fund was only slightly overweighted relative to the Russell
1000(R) Index in the energy sector. The Fund was overweighted in consumer
staples and information technology, where we continue to find select value
opportunities. At the end of the reporting period, the Fund was also
overweighted in telecommunications services, where we judge asset value to be a
near-term catalyst in a number of portfolio holdings. Our belief that some major
drug companies have favorable risk/reward characteristics has supported our
decision to overweight health care stocks.
With gasoline prices finally having an impact on consumer spending, the Fund
closed the reporting period underweighted in consumer discretionary stocks. We
have, however, begun to find select opportunities in the sector. Since we have
yet to find much value in utilities, the Fund remained underweighted relative to
the Index in the sector. At the end of October 2005, the Fund was cautiously
underweighted among interest-rate sensitive financials and REITS. The Fund was
also underweighted relative to the Russell 1000(R) Index in industrials and
materials.
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.
www.MAINSTAYfunds.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (92.8%)+
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE (3.0%)
Northrop Grumman Corp. 270,900 $ 14,533,785
Raytheon Co. 181,400 6,702,730
------------
21,236,515
------------
BUILDING PRODUCTS (1.4%)
American Standard Cos., Inc. 264,100 10,046,364
------------
CAPITAL MARKETS (7.2%)
Goldman Sachs Group, Inc. 76,700 9,692,579
iShares Russell 1000 Value Index Fund (a) 125,000 8,365,000
Merrill Lynch & Co., Inc. 202,600 13,116,324
Morgan Stanley 145,500 7,916,655
State Street Corp. 227,300 12,553,779
------------
51,644,337
------------
COMMERCIAL BANKS (9.3%)
V Bank of America Corp. 510,826 22,343,529
PNC Financial Services Group, Inc. 129,700 7,874,087
U.S. Bancorp 442,300 13,083,234
Wachovia Corp. 225,200 11,377,104
Wells Fargo & Co. 200,300 12,058,060
------------
66,736,014
------------
COMMUNICATIONS EQUIPMENT (5.0%)
Lucent Technologies, Inc. (b) 1,677,900 4,782,015
Motorola, Inc. 658,200 14,585,712
V Nokia OYJ ADR (c) 975,400 16,406,228
------------
35,773,955
------------
COMPUTERS & PERIPHERALS (2.2%)
V International Business Machines Corp. 192,900 15,794,652
------------
DIVERSIFIED FINANCIAL SERVICES (6.2%)
V Citigroup, Inc. 666,766 30,524,548
JPMorgan Chase & Co. 378,692 13,867,701
------------
44,392,249
------------
DIVERSIFIED TELECOMMUNICATION SERVICES (3.8%)
BellSouth Corp. (e) 266,100 6,923,922
SBC Communications, Inc. (e) 316,700 7,553,295
Verizon Communications, Inc. 403,600 12,717,436
------------
27,194,653
------------
ENERGY EQUIPMENT & SERVICES (8.4%)
ENSCO International, Inc. 321,100 14,638,949
V Pride International, Inc. (b) 549,700 15,430,079
Rowan Cos., Inc. 417,200 13,763,428
V Transocean, Inc. (b) 275,700 15,849,993
------------
59,682,449
------------
</Table>
<Table>
<Caption>
SHARES VALUE
FOOD & STAPLES RETAILING (2.5%)
CVS Corp. 329,900 $ 8,052,859
Kroger Co. (The) (b) 495,600 9,862,440
------------
17,915,299
------------
FOOD PRODUCTS (3.2%)
Cadbury Schweppes PLC ADR (c) 287,300 11,402,937
General Mills, Inc. (e) 236,800 11,427,968
------------
22,830,905
------------
HEALTH CARE PROVIDERS & SERVICES (0.7%)
HCA, Inc. (e) 103,400 4,982,846
------------
HOUSEHOLD PRODUCTS (2.0%)
Kimberly-Clark Corp. 248,000 14,096,320
------------
INSURANCE (7.0%)
AFLAC, Inc. 182,700 8,729,406
Allstate Corp. (The) 189,600 10,008,984
Hartford Financial Services Group, Inc. (The) (e) 139,900 11,157,025
Prudential Financial, Inc. 166,800 12,141,372
St. Paul Travelers Cos., Inc. (The) 175,911 7,921,272
------------
49,958,059
------------
IT SERVICES (1.7%)
Computer Sciences Corp. (b) 232,200 11,900,250
------------
MEDIA (2.2%)
V Time Warner, Inc. (e) 826,300 14,732,929
Viacom, Inc. Class B 41,800 1,294,546
------------
16,027,475
------------
METALS & MINING (1.7%)
Inco Ltd. (e) 298,400 12,001,648
------------
OIL, GAS & CONSUMABLE FUELS (6.7%)
Chevron Corp. 190,204 10,854,942
ConocoPhillips 201,400 13,167,532
V ExxonMobil Corp. 313,300 17,588,662
Kerr-McGee Corp. 71,866 6,111,485
------------
47,722,621
------------
</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.
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.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- --------------------------------------------------------------------------------
PHARMACEUTICALS (6.1%)
Abbott Laboratories 39,600 $ 1,704,780
Bristol-Myers Squibb Co. 274,600 5,813,282
V Pfizer, Inc. 1,090,300 23,703,122
Pharmaceutical
HOLDRs Trust (a)(e) 89,700 6,031,428
Wyeth 145,200 6,470,112
------------
43,722,724
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (1.0%)
Texas Instruments, Inc. 239,800 6,846,290
------------
SOFTWARE (0.5%)
BMC Software, Inc. (b)(e) 179,900 3,524,241
------------
SPECIALTY RETAIL (3.8%)
Gap, Inc. (The) (e) 678,000 11,715,840
Home Depot, Inc. (The) 134,800 5,532,192
Wal-Mart Stores, Inc. 205,700 9,731,667
------------
26,979,699
------------
THRIFTS & MORTGAGE FINANCE (2.6%)
PMI Group, Inc. (The) (e) 289,900 11,561,212
Washington Mutual, Inc. 186,750 7,395,300
------------
18,956,512
------------
WIRELESS TELECOMMUNICATION SERVICES (4.6%)
ALLTEL Corp. (e) 170,700 10,559,502
V Sprint Nextel Corp. 943,600 21,995,316
------------
32,554,818
------------
Total Common Stocks
(Cost $565,468,026) 662,520,895
------------
CONVERTIBLE PREFERRED STOCK (1.1%)
- --------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS (1.1%)
Goldman Sachs Group, Inc. (The)
2.125% Series BSKT (b)(f) 80,000 8,005,200
------------
Total Convertible Preferred Stock
(Cost $8,000,000) 8,005,200
------------
<Caption>
NUMBER OF
CONTRACTS (D) VALUE
PURCHASED PUT OPTIONS (0.7%)
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES (0.2%)
ENSCO International, Inc.
Strike Price $40.00
Expire 12/17/05 1,585 $ 134,725
Pride International, Inc.
Strike Price $25.00
Expire 1/21/06 3,000 390,000
Rowan Cos., Inc.
Strike Price $35.00
Expire 1/21/06 1,855 667,800
Transocean, Inc.
Strike Price $55.00
Expire 11/19/05 1,640 188,598
------------
1,381,123
------------
PHARMACEUTICALS (0.5%)
Pfizer, Inc.
Strike Price $25.00
Expire 12/17/05 7,049 2,467,150
Expire 1/21/06 2,368 899,840
------------
3,366,990
------------
Total Purchased Put Options
(Premium $3,217,192) 4,748,113
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (13.6%)
- --------------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.2%)
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (g)(h) $ 1,836,035 1,836,035
------------
Total Certificate of Deposit
(Cost $1,836,035) 1,836,035
------------
COMMERCIAL PAPER (7.1%)
American General Finance Corp.
3.84%, due 11/15/05 8,090,000 8,077,919
3.85%, due 11/9/05 3,995,000 3,991,582
Compass Securitization
3.993%, due 11/22/05 (g) 1,311,456 1,311,456
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (g) 786,872 786,872
Goldman Sachs Group, Inc.
4.00%, due 11/23/05 6,875,000 6,858,196
ING US Funding LLC
4.04%, due 12/27/05 3,575,000 3,552,533
Merrill Lynch & Co., Inc.
3.84%, due 11/14/05 5,000,000 4,993,067
3.94%, due 11/4/05 8,150,000 8,147,324
</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, 2005 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (CONTINUED)
xRabobank USA Finance Corp.
3.92%, due 11/3/05 $ 4,820,000 $ 4,818,950
Silver Tower U.S. Funding
3.932%, due 11/15/05 (g) 778,590 778,590
UBS Finance Delaware LLC
4.00%, due 11/1/05 7,280,000 7,280,000
------------
Total Commercial Paper
(Cost $50,596,489) 50,596,489
------------
SHARES
INVESTMENT COMPANY (1.7%)
BGI Institutional Money Market Fund (g) 11,960,885 11,960,885
------------
Total Investment Company
(Cost $11,960,885) 11,960,885
------------
PRINCIPAL
AMOUNT
TIME DEPOSITS (4.6%)
Bank of the West (The)
4.02%, due 12/8/05 (g) $ 4,983,525 4,983,525
Barclays
3.92%, due 12/5/05 (g) 2,098,326 2,098,326
3.94%, due 11/28/05 (g) 2,360,617 2,360,617
Credit Suisse First Boston, Inc.
3.74%, due 11/1/05 (g) 1,836,035 1,836,035
Deutsche Bank
3.95%, due 12/2/05 (g) 2,098,326 2,098,326
First Tennessee National Corp.
3.88%, due 11/14/05 (g) 2,098,326 2,098,326
Fortis Bank
4.00%, due 12/12/05 (g) 2,360,617 2,360,617
Halifax Bank of Scotland
3.75%, due 11/1/05 (g) 2,098,326 2,098,326
Keybank
4.00%, due 11/1/05 (g) 2,346,348 2,346,348
Marshall & Ilsley Bank
3.97%, due 12/29/05 (g) 2,098,326 2,098,326
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
Societe Generale
3.77%, due 11/1/05 (g) $ 4,458,943 $ 4,458,943
UBS AG
4.01%, due 12/13/05 (g) 2,098,326 2,098,326
Wells Fargo & Co.
4.00%, due 11/25/05 (g) 2,098,326 2,098,326
------------
Total Time Deposits
(Cost $33,034,367) 33,034,367
------------
Total Short-Term Investments
(Cost $97,427,776) 97,427,776
------------
Total Investments
(Cost $674,112,994) (i) 108.2% 772,701,984(j)
Liabilities in Excess of Cash and Other Assets (8.2) 58,731,547
------------- ------------
Net Assets 100.0% $713,970,437
============= ============
</Table>
<Table>
(a) Exchange Traded Fund--represents a basket of securities that are traded on
an exchange.
(b) Non-income producing security.
(c) ADR--American Depositary Receipt.
(d) One contract relates to 100 shares.
(e) Represents security, or a portion thereof, which is out on loan.
(f) Synthetic Convertible--An equity-linked security issued by an entity other
than the issuer of the underlying equity instrument. The underlying equity
investment represents a basket of securities comprised of Abbott
Laboratories, Eli Lilly, Forest Laboratories, GlaxoSmithKline, IVAX,
Johnson & Johnson and Schering-Plough.
(g) Represents security, or a portion thereof, purchased with cash collateral
received for securities on loan.
(h) Floating rate. Rate shown is the rate in effect at October 31, 2005.
(i) The cost for federal income tax purposes is $676,703,216.
(j) At October 31, 2005 net unrealized appreciation was $95,998,768, 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 $107,195,340 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $11,196,572.
</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 ASSETS AND LIABILITIES AS OF OCTOBER 31, 2005
<Table>
ASSETS:
Investment in securities, at value (identified
cost $674,112,994) including $47,923,156
market value of securities loaned $772,701,984
Cash 7,424
Receivables:
Investment securities sold 2,661,676
Dividends and interest 739,483
Fund shares sold 129,030
Other assets 38,863
-------------
Total assets 776,278,460
-------------
LIABILITIES:
Securities lending collateral 49,708,205
Payables:
Investment securities purchased 8,962,535
Fund shares redeemed 2,060,342
Transfer agent 572,520
NYLIFE Distributors 511,344
Manager 268,192
Shareholder communication 149,353
Custodian 5,915
Accrued expenses 69,617
-------------
Total liabilities 62,308,023
-------------
Net assets $713,970,437
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number of
shares authorized:
Class A $ 64,175
Class B 280,605
Class C 6,790
Class I 1
Class R1 1
Class R2 5,674
Additional paid-in capital 615,923,866
Accumulated undistributed net investment
income 824,248
Accumulated net realized loss on investments
and written option transactions (1,723,913)
Net unrealized appreciation on investments 98,588,990
-------------
Net assets $713,970,437
=============
CLASS A
Net assets applicable to outstanding shares $128,918,195
=============
Shares of beneficial interest outstanding 6,417,523
=============
Net asset value per share outstanding $ 20.09
Maximum sales charge (5.50% of offering price) 1.17
-------------
Maximum offering price per share outstanding $ 21.26
=============
CLASS B
Net assets applicable to outstanding shares $560,139,196
=============
Shares of beneficial interest outstanding 28,060,500
=============
Net asset value and offering price per share
outstanding $ 19.96
=============
CLASS C
Net assets applicable to outstanding shares $ 13,554,950
=============
Shares of beneficial interest outstanding 678,953
=============
Net asset value and offering price per share
outstanding $ 19.96
=============
CLASS I
Net assets applicable to outstanding shares $ 1,139
=============
Shares of beneficial interest outstanding 57
=============
Net asset value and offering price per share
outstanding $ 20.06
=============
CLASS R1
Net assets applicable to outstanding shares $ 1,138
=============
Shares of beneficial interest outstanding 57
=============
Net asset value and offering price per share
outstanding $ 20.05
=============
CLASS R2
Net assets applicable to outstanding shares $ 11,355,819
=============
Shares of beneficial interest outstanding 567,407
=============
Net asset value and offering price per share
outstanding $ 20.01
=============
</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, 2005
<Table>
INVESTMENT INCOME:
INCOME:
Interest $10,295,268
Dividends (a) 4,622,356
Income from securities loaned--net 144,334
------------
Total income 15,061,958
------------
EXPENSES:
Manager 4,582,549
Distribution--Class B 4,381,546
Distribution--Class C 90,221
Transfer agent--Classes A, B and C 2,347,466
Transfer agent--Class I, R1 and R2 21,642
Distribution/Service--Class A 333,965
Service--Class B 1,460,515
Service--Class C 30,074
Distribution/Service--Class R2 21,715
Shareholder communication 206,292
Professional 153,583
Recordkeeping 100,518
Registration 76,240
Custodian 62,353
Trustees 53,178
Shareholder Service Fee--Class R1 1
Shareholder Service Fee--Class R2 8,686
Miscellaneous 29,505
------------
Total expenses before reimbursement 13,960,049
Expense reimbursement from Manager (528,090)
------------
Net expenses 13,431,959
------------
Net investment income 1,629,999
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND WRITTEN
OPTIONS:
Net realized gain on:
Security transactions 46,890,890
Written option transactions 63,124
------------
Net realized gain on investment and written
option transactions 46,954,014
------------
Net change in unrealized appreciation on
investments 16,718,167
------------
Net realized and unrealized gain on investments
and written options transactions 63,672,181
------------
Net increase in net assets resulting from
operations $65,302,180
============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$68,730.
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.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2005 AND OCTOBER 31, 2004
<Table>
<Caption>
2005 2004
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 1,629,999 $ 1,050,471
Net realized gain on investment
and written option transactions 46,954,014 48,076,364
Net change in unrealized
appreciation on investments 16,718,167 22,189,601
-----------------------------
Net increase in net assets
resulting from operations 65,302,180 71,316,436
-----------------------------
Dividends to shareholders:
From net investment income:
Class A (1,050,747) (330,510)
Class B (414,484) (553,974)
Class C (10,045) (3,274)
Class I (15) --
Class R1 (15) --
Class R2 (68,181) --
-----------------------------
Total dividends to shareholders (1,543,487) (887,758)
-----------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 23,332,176 23,291,573
Class B 23,902,999 29,566,755
Class C 1,540,402 1,700,177
Class I -- 1,000
Class R1 -- 1,000
Class R2 13,525,728 6,632,744
Net asset value of shares issued in connection
with acquisition of Mainstay Research Value
Fund:
Class A 23,895,074 --
Class B 25,696,672 --
Class C 11,981,177 --
</Table>
<Table>
<Caption>
2005 2004
Net asset value of shares issued to shareholders
in reinvestment of dividends:
Class A $ 1,006,351 $ 320,495
Class B 400,464 536,956
Class C 4,201 2,413
Class I 15 --
Class R1 15 --
Class R2 68,208 --
-----------------------------
125,353,482 62,053,113
Cost of shares redeemed:
Class A (49,421,869) (30,043,320)
Class B (105,014,067) (84,570,388)
Class C (4,965,790) (722,335)
Class R2 (7,672,682) (1,792,733)
-----------------------------
(167,074,408) (117,128,776)
Decrease in net assets derived
from capital share
transactions (41,720,926) (55,075,663)
-----------------------------
Net increase in net assets 22,037,767 15,353,015
NET ASSETS:
Beginning of year 691,932,670 676,579,655
-----------------------------
End of year $ 713,970,437 $ 691,932,670
=============================
Accumulated undistributed net
investment income at end of year $ 824,248 $ 737,736
=============================
</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>
CLASS A
----------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 18.39 $ 16.56 $ 14.13 $ 18.52 $ 19.12 $ 18.18
-------- -------- ------------ -------- -------- --------
Net investment income 0.16 (a) 0.14 (a) 0.11 0.12 0.19 0.15
Net realized and unrealized
gain (loss) on investments 1.70 1.74 2.42 (4.23) (0.52) 1.96
-------- -------- ------------ -------- -------- --------
Total from investment
operations 1.86 1.88 2.53 (4.11) (0.33) 2.11
-------- -------- ------------ -------- -------- --------
Less dividends and
distributions:
From net investment income (0.16) (0.05) (0.10) (0.11) (0.19) (0.15)
From net realized gain on
investments -- -- -- (0.17) (0.08) (0.91)
Return of capital -- -- -- -- -- (0.11)
-------- -------- ------------ -------- -------- --------
Total dividends and
distributions (0.16) (0.05) (0.10) (0.28) (0.27) (1.17)
-------- -------- ------------ -------- -------- --------
Net asset value at end of
period $ 20.09 $ 18.39 $ 16.56 $ 14.13 $ 18.52 $ 19.12
======== ======== ============ ======== ======== ========
Total investment return (b) 10.13% 11.36% 18.02%(d) (22.16%) (1.74%) 11.89%
Ratios (to average net
assets)/Supplemental Data:
Net investment income 0.82% 0.77% 0.93%+ 0.82% 0.99% 0.73%
Net expenses 1.21% 1.30% 1.38%+ 1.30% 1.20% 1.20%
Expenses (before
reimbursement) 1.28% 1.30% 1.38%+ 1.30% 1.20% 1.20%
Portfolio turnover rate 43% 53% 47% 66% 88% 92%
Net assets at end of period
(in 000's) $128,918 $118,818 $112,745 $101,999 $141,703 $113,111
</Table>
<Table>
<Caption>
CLASS C
-------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
Net asset value at beginning
of period $ 18.28 $16.55 $14.13 $ 18.53 $19.12 $18.09
--------- -------- ----------- ------- ------ ------
Net investment income 0.02 (a) 0.00 (a)(c) 0.02 0.01 0.04 0.01
Net realized and unrealized
gain (loss) on investments 1.67 1.75 2.42 (4.23) (0.51) 1.95
--------- -------- ----------- ------- ------ ------
Total from investment
operations 1.69 1.75 2.44 (4.22) (0.47) 1.96
--------- -------- ----------- ------- ------ ------
Less dividends and
distributions:
From net investment income (0.01) (0.02) (0.02) (0.01) (0.04) (0.01)
From net realized gain on
investments -- -- -- (0.17) (0.08) (0.91)
Return of capital -- -- -- -- -- (0.01)
--------- -------- ----------- ------- ------ ------
Total dividends and
distributions (0.01) (0.02) (0.02) (0.18) (0.12) (0.93)
--------- -------- ----------- ------- ------ ------
Net asset value at end of
period $ 19.96 $18.28 $16.55 $ 14.13 $18.53 $19.12
========= ======== =========== ======= ====== ======
Total investment return (b) 9.27% 10.56% 17.26%(d) (22.76%) (2.45%) 11.05%
Ratios (to average net
assets)/Supplemental Data:
Net investment income
(loss) 0.07% 0.02% 0.18%+ 0.07% 0.24% (0.02%)
Net expenses 1.96% 2.05% 2.13%+ 2.05% 1.95% 1.95%
Expenses (before
reimbursement) 2.03% 2.05% 2.13%+ 2.05% 1.95% 1.95%
Portfolio turnover rate 43% 53% 47% 66% 88% 92%
Net assets at end of period
(in 000's) $13,555 $4,418 $3,095 $ 2,336 $1,631 $ 774
</Table>
<Table>
* The Fund changed its fiscal year end from December 31 to October 31.
** Commencement of operations.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive to sales charges. Class I, R1 and R2 are not subject
to sales charges.
(c) Less than one cent per share.
(d) Total return is not annualized.
</Table>
16 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>
CLASS B
--------------------------------------------------------------------------------------
JANUARY 1,
2003*
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED DECEMBER 31,
2005 2004 2003 2002 2001 2000
$ 18.28 $ 16.55 $ 14.13 $ 18.53 $ 19.12 $ 18.09
---------- ----------- ----------- -------- -------- --------
0.01(a) 0.00(a)(c) 0.02 0.01 0.04 0.01
1.68 1.75 2.42 (4.23) (0.51) 1.95
---------- ----------- ----------- -------- -------- --------
1.69 1.75 2.44 (4.22) (0.47) 1.96
---------- ----------- ----------- -------- -------- --------
(0.01) (0.02) (0.02) (0.01) (0.04) (0.01)
-- -- -- (0.17) (0.08) (0.91)
-- -- -- -- -- (0.01)
---------- ----------- ----------- -------- -------- --------
(0.01) (0.02) (0.02) (0.18) (0.12) (0.93)
---------- ----------- ----------- -------- -------- --------
$ 19.96 $ 18.28 $ 16.55 $ 14.13 $ 18.53 $ 19.12
========== =========== =========== ======== ======== ========
9.27% 10.56% 17.26%(d) (22.76%) (2.45%) 11.05%
0.07% 0.02% 0.18%+ 0.07% 0.24% (0.02%)
1.96% 2.05% 2.13%+ 2.05% 1.95% 1.95%
2.03% 2.05% 2.13%+ 2.05% 1.95% 1.95%
43% 53% 47% 66% 88% 92%
$560,139 $563,838 $560,740 $517,050 $753,299 $819,003
</Table>
<Table>
<Caption>
CLASS I CLASS R1 CLASS R2
---------------------------- ---------------------------- ----------------------------
JANUARY 2, JANUARY 2, JANUARY 2,
2004** 2004** 2004**
YEAR ENDED THROUGH YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2005 2004 2005 2004 2005 2004
$18.43 $17.86 $18.42 $17.86 $ 18.38 $17.86
----------- ----------- ----------- ----------- ----------- -----------
0.21(a) 0.09(a) 0.21(a) 0.07(a) 0.16(a) 0.12(a)
1.69 0.48 1.69 0.49 1.67 0.40
----------- ----------- ----------- ----------- ----------- -----------
1.90 0.57 1.90 0.56 1.83 0.52
----------- ----------- ----------- ----------- ----------- -----------
(0.27) -- (0.27) -- (0.20) --
-- -- -- -- -- --
-- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
-- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
$20.06 $18.43 $20.05 $18.42 $ 20.01 $18.38
=========== =========== =========== =========== =========== ===========
10.36% 3.19%(d) 10.31% 3.14%(d) 10.02% 2.91%(d)
1.13% 1.11%+ 1.03% 1.01%+ 0.79% 0.76%+
0.90% 0.96%+ 1.00% 1.06%+ 1.24% 1.31%+
0.97% 0.96%+ 1.07% 1.06%+ 1.31% 1.31%+
43% 53% 43% 53% 43% 53%
$ 1 $ 1 $ 1 $ 1 $11,356 $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 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 nineteen 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 a
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 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 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 accounting
principles generally accepted in the United States of America 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 normally are taken from the principal 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 in good faith by 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 principal
market is temporarily closed at a time when under normal conditions it would be
open. The Fund did not hold securities at October 31, 2005, 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 and
unrealized appreciation or depreciation is recorded 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, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the market price of the underlying security or foreign
currency increase but, as long as the obligation as a writer continues, have
retained the risk of loss should the price of the underlying security decline.
By writing a covered put option, the Fund, in exchange for the premium, accepts
the risk of decline in the market value of the underlying security or foreign
currency below the exercise price. After writing a put option, the Fund may
18 MainStay Value Fund
incur a loss equal to the difference between the exercise price of the option
and the sum of the market value of the underlying security plus the premium
received from the sale of the option. 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) 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 accounting principles generally accepted in
the United States of America. 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 transfer agent expenses and 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.
(I) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the risk of loss
in connection with these potential indemnification obligations is remote;
however, there can be no assurance that material liabilities related to such
obligations will not arise in the future that could adversely impact the 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 advisor and indirect
wholly-owned subsidiary of New York Life, is responsible for the day-to-day
portfolio management of the Fund.
www.MAINSTAYfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual percentage of the Fund's
average daily net assets as follows: 0.72% on assets up to $200 million, 0.65%
on assets from $200 million to $500 million and 0.50% on assets in excess of
$500 million. Effective August 1, 2005, the Manager has entered into a written
expense limitation agreement, under which the Manager has agreed to reimburse
the expenses of the Fund so that the total operating expenses (excluding taxes,
interest, litigation, extraordinary expenses, and brokerage and other
transaction expenses relating to the purchase or sale of portfolio investments)
do not exceed, on an annualized basis, 1.17% of the average daily net assets of
the Class A shares. An equivalent reimbursement, in an equal amount of basis
points, will be applied to the other share classes. The Manager, within three
years of incurring such expenses, may recoup the amount of any management fee
waiver or expense reimbursement from the Fund pursuant to this agreement if such
recoupment does not cause the Fund to exceed the expense limitations. At October
31, 2005, the Fund had $235,721 of recoupment available. This amount is
available until October 31, 2008. This expense limitation may be modified or
terminated only with the approval of the Board of Trustees. Prior to August 1,
2005 and effective December 1, 2004, NYLIM agreed to voluntarily reimburse the
expenses of the Fund so that the total operating expenses for Class A shares
would not exceed on an annualized basis 1.22% of the average daily net assets of
the Class A shares, and such that there would be an equivalent reduction for the
other classes of shares. For the year ended October 31, 2005, the Manager earned
fees from the Fund in the amount of $4,582,549 and waived its fee and/or
reimbursed expenses in the amount of $476,057.
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 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. To the extent the Manager has agreed to reimburse expenses of
the Fund, the Subadvisor has voluntarily agreed to do so proportionately.
(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 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 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 $59,894 for the year ended
October 31, 2005. 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 $6,542, $302,656 and $1,323, respectively, for the year ended October
31, 2005.
(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 incurred by the Fund for the year ended
October 31, 2005, amounted to $2,369,108.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
Committee,
20 MainStay Value Fund
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 Fund only pays a portion of the
fees identified above.
(F) CAPITAL. At October 31, 2005 New York Life and its affiliates held shares
of Class I and Class R1 with net values of $1,139 and $1,138, respectively. This
represents 100.0% of Class I and Class R1 shares' net assets and 0.0% of the
Fund's total net assets at October 31, 2005.
(G) OTHER. Pursuant to the Management Agreement, fees for the cost of legal
services, included in Professional fees as shown on the Statement of Operations,
provided to the Fund by the Office of the General Counsel of NYLIM amounted to
$19,211 for the year ended October 31, 2005.
The Fund pays the Manager a monthly fee for certain pricing and 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 these services
provided to the Fund by the Manager amounted to $100,518 for the year ended
October 31, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, State Street Bank and Trust Company acted as custodian for
the Fund.
NOTE 5--FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED TOTAL
ORDINARY CAPITAL AND UNREALIZED ACCUMULATED
INCOME OTHER GAINS APPRECIATION GAIN
$824,248 $866,309 $95,998,768 $97,689,325
--------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sales deferrals and straddle loss deferrals.
The Fund utilized $46,208,785 of capital loss carryforwards during the year
ended October 31, 2005.
The tax character of distributions paid during the years ended October 31, 2005
and 2004, shown in the Statement of Changes in Net Assets, were as follows:
<Table>
<Caption>
2005 2004
Distributions paid from:
Ordinary Income $1,543,487 $887,758
--------------------------------------------------------
</Table>
NOTE 6--PORTFOLIO SECURITIES LOANED AND WRITTEN OPTIONS:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $47,923,156. The Fund received $49,708,205 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.
Written option activity for the year ended October 31, 2005 was as follows:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options outstanding at October 31,
2004 -- $ --
- --------------------------------------------------------
Options--written (378) (63,124)
- --------------------------------------------------------
Options--expired 378 (63,124)
- --------------------------------------------------------
Options outstanding at October 31,
2005 -- $ --
- --------------------------------------------------------
</Table>
NOTE 7--FUND ACQUISITIONS:
On February 4, 2005, the Fund acquired the assets, including investments, and
assumed the identified liabilities of MainStay Research Value Fund.
This reorganization was completed after shareholders approved the plan on
February 2, 2005. The aggregate net assets of the Fund immediately before the
acquisition was $726,266,628 and the combined net assets after the acquisition
was $787,839,551.
The acquisition was accomplished by a tax-free exchange of the following:
<Table>
<Caption>
SHARES VALUE
MainStay Research Value Fund
- -----------------------------------------------------------
Class A 2,056,326 $23,895,074
- -----------------------------------------------------------
Class B 2,298,713 25,696,672
- -----------------------------------------------------------
Class C 1,071,990 11,981,177
- -----------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In exchange for the Mainstay Research Value Fund shares and net assets, the Fund
issued the following number of shares:
<Table>
<Caption>
SHARES
Class A 1,213,851
- ------------------------------------------------------------
Class B 1,307,962
- ------------------------------------------------------------
Class C 610,075
- ------------------------------------------------------------
</Table>
MainStay Research Value Fund's net assets after adjustments for any permanent
book-to-tax differences at the acquisition date were as follows, which include
the following amounts of capital stock, unrealized appreciation, accumulated net
realized loss and undistributed net investment income:
<Table>
<Caption>
ACCUMULATED UNDISTRIBUTED
TOTAL NET UNREALIZED NET REALIZED NET INVESTMENT
ASSETS CAPITAL STOCK APPRECIATION LOSS INCOME
MainStay Research Value Fund $61,572,923 $59,338,513 $10,409,157 $(8,174,888) $ 151
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2005, purchases and sales of securities, other
than short-term securities, were $297,310 and $390,005, 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, 2005.
NOTE 10--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS A CLASS B CLASS C
Shares sold 1,181 1,222 79
- ---------------------------------------------------------------------
Shares issued in connection with
acquisition of MainStay Research Value
Fund(b) 1,214 1,308 610
- ---------------------------------------------------------------------
Shares issued in reinvestment of
dividend and distributions 51 20 --(a)
- ---------------------------------------------------------------------
2,446 2,550 689
- ---------------------------------------------------------------------
Shares redeemed (2,491) (5,341) (252)
- ---------------------------------------------------------------------
Net increase (decrease) (45) (2,791) 437
- ---------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31, 2005
CLASS I CLASS R1 CLASS R2
Shares sold -- -- 688
- -----------------------------------------------------------------------
Shares issued in reinvestment of
dividend and distributions --(a) --(a) 3
- -----------------------------------------------------------------------
--(a) --(a) 691
- -----------------------------------------------------------------------
Shares redeemed -- -- (388)
- -----------------------------------------------------------------------
Net increase --(a) --(a) 303
- -----------------------------------------------------------------------
</Table>
22 MainStay Value Fund
<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
dividend 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>
PERIOD ENDED
OCTOBER 31, 2004
CLASS CLASS CLASS
I* R1* R2*
Shares sold --(a) --(a) 362
- -----------------------------------------------------------------------
Shares issued in reinvestment of
dividend and distributions -- -- --
- -----------------------------------------------------------------------
--(a) --(a) 362
- -----------------------------------------------------------------------
Shares redeemed -- -- (98)
- -----------------------------------------------------------------------
Net increase --(a) --(a) 264
- -----------------------------------------------------------------------
</Table>
* Commenced operations on January 2, 2004.
(a) Less than one-thousand.
(b) On February 4, 2005, and pursuant to shareholder approval, the assets of the
MainStay Research Value Fund were acquired by the Fund.
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.9 million to nine MainStay funds. The amount paid to the MainStay
Value Fund was $374,000. NYLIM has also agreed to reimburse or pay all expenses
relating to the Board of Trustees' review of this matter and has paid
substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
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 Value Fund ("the Fund"), one of
the funds constituting The MainStay Funds, as of October 31, 2005, and the
related statement of operations for the year then ended, and the statements of
changes in net assets and financial highlights for each of the years in the
two-year 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 audits. 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 audits 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
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, 2005, 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 audits provide 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, 2005, the results of
its operations for the year then ended, and the changes in its net assets and
financial highlights for each of the years in the two-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
24 MainStay 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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
www.MAINSTAYfunds.com 25
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
26 MainStay Value Fund
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 27
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager and Subadvisor have provided historically to the Fund, and also
generally to other series of the Trust. The Manager's services to the Trust have
included investment management services, including the selection and supervision
of portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the
day-to-day management of the portfolio, providing reports to the Manager, and
reviewing certain aspects of Fund filings. The Trustees considered, among other
things, the Manager's and Subadvisor's management, personnel, resources,
operations and portfolio management capabilities. In considering the Manager's
and Subadvisor's practices relating to best execution of portfolio trades, the
Board reviewed reports of the Fund's Brokerage Committee including with respect
to analysis prepared by Plexus Group. The Trustees considered the Manager's
supervision of the Fund's service providers and its attention to the compliance
program of the Trust, the Manager, the Subadvisor and certain other service
providers, as well as the Subadvisor's attention to its compliance program. The
Trustees noted the generally favorable conclusions of financial services
research firm DALBAR Inc. of the services, investor complaint levels, and
communications that NYLIM Service Company LLC ("NYLIM Service"), an affiliate of
the Manager, has provided to Trust shareholders. A majority of the Trustees,
including a majority of the Non-Interested Trustees, concluded that, overall,
the nature, extent and quality of the services expected to be provided by the
Manager and Subadvisor were such that, in the context of the Board's overall
review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Trustees also
considered information contained in management presentations to the Board's
Performance Committee over the course of the past year. The Board's decision
took account of, among other things, the Fund's underperformance when compared
over several time periods with funds concluded by Trustees to be peers of the
Fund, as well as steps the Subadvisor had taken to improve performance.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees reviewed information about the compensation structure
for portfolio managers employed by the Manager and assessed whether that
structure appears to align portfolio manager compensation with the long-term
objectives of the Fund's shareholders. The Trustees noted the Manager's
agreement to limit the Fund's net expenses to a certain level with respect to
the Fund, with the expectation that the Manager intended, over time, to
implement measures designed to reduce the Trust's transfer agency fees. The
Trustees considered certain benefits expected for, and risks borne by, the
Manager and its affiliates, including benefits from soft dollar arrangements.
The Trustees considered the services provided to the Fund by affiliates of the
Manager, NYLIFE Distributors and NYLIM Service, under other agreements, and the
benefits to the Manager and its affiliates from those relationships. The
information provided to the Trustees indicated that the profitability to the
Manager and its affiliates arising directly from those other agreements was not
excessive. The Trustees acknowledged certain benefits to the reputation of the
Manager and its affiliates, as well to that of the Trust, from their association
with each other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distributing shares
of various series of the Trust. They noted the Manager's willingness to
implement contractual breakpoints, and that the contractual breakpoints in place
for the management fee were intended to provide that the
28 MainStay Value Fund
Fund's shareholders would share in benefits from economies of scale arising from
the growth of Fund assets. The Trustees noted that the Fund's contractual
management fee had been reduced in accordance with the terms of the breakpoint
schedule applicable to the Fund. Acknowledging the difficulty of forecasting
economies of scale, the Trustees generally expressed an intention to monitor the
Manager's profitability and consider the application of fee breakpoints or other
appropriate measures as the Board may determine from time to time. The Trustees
reviewed historical information about changes in the Fund's expense and asset
levels over time, as well as information about certain Fund expenses that would
remain fixed even as Fund assets increase and, therefore, provide the Fund with
benefits from economies of scale as the Fund grows. The Trustees noted that, to
the extent the Fund's gross expenses currently are higher than its net expenses,
economies of scale achieved through an increase in the Fund's assets might not
directly benefit the Fund through lower net expenses. The Trustees considered
various information about transfer agency expenses, including information
showing that transfer agency fees of the Fund and a significant number of series
of the Trust (although not every such series or with respect to every share
class of each series) tended to be high, when aggregated and expressed as a
percentage of the assets of certain series, compared to the mutual fund industry
average according to certain studies reviewed by the Board and, therefore,
adversely affected gross expense ratios. The Board received information about
potential effects on the Manager were it to subsidize certain portions of the
Trust's transfer agency fees. The Trustees noted that a significant number of
shareholders of the Trust's series had small amounts invested in the series, and
have considered measures intended to increase average shareholder account size
and/or otherwise reduce the Trust's transfer agency fees and expenses, including
steps that the Manager has taken to encourage shareholders to consolidate or
close small accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager and Subadvisor, including other registered funds
and separate institutional accounts, that had investment objectives similar to
that of the Fund. The Trustees took into account information provided by the
Manager or Subadvisor about the relative scope of services provided to the Fund
and to those accounts or explanations about the accounts' histories. In
considering the extent of the fees received by the Manager and Subadvisor for
providing services to the Fund, the Trustees evaluated factors such as the fees
and expenses borne by other registered funds in the market pursuing strategies
generally similar to those followed by the Fund. The Trustees considered the
Fund's historical and proposed contractual and net management fees, its gross
and net expense ratio, and various components of that expense ratio, in
comparison to other funds in comparison groupings prepared by outside data
providers using objective methodologies.
The Trustees acknowledged the historical relationships among the Manager, the
Subadvisor and the Trust and the likely difficulties in implementing an
alternative to the investment management arrangement between the Trust and the
manager. The Trustees also took account of the results of their various
discussions with the Manager concerning the levels of the Fund's contractual and
net management fees and the Fund's anticipated net expense level.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees did not identify any
particular information or any single factor that was controlling, or the
particular weight any Trustee placed on any one factor for purposes of
determining whether to vote in approval of the Agreements. The summary set out
above describes the most important factors, but not all of the matters
considered by the Trustees in coming to their decision regarding the Agreements.
On the basis of their review, a majority of the Trustees and a majority of the
Non-Interested Trustees concluded that each factor they considered, in the
context of all of the other factors they considered, favored renewal of the
Agreements, and it was the judgment of a majority of the Trustees and a majority
of the Non-Interested Trustees that approval of these Agreements was in the best
interests of the Fund and its shareholders.
www.MAINSTAYfunds.com 29
FEDERAL INCOME TAX INFORMATION--UNAUDITED
The dividends paid by the Fund during the fiscal year ended October 31, 2005,
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 2006, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2005. 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, 2005.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
30 MainStay 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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
www.MAINSTAYfunds.com 31
(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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A07987 (RECYCLE SYMBOL) MS225-05 MSV11-12/05
15
(MAINSTAY LOGO)
MAINSTAY
LARGE CAP GROWTH FUND
The MainStay Funds
Annual Report
October 31, 2005
This page intentionally left blank
2 MainStay Large Cap Growth Fund
MESSAGE FROM
THE PRESIDENT
During the 12 months ended October 31, 2005, most domestic and international
stock markets provided positive overall returns. In the United States, mid-
capitalization stocks outperformed small- and large-cap issues, and investors
tended to prefer value stocks over growth stocks at all capitalization levels.
The U.S. economy continued to advance throughout the reporting period, with
positive growth in gross domestic product and gradually improving labor-market
conditions. In August and September 2005, devastating hurricanes pummeled the
Gulf region, destroying homes, flooding coastal cities, and taking hundreds of
lives. At MainStay, we wish to express our heartfelt concern for the millions of
people who were adversely affected by these natural disasters.
At the end of August, crude-oil prices rose to record levels when rigs and
refineries in the Gulf region faced hurricane-related setbacks. Higher oil and
natural gas prices benefited stocks in the energy sector, but raised concerns
about inflation. To keep the economy on track and inflation at bay, the Federal
Open Market Committee raised the targeted federal funds rate eight times during
the reporting period, with a 25-basis-point increase on each occasion. At the
end of October 2005, the federal funds target rate stood at 3.75%, its highest
level in more than four years.
Since the economy and the markets are constantly changing, managing investments
is a complex task. Fortunately, each MainStay Fund pursues its objective with
the help of a well-defined investment approach that the portfolio managers seek
to apply with discipline, care, and consistency.
At MainStay, we take pride in offering a wide range of Funds suited to the needs
of different types of investors. During the reporting period, MainStay
introduced four new Asset Allocation Funds, each with a distinct risk/reward
profile.
The report that follows takes a closer look at the specific securities and
decisions that affected your MainStay Fund investment during the 12 months ended
October 31, 2005. We hope that you will review the report carefully to gain
greater insight into your Fund's performance, holdings, and management style.
Sincerely,
/s/ Christopher O. Blunt
Christopher O. Blunt
President
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
Message from the President 3
- --------------------------------------------------------------------------------
Investment and Performance Comparison 4
- --------------------------------------------------------------------------------
Portfolio Management Discussion and Analysis 9
- --------------------------------------------------------------------------------
Portfolio of Investments 11
- --------------------------------------------------------------------------------
Financial Statements 13
- --------------------------------------------------------------------------------
Notes to Financial Statements 18
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 24
Trustees and Officers 25
- --------------------------------------------------------------------------------
Board Consideration and Approval of Management and Subadvisory Agreements 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 (UNAUDITED)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER 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 CALL 1-800-MAINSTAY (1-800-624-6782) OR VISIT
WWW.MAINSTAYFUNDS.COM. PERFORMANCE DATA SHOWN EXCLUDING SALES CHARGES DOES NOT
REFLECT THE DEDUCTION OF ANY SALES LOAD, WHICH, IF REFLECTED, WOULD REDUCE
PERFORMANCE QUOTED.
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 7.91% -4.24% 5.90%
Excluding sales charges 14.19 -3.15 6.50
</Table>
(LINE GRAPH FOR CLASS A SHARES IN $) (With sales charges)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/95 9450 10000 10000
11021 12205 12410
12600 15924 16394
14395 19848 20000
17233 26646 25134
20825 29132 26665
14171 17495 20024
11698 14063 16999
14472 17131 20535
15541 17710 22470
10/31/05 17747 19271 24429
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 8.41% -4.25% 5.72%
Excluding sales charges 13.41 -3.86 5.72
</Table>
(LINE GRAPH FOR CLASS B SHARES IN $) (With sales charges)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/95 10000 10000 10000
11575 12205 12410
13135 15924 16394
14894 19848 20000
17696 26646 25134
21225 29132 26665
14335 17495 20024
11745 14063 16999
14422 17131 20535
15371 17710 22470
10/31/05 17433 19271 24429
</Table>
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
With sales charges 12.41% -3.86% 5.72%
Excluding sales charges 13.41 -3.86 5.72
</Table>
(LINE GRAPH FOR CLASS C SHARES IN $) (With sales charges)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/95 10000 10000 10000
11575 12205 12410
13135 15924 16394
14894 19848 20000
17696 26646 25134
21225 29132 26665
14335 17495 20024
11745 14063 16999
14422 17131 20535
15371 17710 22470
10/31/05 17433 19271 24429
</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.
THE DISCLOSURE AND FOOTNOTES ON THE FOLLOWING TWO PAGES ARE AN INTEGRAL PART OF
THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
4 MainStay Large Cap Growth Fund
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
14.74% -2.86% 6.80%
</Table>
(LINE GRAPH FOR CLASS I IN $)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/95 10000 10000 10000
11691 12205 12410
13400 15924 16394
15348 19848 20000
18419 26646 25134
22314 29132 26665
15222 17495 20024
12597 14063 16999
15624 17131 20535
16820 17710 22470
10/31/05 19300 19271 24429
</Table>
CLASS R1 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
14.26% -3.02% 6.66%
</Table>
(LINE GRAPH FOR CLASS R1 IN $)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/95 10000 10000 10000
11680 12205 12410
13373 15924 16394
15302 19848 20000
18345 26646 25134
22203 29132 26665
15131 17495 20024
12509 14063 16999
15499 17131 20535
16669 17710 22470
10/31/05 19047 19271 24429
</Table>
CLASS R2 SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------
13.93% -3.27% 6.38%
</Table>
(LINE GRAPH FOR CLASS R2 IN $)
<Table>
<Caption>
MAINSTAY LARGE CAP RUSSELL 1000 GROWTH
GROWTH FUND INDEX S&P 500 INDEX
------------------ ------------------- -------------
10/31/95 10000 10000 10000
11650 12205 12410
13307 15924 16394
15188 19848 20000
18163 26646 25134
21927 29132 26665
14906 17495 20024
12292 14063 16999
15192 17131 20535
16298 17710 22470
10/31/05 18569 19271 24429
</Table>
<Table>
<Caption>
ONE FIVE TEN
BENCHMARK PERFORMANCE YEAR YEARS YEARS
- -----------------------------------------------------------------
Russell 1000(R) Growth Index(1) 8.81% -7.93% 6.78%
S&P 500(R) Index(2) 8.72 -1.74 9.34
Average Lipper large-cap growth fund(3) 10.06 -7.15 6.48
</Table>
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 only available 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 contractual and may be modified or terminated
only with the approval of the Board of Trustees. On 4/1/05, FMI Winslow Growth
Fund was reorganized as MainStay Large Cap Growth Fund Class A shares. From
inception (7/1/95) through 3/31/05, performance for MainStay Large Cap Growth
Fund Class A shares (first offered 4/1/05) includes the historical performance
of FMI Winslow Growth Fund adjusted to reflect the applicable sales charge and
fees and expenses for Class A shares. From inception (7/1/95) through 3/31/05,
performance for Class B, C, and I shares (first offered 4/1/05), includes the
performance of Class A shares adjusted to reflect the applicable sales charge
(or CDSC) and fees and expenses for Class B, C, and I shares.
THE DISCLOSURE AND FOOTNOTES ON THE PRECEDING PAGE AND THE FOLLOWING PAGE ARE AN
INTEGRAL PART OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN
CONJUNCTION WITH THEM.
www.MAINSTAYfunds.com 5
Prior to the reorganization, FMI Winslow Growth Fund had no sales charge and its
total net expenses were capped at 1.30%. The total expenses of MainStay Large
Cap Growth Fund are currently capped at 1.40%. Fund performance for all shares
classes prior to 4/1/05 has not been adjusted to reflect the current expense
cap; had it been, the performance shown would have been lower.
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 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.
On 4/1/05, FMI Winslow Growth Fund was reorganized as MainStay Large Cap Growth
Fund Class A shares. Effective 6/29/05, MainStay Blue Chip Growth Fund, which
had assets of $234.1 million, merged into MainStay Large Cap Growth Fund, which
had assets of $16.5 million. Performance for MainStay Large Cap Growth Fund
includes the performance history of FMI Winslow Growth Fund from inception
(7/1/95) through 3/31/05, during which time FMI Winslow Growth Fund's asset size
generally was in the range of $4 million to $52 million. Performance history
shown for MainStay Large Cap Growth Fund through 3/31/05, therefore, reflects
performance of a much smaller portfolio than the current MainStay Large Cap
Growth Fund. Performance shown may not be indicative of what performance would
have been had the portfolio been larger.
THE DISCLOSURE AND FOOTNOTES ON THE TWO PRECEDING PAGES ARE AN INTEGRAL PART OF
THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Large Cap Growth Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY LARGE CAP GROWTH FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2005, to October 31, 2005,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, if applicable, exchange fees, and sales
charges (loads) on purchases, and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds. The example is based on an investment of $1,000 made at the
beginning of the six-month period and held for the entire period from May 1
through October 31, 2005.
This example illustrates your Fund's ongoing costs in two ways:
ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested to estimate the expenses that you
paid during the six months ended October 31,2005. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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 were
included, your costs would have been higher.
<Table>
<Caption>
ENDING ACCOUNT ENDING ACCOUNT
VALUE (BASED VALUE (BASED
BEGINNING ON ACTUAL EXPENSES ON HYPOTHETICAL EXPENSES
ACCOUNT RETURNS AND PAID 5% RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/05 10/31/05 PERIOD(1) 10/31/05 PERIOD(1)
CLASS A SHARES $1,000.00 $1,123.60 $ 7.49 $1,018.25 $ 7.12
- ---------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,119.55 $11.49 $1,014.25 $10.92
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,119.85 $11.49 $1,014.25 $10.92
- ---------------------------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $1,128.80 $ 3.22 $1,022.00 $ 3.06
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $1,124.70 $ 3.75 $1,021.50 $ 3.57
- ---------------------------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $1,122.75 $ 5.08 $1,020.25 $ 4.84
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.40% for Class A and 2.15% for Class B and Class C, 0.60% for Class I,
0.70% for Class R1 and 0.95% for Class R2) multiplied by the average account
value over the period, divided by 365, multiplied by 184 (to reflect the
one-half year period). The Fund changed its fiscal year end and from June 30
to October 31, 2005. Expenses for the six-month period ended October 31, 2005
were estimated using the actual returns for the four-month period from July
1, 2005 to October 31, 2005.
www.MAINSTAYfunds.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2005
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 96.6
Short-Term Investments (collateral from securities lending 4.7
is 4.7%)
Liabilities in Excess of Cash and Other Assets (1.3)
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2005 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Caremark Rx, Inc.
2. UnitedHealth Group, Inc.
3. Google, Inc., Class A
4. General Electric Co.
5. XTO Energy, Inc.
6. Procter & Gamble Co. (The)
7. Microsoft Corp.
8. QUALCOMM, Inc.
9. SLM Corp.
10. Fisher Scientific International, Inc.
</Table>
8 MainStay Large Cap Growth Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
Questions answered by portfolio managers Clark J. Winslow, Justin H. Kelly, CFA,
and R. Bart Wear, CFA, of Winslow Capital Management, Inc.
CAN YOU DESCRIBE THE FUND'S INVESTMENT APPROACH?
The Fund invests in companies that have the potential for above-average future
earnings growth. Under normal circumstances, the Fund invests at least 80% of
its total assets in large-capitalization companies. These companies have a
market capitalization in excess of $4.0 billion at the time of purchase and
generally have improving financial returns. In implementing this strategy, we
look for companies that we believe have attractive attributes, such as
consistent and sustainable future growth of revenue and earnings, low financial
leverage with strong cash flow, high return on equity and a low
debt-to-total-capital ratio, management focused on shareholder value, and market
dominance. We use a "bottom-up" investment approach, basing investment decisions
on company specific factors, not general economic conditions. We also employ
strict sell disciplines.
On April 1, 2005, FMI Winslow Growth Fund was reorganized as MainStay Large Cap
Growth Fund Class A shares. Class B, C, I, R1, and R2 shares were subsequently
added. Effective June 29, 2005, MainStay Blue Chip Growth Fund merged into
MainStay Large Cap Growth Fund. The Fund is subadvised by Winslow Capital
Management.
WHAT MAJOR FACTORS INFLUENCED THE STOCK MARKET DURING THE 12 MONTHS ENDED
OCTOBER 31, 2005?
The market rose during the last two months of 2004, as investors' summer worries
about macro factors such as economic growth, corporate earnings, inflation, and
interest rates lessened. During the first quarter of 2005, however, investor
confidence waned amid growing concerns about climbing energy prices, rising
inflation, higher interest rates, and slowing growth in corporate profits. This
led to a pullback in stock prices and weak performance for the first three
months of the year. In late spring 2005, investor sentiment improved when these
worries began to seem excessive and stocks began to rise. This momentum carried
over into the third calendar quarter, although stock prices took a step backward
in October.
WHICH SECTORS AND INDIVIDUAL STOCKS WERE AMONG THE FUND'S STRONG PERFORMERS FOR
THE YEAR ENDED OCTOBER 31, 2005?
We emphasize internal research and employ a bottom-up(1) stock-selection process
to construct the Fund's portfolio. Since the Fund's sector weightings are
primarily a residual of our individual stock deci-
sions, sector results are less important to us than the performance of
individual securities.
The Fund's best individual performers during the reporting period came from the
health care, information technology, and energy sectors. New drug offerings and
a favorable outlook helped Genentech advance strongly during the reporting
period. The Fund's long-held position in pharmacy benefit manager Caremark Rx
also showed excellent performance. In information technology, Google saw its
earnings soar and the stock advanced on the continuing shift to online
advertising. Another important contributor to Fund performance was Corning,
which benefited from a strong position in flat-panel glass displays used in TVs
and computer monitors. In the energy sector, XTO Energy continued to benefit
from favorable growth in natural gas reserves and production and a sharp rise in
the price of natural gas during the reporting period.
WHICH STOCKS DETRACTED FROM THE FUND'S PERFORMANCE?
In a surprise announcement in late February 2005, Biogen Idec withdrew a new
drug that had carried high expectations. The withdrawal caused the company's
share price to decline sharply. Since the withdrawal had removed the company's
major source of growth potential, we sold the Fund's position in the stock.
Shares of Internet-auction giant eBay had an excellent run in calendar year 2004
and we reduced the Fund's position in mid-December 2004 on concerns about the
stock's high valuation. When eBay announced a slightly below-consensus earnings
outlook for 2005, the stock price weakened and we reduced the Fund's position to
control risk.
Typically, the subadvisor intends to invest substantially all of the Fund's
investable assets in domestic securities. However, the Fund is permitted to
invest up to 20% of its net assets in foreign securities. 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.
1. With bottom-up stock selection, securities are evaluated on their individual
merits, which may include fundamental characteristics, quantitative measures,
or both. The process differs from top-down stock selection, which uses broad
economic, market, or industry considerations to narrow a portfolio's focus to
specific areas or securities.
www.MAINSTAYfunds.com 9
Our confidence in Mercury Interactive, a software and services provider to the
business technology-optimization marketplace, waned over the course of the
reporting period, and we eliminated the holding from the Fund.
Zimmer Holdings, which designs and manufactures reconstructive orthopedic
products, suffered from concerns about somewhat slower revenue growth. Although
we have a positive long-term outlook for the company, we reduced the Fund's
position to help control risk should the company's results fall short of our
expectations.
WERE THERE ANY SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
We increased the Fund's energy weighting over the course of the reporting
period. This occurred, in part, by adding to the Fund's position in
Schlumberger, an international leader in oil services. When Proctor & Gamble
proposed the acquisition of Gillette, we saw potential in the merger and took
advantage of a price dip to add to the Fund's position in Procter & Gamble.
Since we believe that the managed-care industry has a favorable outlook, we
purchased shares of WellPoint for the Fund. We also expect WellPoint to benefit
from its recent merger with Anthem. In the telecommunication services sector,
the Fund initiated a position in Mexico-based America Movil. The company is the
fastest growing significant cell-phone operator in Latin America, where
penetration levels remain relatively low. Another important purchase in health
care was Alcon, a medical specialty company focused on eye care. The shares
performed well from the time they were purchased through the end of the
reporting period.
WHICH STOCKS DID THE FUND SELL DURING THE REPORTING PERIOD?
In addition to the sales we previously mentioned, we eliminated American
International Group because of legal and accounting uncertainties that developed
during the reporting period. We also sold Royal Caribbean Cruises because rising
oil costs were having a negative effect on the company's earnings growth. We
eliminated the Fund's positions in Teva Pharmaceutical Industries and Manpower
because of questions regarding earnings growth, and we sold the Fund's position
in Univision when television-advertising sales showed less strength than we had
expected.
WERE ANY ADJUSTMENTS MADE TO THE FUND'S SECTOR WEIGHTINGS?
Although sector weightings are primarily a residual of our bottom-up
stock-selection process, we did make a few notable weighting changes during the
reporting period. In information technology, the Fund increased its
underweighted position relative to the Russell 1000(R) Growth Index to an
overweighted position by the end of June. We took profits in several issues,
which reduced the Fund's information technology weighting by the end of October.
The other notable change in the Fund's sector weightings occurred in the energy
sector. The Fund increased its energy weighting to well above that of the
Russell 1000(R) Growth Index in March. Although the size of the Fund's position
was relatively modest during reporting period, strong stock selection helped the
Fund's energy sector holdings outperform related stocks in the Index by a
substantial margin.
The Fund's health care sector weighting remained essentially unchanged during
the reporting period and was similar to the health care sector weighting in the
Index. Even so, the Fund benefited from excellent stock selection. We continued
to underweight major pharmaceutical companies because of slowing earnings
growth. We overweighted the managed care industry (UnitedHealth Group and Well-
Point), pharmacy benefit management (Caremark Rx), and device companies (St.
Jude Medical and Medtronic). These decisions produced a sector total return for
the Fund that was more than twice that of health care stocks in the Index.
2. See footnote on page 6 for more information on the Russell 1000(R) Growth
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.
10 MainStay Large Cap Growth Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (96.6%)+
- -----------------------------------------------------------------------------
BIOTECHNOLOGY (3.2%)
Amgen, Inc. (a) 68,000 $ 5,151,680
Genentech, Inc. (a) 63,400 5,744,040
------------
10,895,720
------------
CAPITAL MARKETS (5.5%)
Franklin Resources, Inc. 75,700 6,689,609
Goldman Sachs Group, Inc. (The) 69,600 8,795,352
Merrill Lynch & Co., Inc. 52,600 3,405,324
------------
18,890,285
------------
CHEMICALS (2.0%)
Ecolab, Inc. (b) 94,300 3,119,444
Monsanto Co. 58,700 3,698,687
------------
6,818,131
------------
COMMERCIAL SERVICES & SUPPLIES (1.0%)
Robert Half International, Inc. (b) 89,700 3,308,136
------------
COMMUNICATIONS EQUIPMENT (8.4%)
Cisco Systems, Inc. (a) 227,300 3,966,385
Comverse Technology, Inc. (a) 143,700 3,606,870
Corning, Inc. (a) 179,100 3,598,119
Juniper Networks, Inc. (a) 150,900 3,520,497
Motorola, Inc. 176,200 3,904,592
V QUALCOMM, Inc. 259,700 10,325,672
------------
28,922,135
------------
COMPUTERS & PERIPHERALS (2.1%)
Apple Computer, Inc. (a) 64,900 3,737,591
Network Appliance, Inc. (a) 131,400 3,595,104
------------
7,332,695
------------
CONSUMER FINANCE (3.0%)
V SLM Corp. (b) 183,800 10,206,414
------------
ENERGY EQUIPMENT & SERVICES (4.5%)
Baker Hughes, Inc. 100,300 5,512,488
Halliburton Co. 57,200 3,380,520
Schlumberger Ltd. 73,000 6,626,210
------------
15,519,218
------------
FOOD & STAPLES RETAILING (3.3%)
CVS Corp. 209,500 5,113,895
Walgreen Co. 137,600 6,251,168
------------
11,365,063
------------
HEALTH CARE EQUIPMENT & SUPPLIES (7.8%)
Alcon, Inc. 26,100 3,468,690
V Fisher Scientific International, Inc. (a) 156,100 8,819,650
Medtronic, Inc. (b) 75,000 4,249,500
St. Jude Medical, Inc. (a) 142,200 6,835,554
Zimmer Holdings, Inc. (a) 53,900 3,437,203
------------
26,810,597
------------
</Table>
<Table>
<Caption>
SHARES VALUE
HEALTH CARE PROVIDERS & SERVICES (10.3%)
V Caremark Rx, Inc. (a) 298,200 $ 15,625,680
V UnitedHealth Group, Inc. 242,700 14,049,903
WellPoint, Inc. (a) 74,200 5,541,256
------------
35,216,839
------------
HOTELS, RESTAURANTS & LEISURE (1.8%)
Carnival Corp. 123,600 6,139,212
------------
HOUSEHOLD PRODUCTS (3.0%)
V Procter & Gamble Co. (The) 185,500 10,386,145
------------
INDUSTRIAL CONGLOMERATES (3.7%)
V General Electric Co. 370,000 12,546,700
------------
INTERNET & CATALOG RETAIL (1.5%)
eBay, Inc. (a) 128,300 5,080,680
------------
INTERNET SOFTWARE & SERVICES (5.3%)
V Google, Inc. Class A (a) 34,000 12,652,760
Yahoo!, Inc. (a) 145,900 5,393,923
------------
18,046,683
------------
IT SERVICES (1.1%)
Paychex, Inc. 97,400 3,775,224
------------
MACHINERY (1.9%)
Danaher Corp. (b) 126,700 6,601,070
------------
MULTILINE RETAIL (2.7%)
Kohl's Corp. (a) 101,600 4,890,008
Target Corp. 78,800 4,388,372
------------
9,278,380
------------
OIL & GAS (4.7%)
ConocoPhillips 72,800 4,759,664
V XTO Energy, Inc. 265,666 11,545,844
------------
16,305,508
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (3.5%)
Broadcom Corp. Class A (a) 82,700 3,511,442
Linear Technology Corp. 106,500 3,536,865
Maxim Integrated Products, Inc. 147,500 5,115,300
------------
12,163,607
------------
SOFTWARE (4.3%)
V Microsoft Corp. 402,300 10,339,110
NAVTEQ Corp. (a) 33,500 1,310,520
SAP AG, Sponsored ADR (b)(c) 75,700 3,250,558
------------
14,900,188
------------
</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 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2005 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
- -----------------------------------------------------------------------------
SPECIALTY RETAIL (5.6%)
Advance Auto Parts, Inc. (a)(b) 139,750 $ 5,240,625
Bed Bath & Beyond, Inc. (a) 191,700 7,767,684
Lowe's Cos., Inc. 105,100 6,386,927
------------
19,395,236
------------
TEXTILES, APPAREL & LUXURY GOODS (1.1%)
Coach, Inc. (a) 114,400 3,681,392
------------
THRIFTS & MORTGAGE FINANCE (1.5%)
Golden West Financial Corp. (b) 86,600 5,086,018
------------
TRADING COMPANIES & DISTRIBUTORS (1.8%)
Fastenal Co. 87,800 6,157,414
------------
WIRELESS TELECOMMUNICATION SERVICES (2.0%)
America Movil S.A. de C.V. Class L, ADR (c) 256,600 6,735,750
------------
Total Common Stocks
(Cost $302,606,697) 331,564,440
------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENTS (4.7%)
- -----------------------------------------------------------------------------
CERTIFICATE OF DEPOSIT (0.2%)
Skandinaviska Enskilda Banken AB
4.082%, due 2/22/06 (d)(e) $ 592,772 592,772
------------
Total Certificate of Deposit
(Cost $592,772) 592,772
------------
COMMERCIAL PAPER (0.3%)
Compass Securitization
3.993%, due 11/22/05 (d) 423,409 423,409
Falcon Asset Securitization Corp.
4.026%, due 12/2/05 (d) 254,045 254,045
Silver Tower U.S. Funding
3.932%, due 11/15/05 (d) 251,371 251,371
------------
Total Commercial Paper
(Cost $928,825) 928,825
------------
<Caption>
SHARES
INVESTMENT COMPANY (1.1%)
BGI Institutional Money Market Fund (d) 3,861,625 3,861,625
------------
Total Investment Company
(Cost $3,861,625) 3,861,625
------------
<Caption>
PRINCIPAL
AMOUNT VALUE
TIME DEPOSITS (3.1%)
Bank of the West (The)
4.02%, due 12/8/05 (d) $1,608,954 $ 1,608,954
Barclays
3.92%, due 12/5/05 (d) 677,454 677,454
3.94%, due 11/28/05 (d) 762,136 762,136
Credit Suisse First Boston Corp.
3.74%, due 11/1/05 (d) 592,772 592,772
Deutsche Bank
3.95%, due 12/2/05 (d) 677,454 677,454
First Tennessee National Corp.
3.88%, due 11/14/05 (d) 677,454 677,454
Fortis Bank
4.00%, due 12/12/05 (d) 762,136 762,136
Halifax Bank of Scotland
3.75%, due 11/1/05 (d) 677,454 677,454
Keybank
4.00%, due 11/1/05 (d) 757,529 757,529
Marshall & Ilsley Bank
3.97%, due 12/29/05 (d) 677,454 677,454
Societe Generale
3.77%, due 11/1/05 (d) 1,439,590 1,439,590
UBS AG
4.01%, due 12/13/05 (d) 677,454 677,454
Wells Fargo & Co.
4.00%, due 11/25/05 (d) 677,454 677,454
------------
Total Time Deposits
(Cost $10,665,295) 10,665,295
------------
Total Short-Term Investments
(Cost $16,048,517) 16,048,517
------------
Total Investments
(Cost $318,655,214) (f) 101.3% 347,612,957(g)
Liabilities in Excess of
Cash and Other Assets (1.3) (4,328,266)
---------- ------------
Net Assets 100.0% $343,284,691
========== ============
</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) Floating rate. Rate shown is the rate in effect at
October 31, 2005.
(f) The cost for federal income tax purposes is
$319,841,884.
(g) At October 31, 2005 net unrealized appreciation was
$27,771,073, 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 $34,643,174 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $6,872,101.
</Table>
12 MainStay Large 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, 2005
<Table>
ASSETS:
Investment in securities, at value
(identified cost $318,655,214) including
$15,555,489 market value of securities
loaned $ 347,612,957
Cash 7,314,265
Receivables:
Investment securities sold 7,514,245
Fund shares sold 539,888
Dividends and interest 147,911
Other assets 20,604
-------------
Total assets 363,149,870
-------------
LIABILITIES:
Securities lending collateral 16,048,517
Payables:
Investment securities purchased 2,834,982
Transfer agent 345,672
Fund shares redeemed 257,697
NYLIFE Distributors 163,814
Shareholder communication 94,882
Manager 57,793
Professional 44,768
Custodian 4,259
Accrued expenses 12,795
-------------
Total liabilities 19,865,179
-------------
Net assets $ 343,284,691
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest outstanding (par
value of $.01 per share) unlimited number
of shares authorized:
Class A $ 135,449
Class B 320,633
Class C 15,173
Class I 175,814
Class R1 4
Class R2 4
Additional paid-in capital 483,566,477
Accumulated net realized loss on investments (169,886,606)
Net unrealized appreciation on investments 28,957,743
-------------
Net assets $ 343,284,691
=============
CLASS A
Net assets applicable to outstanding shares $ 71,859,338
=============
Shares of beneficial interest outstanding 13,544,872
=============
Net asset value per share outstanding $ 5.31
Maximum sales charge (5.50% of offering
price) 0.31
-------------
Maximum offering price per share outstanding $ 5.62
=============
CLASS B
Net assets applicable to outstanding shares $ 169,702,875
=============
Shares of beneficial interest outstanding 32,063,263
=============
Net asset value and offering price per share
outstanding $ 5.29
=============
CLASS C
Net assets applicable to outstanding shares $ 8,023,951
=============
Shares of beneficial interest outstanding 1,517,260
=============
Net asset value and offering price per share
outstanding $ 5.29
=============
CLASS I
Net assets applicable to outstanding shares $ 93,694,136
=============
Shares of beneficial interest outstanding 17,581,375
=============
Net asset value and offering price per share
outstanding $ 5.33
=============
CLASS R1
Net assets applicable to outstanding shares $ 2,198
=============
Shares of beneficial interest outstanding 414
=============
Net asset value and offering price per share
outstanding $ 5.31
=============
CLASS R2
Net assets applicable to outstanding shares $ 2,193
=============
Shares of beneficial interest outstanding 414
=============
Net asset value and offering price per share
outstanding $ 5.30
=============
</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 PERIOD ENDED OCTOBER 31, 2005* AND THE YEAR ENDED JUNE 30, 2005
<Table>
<Caption>
OCTOBER 31, JUNE 30,
2005* 2005
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 569,204 $ 69,095
Interest 98,281 5,837
Income from securities
loaned--net 7,092 --
----------- -----------
Total income 674,577 74,932
----------- -----------
EXPENSES:
Manager 838,898 76,091
Transfer agent--Classes A, B and
C 462,790 15,789
Transfer agent--Class I 1,194 --
Distribution--Class B 431,270 8,952
Distribution--Class C 19,561 623
Distribution/Service--Class A 59,419 7,008
Service--Class B 143,757 2,984
Service--Class C 6,520 208
Distribution/Service--Class R2 2 1
Professional 76,469 35,023
Shareholder communication 41,405 51,404
Trustees 25,009 9,142
Recordkeeping 19,610 3,033
Custodian 16,344 11,955
Registration 11,395 15,985
Portfolio pricing 2,914 --
Miscellaneous 1,371 9,958
----------- -----------
Total expenses before
waiver/reimbursement 2,157,928 248,156
Expense waiver/reimbursement
from Manager (397,089) (136,738)
----------- -----------
Net expenses 1,760,839 111,418
----------- -----------
Net investment loss (1,086,262) (36,486)
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on
investments (1,170,546) 456,600
Net change in unrealized
appreciation on investments 15,490,193 (1,598,830)
----------- -----------
Net realized and unrealized gain
(loss) on investments 14,319,647 (1,142,230)
----------- -----------
Net increase (decrease) in net
assets resulting from operations $13,233,385 $(1,178,716)
=========== ===========
</Table>
* The Fund changed its fiscal year end from June 30 to October 31.
(a) Dividends recorded net of foreign withholding taxes in the amount of $3,790
and $222 for the period ended October 31, 2005 and the year ended June 30,
2005, respectively.
14 MainStay Large 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 PERIOD ENDED OCTOBER 31, 2005* AND THE YEARS ENDED JUNE 30, 2005 AND
JUNE 30, 2004
<Table>
<Caption>
OCTOBER 31, JUNE 30, JUNE 30,
2005* 2005 2004
INCREASE IN NET ASSETS:
Operations:
Net investment loss $(1,086,262) $ (36,486) $ (35,407)
Net realized gain (loss) on
investments (1,170,546) 456,600 484,687
Net change in unrealized
appreciation (depreciation)
on investments 15,490,193 (1,598,830) 326,080
----------------------------------------
Net increase (decrease) in
net assets resulting from
operations 13,233,385 (1,178,716) 775,360
----------------------------------------
Capital share transactions:
Net proceeds from sale of shares:
Class A 7,051,226 3,512,262 518,473
Class B 5,476,548 2,153,623 --
Class C 1,133,443 544,063 --
Class I 79,668,226 14,337,964 --
Class R1 -- 2,075 --
Class R2 -- 2,075 --
Net asset value of shares
issued in connection with
acquisition of MainStay Blue
Chip Growth Fund:
Class A $ -- $ 59,916,067 $ --
Class B -- 167,355,893 --
Class C -- 6,736,178 --
----------------------------------------
93,329,443 254,560,200 518,473
Cost of shares redeemed:
Class A (5,441,061) (1,379,081) (339,697)
Class B (11,565,371) (217,268) --
Class C (635,320) (44,709) --
Class I (2,242,075) (60,723) --
Class R1 -- (72) --
Class R2 -- (72) --
----------------------------------------
(19,883,827) (1,701,925) (339,697)
Increase in net assets
derived from capital
share transactions 73,445,616 252,858,275 178,776
----------------------------------------
Net increase in net assets 86,679,001 251,679,559 954,136
NET ASSETS:
Beginning of period 256,605,690 4,926,131 3,971,995
----------------------------------------
End of period $343,284,691 $256,605,690 $4,926,131
========================================
</Table>
* The Fund changed its Fiscal year end from June 30 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>
CLASS A
------------------------------------------------------------------------
JULY 1,
2005*
THROUGH
OCTOBER 31, YEAR ENDED JUNE 30,
2005 2005 2004 2003 2002 2001
Net asset value at beginning
of period $ 5.06 $ 4.69 $ 3.96 $ 3.92 $ 5.07 $11.62
----------- ------- ------ ------ ------ ------
Net investment loss (a) (0.01) (0.03) (0.03) (0.03) (0.03) (0.05)
Net realized and unrealized
gain (loss) on investments 0.26 0.40 0.76 0.07 (1.12) (1.94)
----------- ------- ------ ------ ------ ------
Total from investment
operations 0.25 0.37 0.73 0.04 (1.15) (1.99)
----------- ------- ------ ------ ------ ------
Less distributions:
From net realized gain on
investments -- -- -- -- -- (4.56)
----------- ------- ------ ------ ------ ------
Net asset value at end of
period $ 5.31 $ 5.06 $ 4.69 $ 3.96 $ 3.92 $ 5.07
=========== ======= ====== ====== ====== ======
Total investment return (c) 4.94% (d) 7.89% 18.43% 1.02% (22.53%) (20.54%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income
(loss) (0.77%)+ (0.29%) (0.77%) (0.74%) (0.73%) (0.70%)
Net expenses 1.40% + 1.35% 1.30% 1.30% 1.30% 1.30%
Expenses (before
waiver/reimbursement) 1.77% + 3.01% 2.78% 3.17% 2.71% 1.87%
Portfolio turnover rate 29% 27% 94% 108% 71% 112%
Net assets at end of period
(in 000's) $71,859 $67,000 $4,926 $3,972 $4,144 $5,860
</Table>
<Table>
<Caption>
CLASS R1 CLASS R2
------------------------- -------------------------
JULY 1, APRIL 1, JULY 1, APRIL 1,
2005* 2005** 2005* 2005**
THROUGH THROUGH THROUGH THROUGH
OCTOBER 31, JUNE 30, OCTOBER 31, JUNE 30,
2005 2005 2005 2005
Net asset value at beginning
of period $5.06 $ 4.83 $ 5.05 $ 4.83
----------- -------- ----------- --------
Net investment (loss) (a) 0.00(b) (0.03) (0.01)(b) (0.03)
Net realized and unrealized
gain (loss) on investments 0.25 0.26 0.26 0.25
----------- -------- ----------- --------
Total from investment
operations 0.25 0.23 0.25 0.22
----------- -------- ----------- --------
Less distributions:
From net realized gain on
investments -- -- -- --
Net asset value at end of
period $5.31 $ 5.06 $ 5.30 $ 5.05
=========== ======== =========== ========
Total investment return (c) 4.94%(d) 4.76% (d) 4.95% (d) 4.55% (d)
Ratios (to average net
assets)/Supplemental Data:
Net investment income
(loss) 0.10%+ (0.38%)+ (0.51%)+ (0.63%)+
Net expenses 0.70%+ 1.12% + 0.95% + 1.37% +
Expenses (before
waiver/reimbursement) 1.07%+ 3.21% + 1.32% + 3.46% +
Portfolio turnover rate 29% 27% 29% 27%
Net assets at end of period
(in 000's) $ 2 $ 2 $ 2 $ 2
</Table>
<Table>
* The Fund changed its fiscal year end from June 30 to October 31.
** Commencement of operations
+ 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. Classes I, R1 and R2 are not
subject to sales charges.
(d) Total return is not annualized.
</Table>
16 MainStay Large 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>
CLASS B CLASS C CLASS I
---------------------------- ------------------------- -------------------------
JULY 1, APRIL 1, JULY 1, APRIL 1, JULY 1, APRIL 1,
2005* 2005** 2005* 2005** 2005* 2005**
THROUGH THROUGH THROUGH THROUGH THROUGH THROUGH
OCTOBER 31, JUNE 30, OCTOBER 31, JUNE 30, OCTOBER 31, JUNE 30,
2005 2005 2005 2005 2005 2005
$ 5.06 $ 4.83 $ 5.05 $ 4.83 $ 5.07 $ 4.83
----------- ----------- ----------- -------- ----------- --------
(0.03) 0.00(b) (0.03) (0.01) 0.00(b) (0.01)
0.26 0.23 0.27 0.23 0.26 0.25
----------- ----------- ----------- -------- ----------- --------
0.23 0.23 0.24 0.22 0.26 0.24
----------- ----------- ----------- -------- ----------- --------
-- -- -- -- -- --
----------- ----------- ----------- -------- ----------- --------
$ 5.29 $ 5.06 $ 5.29 $ 5.05 $ 5.33 $ 5.07
=========== =========== =========== ======== =========== ========
4.55% (d) 4.76% (d) 4.75% (d) 4.55% (d) 5.13%(d) 4.97% (d)
(1.52%)+ (1.41%)+ (1.52%)+ (1.41%)+ 0.06%+ (0.28%)+
2.15% + 2.15% + 2.15% + 2.15% + 0.60%+ 1.02% +
2.52% + 4.24% + 2.52% + 4.24% + 0.97%+ 3.11% +
29% 27% 29% 27% 29% 27%
$169,703 $168,063 $8,024 $7,190 $93,694 $14,349
</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 nineteen funds (collectively referred to as the
"Funds"). These financial statements and notes relate only to MainStay Large Cap
Growth Fund (the "Fund"), a diversified fund. The Fund commenced operations on
April 1, 2005.
On March 31, 2005 the fund acquired all the net assets of the FMI Winslow Growth
Fund (the "Winslow Fund"), a series of the FMI Mutual Funds, Inc., pursuant to
an Agreement and Plan of Reorganization approved by the shareholders of the
Winslow Fund on March 28, 2005. The acquisition was accomplished by the transfer
of all the assets and liabilities of the Winslow Fund (valued at $5,417,292), to
the Fund. Following the transfer, 1,122,224 shares of the Fund were distributed
to shareholders in liquidation of the Winslow Fund in a tax free exchange for
1,122,224 shares of the Winslow Fund. The reorganization qualifies as a tax-free
reorganization for federal income tax purposes with no gain or loss recognized
by the portfolios or their shareholders. The Fund constitutes the surviving
entity for financial reporting purposes; therefore, it is deemed the "accounting
survivor" for the merger. The financial statements of the Fund (fiscal year end
of October 31) reflect the historical financial highlights of the Winslow Fund
(fiscal year end of June 30) prior to the reorganization.
On June 29, 2005, the Fund acquired substantially all the net assets of the
MainStay Blue Chip Growth Fund, a series of the Trust, pursuant to an Agreement
and Plan of Reorganization approved by the shareholders on June 27, 2005. The
acquisition was accomplished by a transfer of all the assets and liabilities of
the MainStay Blue Chip Growth Fund (valued at $234,008,138), to the Fund.
Following the transfer, 45,899,942 shares of the Fund were distributed to
shareholders in liquidation of the MainStay Blue Chip Growth Fund in a tax free
exchange for 24,366,396 shares of the MainStay Blue Chip Growth Fund. The
reorganization qualified as a tax-free reorganization for federal income tax
purposes with no gain or loss recognized by the portfolios or their
shareholders. The MainStay Blue Chip Growth Fund's net assets at the date of
acquisition, including $15,306,040 and ($1,310,067) of unrealized appreciation
(depreciation), respectively, ($168,915,585) of accumulated net realized loss
and ($1,052,103) of undistributed net investment loss and ($846,002) of
liabilities were combined with those of the MainStay Large Cap Growth Fund. The
Fund constitutes the surviving entity for financial reporting purposes;
therefore it is deemed the "accounting survivor" for the merger. Effective June
29, 2005, the Fund's operations are combined with that of the Mainstay Blue Chip
Growth Fund in the accompanying Statement of Operations, Statements of Changes
in Net Assets, and Financial Highlights.
The Fund currently offers six classes of shares, Class A, Class B, Class C
shares, Class I shares, Class R1 shares and Class R2 shares, whose distribution
commenced on March 31, 2005. 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, Class R1 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, 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 seek long-term growth of capital.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America 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 normally are taken from the principal 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 in good faith by Board of Trustees to
18 MainStay Large Cap Growth Fund
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 principal market is temporarily closed at a time when under normal
conditions it would be open. The Fund did not hold securities at October 31,
2005, 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 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 accounting principles generally accepted in
the United States of America. 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, accumulated net realized loss on investments and additional
paid-in-capital arising from permanent differences; net assets at October 31,
2005, are not affected.
<Table>
<Caption>
NET ACCUMULATED NET ADDITIONAL
INVESTMENT REALIZED LOSS PAID-IN
LOSS ON INVESTMENTS CAPITAL
$1,086,262 $(35,290) $(1,050,972)
------------------------------------------
</Table>
The reclassification for the Fund is due to the reclassification of net
operating losses that cannot be utilized for 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 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.
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 transfer agent expenses and 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.
(H) INDEMNIFICATIONS. In the normal course of business the Fund enters into
contracts with third party service providers that contain a variety of
representations and warranties and which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Fund that have not yet
occurred. Based on experience, management is of the view that the
www.MAINSTAYfunds.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
risk of loss in connection with these potential indemnification obligations is
remote; however, there can be no assurance that material liabilities related to
such obligations will not arise in the future that could adversely impact the
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. Winslow
Capital Management, Inc. (the "Subadvisor"), is responsible for the day-to-day
portfolio management of the Fund.
Prior to March 31, 2005, the Fund was advised by Fiduciary Management, Inc.
("FMI") and subadvised by the subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual percentage of the Fund's
average daily net assets as follows: 0.80% on assets up to $250 million, 0.75%
on assets from $250 million up to $500 million, 0.725% on assets from $500
million up to $750 million, 0.70% on assets from $750 million up to $2.0
billion, 0.65% on assets from $2.0 billion up to $3.0 billion, and 0.60% on
assets in excess of $3.0 billion. The Manager has also voluntarily agreed to
waive a portion of its management fee so that the management fee does not exceed
0.75% on assets up to $250 million. Effective August 1, 2005, the Manager has
entered into a written expense limitation agreement, under which the Manager has
agreed to reimburse the expenses of the Fund so that the total operating
expenses (excluding taxes, interest, litigation, extraordinary expenses, and
brokerage and other transaction expenses relating to the purchase or sale of
portfolio investments) do not exceed, on an annualized basis, 1.40% of the
average daily net assets of the Class A shares. An equivalent reimbursement, in
an equal amount of basis points, will be applied to the other share classes. The
Manager, within three years of incurring such expenses, may recoup the amount of
any management fee waiver or expense reimbursement from the Fund pursuant to
this agreement if such recoupment does not cause the Fund to exceed the expense
limitations. This expense limitation may be modified or terminated only with the
approval of the Board of Trustees. Prior to August 1, 2005, the Manager
voluntarily agreed to waive other fees and/or reimburse the Fund so that total
annual fund operating expenses would not exceed on an annualized basis 1.40% of
the average daily net assets of the Class A shares, and such that there would be
an equivalent reduction for the other classes of shares. For the period ended
October 31, 2005, the manager earned from the Fund $838,898 and waived its fee
and/or reimbursement expense in the amount of $397,089. For the period from
March 31, 2005 through June 30, 2005, the Manager earned from the Fund $31,005
and waived its fee and/or reimbursed expenses in the amount of $82,942.
Prior to March 31, 2005, the Winslow Fund paid FMI a monthly fee for services
performed at an annual percentage of 1% of the Fund's average daily net assets.
FMI was contractually obligated to reimburse the Winslow Fund for expenses over
2.00% of the daily net assets of the Winslow Fund. In addition to the
reimbursement required under the management agreement, FMI voluntarily
reimbursed the Winslow Fund for expenses over 1.30% of the daily net assets of
the Fund. For the period from July 1, 2004 through March 31, 2005, FMI earned
from the Fund $37,572 and waived its fee and/or reimbursement expense in the
amount of $53,796.
Pursuant to the terms of a Sub-Advisory Agreement between NYLIM and the
Subadvisor, dated April 1, 2005, the Manager paid the Subadvisor a monthly fee
at an annual rate of the average daily net assets of all Winslow-serviced
investment company assets managed by NYLIM, including the Fund as follows: 0.40%
up to $250 million, 0.35% on assets from $250 million up to $500 million, 0.30%
on assets from $500 million up to $750 million, 0.25% on assets from $750
million up to $1.0 billion, and 0.20% on assets in excess of $1.0 billion.
Prior to March 31, 2005, Winslow Capital Management, Inc., ("Winslow") served as
sub-advisor to the Winslow Fund. FMI paid Winslow a fee of 0.75% of the Winslow
Fund's management fee.
In addition, prior to March 31, 2005, pursuant to the terms of an administrative
agreement with FMI, the Winslow Fund paid FMI a monthly administrative fee at
the annual rate of 0.20% on the first $25.0 million of the Winslow Fund's daily
net assets, 0.10% on the next $20.0 million of the Winslow Fund's daily net
assets, and 0.05% over $45.0 million of the Winslow Fund's daily net assets,
subject to a fiscal year minimum of $20,000. FMI voluntarily waived this
minimum. For the year ended June 30, 2005, Administration fees of $7,514 are
included in Management Fees in the accompanying Statement of Operations.
(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. Effective March 31, 2005, the
Fund, with respect to each class of shares other than Class I shares, has
adopted distribution
20 MainStay Large Cap Growth 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, Class C and Class R2
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.
Prior to March 31, 2005, the Winslow Fund had entered into a Distribution Plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940. The Plan
provided that the Fund may incur certain costs which may not exceed the lesser
of a monthly amount equal to 0.25% of the Fund's daily net assets or the actual
distribution cost incurred during the year.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Class A shares was $14,810 for the period
ended October 31, 2005. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class A, Class B and Class C
shares of $1,334, $89,100 and $741, respectively, for the period ended October
31, 2005.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. Effective
March 31, 2005, 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 paid to NYLIM
for the period ended October 31, 2005 and the period from March 31, 2005 through
June 30, 2005 were $463,984 and $4,189, respectively.
Prior to March 31, 2005, Transfer Agent expenses paid to U.S. Bancorp Fund
Services, LLC for the period July 1, 2004 through March 31, 2005 were $11,600.
(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
and Compliance Committee Chairman receives an additional $2,000 for each meeting
of the Audit and Compliance Committee attended and the Chairpersons of the
Brokerage and Expense Committee, Operations Committee and Performance Committee
each receive an additional $1,000 for each meeting of the Brokerage and Expense
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, effective March 31,
2005, the Fund only pays a portion of the fees identified above.
(F) OTHER. Pursuant to the Management Agreement, 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
$6,032 for the period ended October 31, 2005. Legal fees paid for the period
March 31, 2005 through June 30, 2005 and the period July 1, 2004 through March
31, 2005 were $5,814 and $15,881, respectively.
Effective March 31, 2005, the Fund pays the Manager a monthly fee for certain
pricing and 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 these services provided to the Fund by the Manager amounted to
$19,610 for the period ended October, 2005 and $3,033 for the period from March
31, 2005 through June 30, 2005.
NOTE 4--CUSTODIAN:
Investors Bank & Trust Company is the 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. Formerly, The Bank of New York acted as custodian for the Fund.
www.MAINSTAYfunds.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--FEDERAL INCOME TAX:
As of October 31, 2005, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED UNDISTRIBUTED TOTAL
ORDINARY CAPITAL LONG TERM UNREALIZED ACCUMULATED
INCOME LOSSES CAPITAL GAINS APPRECIATION LOSS
$42,026 $(168,901,948) $159,986 $27,771,073 $(140,928,863)
----------------------------------------------------------------------------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
primarily due to wash sale deferrals.
At October 31, 2005, for federal income tax purposes, capital loss carryforwards
of $168,901,948 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 $ 9,625
2008 99,425
2009 53,277
2010 5,418
2013 1,157
-------------------------------------------
$168,902
-------------------------------------------
</Table>
NOTE 6--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the period ended October 31, 2005, purchases and sales of securities,
other than short-term securities, were $159,219 and $86,396, respectively.
During the year ended June 30, 2005, purchase and sales of securities, other
than short term securities, were $18,178 and $6,595, respectively.
NOTE 7--PORTFOLIO SECURITIES LOANED:
As of October 31, 2005, the Fund had securities on loan with an aggregate market
value of $15,555,489. The Fund received $16,048,517 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 period ended October 31, 2005 or for the year ended June 30,
2005.
NOTE 9 --CAPITAL SHARE TRANSACTIONS
(IN 000'S):
<Table>
<Caption>
PERIOD ENDED
OCTOBER 31, 2005*
CLASS A CLASS B CLASS C
Shares sold 1,344 1,043 215
- ---------------------------------------------------------------------
Shares redeemed (1,037) (2,206) (121)
- ---------------------------------------------------------------------
Net increase (decrease) 307 (1,163) 94
- ---------------------------------------------------------------------
</Table>
<Table>
<Caption>
PERIOD ENDED
OCTOBER 31, 2005*
CLASS I CLASS R1 CLASS R2
Shares sold 15,177 -- --
- -----------------------------------------------------------------------
Shares redeemed (428) -- --
- -----------------------------------------------------------------------
Net increase 14,749 -- --
- -----------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
JUNE 30, 2005
CLASS A CLASS B** CLASS C**
Shares sold 714 439 110
- -------------------------------------------------------------------------
Shares acquired in connection with the
acquisition of MainStay Blue Chip
Growth Fund (a) 11,748 32,830 1,322
- -------------------------------------------------------------------------
12,462 33,269 1,432
- -------------------------------------------------------------------------
Shares redeemed (274) (43) (9)
- -------------------------------------------------------------------------
Net increase 12,188 33,226 1,423
- -------------------------------------------------------------------------
</Table>
<Table>
<Caption>
YEAR ENDED
JUNE 30, 2005
CLASS I** CLASS R1** CLASS R2**
Shares sold 2,845 429 429
- -----------------------------------------------------------------------------
Shares redeemed (13) (15) (15)
- -----------------------------------------------------------------------------
Net increase 2,832 414 414
- -----------------------------------------------------------------------------
</Table>
22 MainStay Large Cap Growth Fund
<Table>
<Caption>
YEAR ENDED
JUNE 30, 2004
CLASS A
Shares sold 120,700
- --------------------------------------------------------
Shares redeemed (75,339)
- --------------------------------------------------------
Net increase 45,361
- --------------------------------------------------------
</Table>
* The fund changed it fiscal year end from June 30 to October 31.
** Commenced operations on April 1, 2005.
(a) On June 29, 2005 and pursuant to shareholder approval, the assets of the
MainStay Blue Chip Growth Fund were acquired by the Fund.
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 have cooperated fully and completed responding to these
requests. As previously reported in response to those requests for information
and, as noted in the notes to the year-end 2004 financial statements of each
fund of the Trust, NYLIM had been a party to arrangements with certain
registered representatives of broker-dealers relating to the level of trading by
clients of those registered representatives in shares of certain funds of the
Trust. All such arrangements were terminated by the fourth quarter of 2003.
NYLIM and the Trustees of the Trust have reviewed the possible dilutive effects
that transactions under those arrangements and certain other levels of trading
by fund shareholders over the period from 1999 to 2003 may have had on the
funds. As a result of this review, in December 2005, NYLIM made payments
totaling $5.9 million to nine MainStay funds. No payment was made with respect
to the MainStay Large Cap Growth Fund. NYLIM has also agreed to reimburse or pay
all expenses relating to the Board of Trustees' review of this matter and has
paid substantially all of the costs associated with the other regulatory matters
described in this note.
In a separate matter, the SEC 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. There can be no assurance of the outcome of these
efforts.
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 Large Cap Growth Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2005, and the related statements of operations and changes in net assets and the
financial highlights for the four-month period ended October 31, 2005 and the
year ended June 30, 2005. 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 audits. The statement of changes in net assets for the year ended June
30, 2004, and the financial highlights for the years presented through June 30,
2004, were audited by other auditors, whose report dated August 4, 2004,
expressed an unqualified opinion thereon.
We conducted our audits 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
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, 2005, 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 audits provide 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 Large Cap Growth Fund of The MainStay Funds as of October 31, 2005, and
the results of its operations, the changes in its net assets and financial
highlights for the four-month period ended October 31, 2005 and the year ended
June 30, 2005, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 23, 2005
24 MainStay Large 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 (1) such time as less than a majority of the Trustees
holding office have been elected by shareholders, in which case the trustees
then in office will call a shareholder meeting for the election of Trustees, or
(2) his or 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.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available, without charge, upon
request, by calling 1-800-MAINSTAY (1-800-624-6782).
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
GARY E. Chairman since 2002, Chief Executive Officer, Chairman, and 58 None
WENDLANDT Chief Executive Manager, New York Life Investment
10/8/50 Officer since 2004, Management LLC (including predecessor
and Trustee since advisory organizations) and New York
2000 Life Investment Management Holdings LLC;
Executive Vice President, New York Life
Insurance Company; Executive Vice
President and Manager, NYLIFE LLC;
Chairman, McMorgan & Company LLC,
Madison Capital Funding LLC, and NYLCAP
Manager 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.
(21 portfolios); Chief Executive
Officer, Eclipse Funds (3 Portfolios)
and Eclipse Funds Inc. (15 Portfolios)
(since June 2005); 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 19 None
9/15/42 Department, Washington, DC (1998 to
2000).
-----------------------------------------------------------------------------------------------------------------------
EDWARD J. HOGAN Trustee since 1996 Rear Admiral U.S. Navy (Retired); 19 None
8/17/32 Independent Management Consultant (1997
to 2002).
-----------------------------------------------------------------------------------------------------------------------
TERRY L. LIERMAN Trustee since 1991 Community Volunteer; Chairman, 19 None
1/4/48 Smartpaper Networks Corporation
(communications); Partner, Health
Ventures LLC (2001 to 2005); Vice Chair,
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 19 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 19 Director,
NICKELSON and Lead Non- Industries, Inc. (leveraged buyout Adolor
12/9/32 Interested Trustee firm); President, PaineWebber Group Corporation;
since 2000 (1988 to 1990). Director, First
Advantage
Corporation.
-----------------------------------------------------------------------------------------------------------------------
</Table>
* A Trustee is considered to be an interested person of the Trust within
the meaning of the 1940 Act because of an 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 Five Years." All Trustees not considered to be
interested persons of the Trust are referred to as "Non-Interested
Trustees."
www.MAINSTAYfunds.com 25
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
RICHARD S. Trustee since 1994 Chairman, Somerset Group (financial 19 None
TRUTANIC advisory firm); Managing Director and
2/13/52 Advisor, The Carlyle Group (private
investment firm) (2001 to 2004); Senior
Managing Director, Groupe Arnault
(private investment firm) (1999 to
2001).
-----------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
POSITION(S) HELD WITH NUMBER OF FUNDS OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OVERSEEN BY OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
ROBERT A. Chief Legal Officer Senior Managing Director, General 64 None
ANSELMI since 2003 Counsel, and Secretary, New York Life
10/19/46 Investment Management LLC (including
predecessor advisory organizations);
General Counsel and Secretary, New York
Life Investment Management Holdings LLC;
Senior Vice President, New York Life
Insurance Company; Vice President and
Secretary, McMorgan & Company LLC;
Secretary, NYLIM Service Company LLC,
NYLCAP Manager LLC, and Madison Capital
Funding LLC; Chief Legal Officer, Eclipse
Funds, Eclipse Funds Inc., MainStay VP
Series Fund, Inc., and McMorgan Funds;
Managing Director and Senior Counsel,
Lehman Brothers Inc. (October 1998 to
December 1999); General Counsel and
Managing Director, JP Morgan Investment
Management Inc. (1986 to September 1998).
------------------------------------------------------------------------------------------------------------------------
ARPHIELA Treasurer and Director and Manager of Fund Accounting 64 None
ARIZMENDI Principal Financial and Administration, New York Life
10/26/56 and Accounting Investment Management LLC (since March
Officer since 2005 2003); Treasurer and Principal Financial
and Accounting Officer, Eclipse Funds,
Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and McMorgan Funds (since
December 2005); Assistant Treasurer, The
MainStay Funds, Eclipse Funds, Eclipse
Funds Inc., MainStay VP Series Fund,
Inc., and McMorgan Funds (1992 to
December 2005).
------------------------------------------------------------------------------------------------------------------------
CHRISTOPHER O. President since 2005 Executive Vice President, New York Life 37 None
BLUNT Investment Management LLC and New York
5/13/62 Life Investment Management Holdings LLC
(since July 2004); Manager and Executive
Vice President, NYLIM Product
Distribution, NYLIFE Distributors LLC
(since January 2005); Chairman, NYLIM
Service Company LLC (since March 2005);
Chairman and Class C Director, New York
Life Trust Company, FSB (since December
2004); Chairman, New York Life Trust
Company (since February 2005); President,
Eclipse Funds and Eclipse Funds Inc.
(since June 2005); Chairman and Chief
Executive Officer, Giving Capital, Inc.
(2001 to June 2004); Chief Marketing
Officer--Americas, Merrill Lynch
Investment Managers (1999 to 2001);
President, Mercury Funds Distributors
(1999 to 2001).
------------------------------------------------------------------------------------------------------------------------
</Table>
26 MainStay Large Cap Growth Fund
<Table>
<Caption>
POSITION(S) HELD NUMBER OF FUNDS
WITH IN FUND COMPLEX OTHER
NAME AND FUND AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
DATE OF BIRTH OF SERVICE DURING PAST FIVE YEARS OFFICER HELD BY OFFICER
------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES
SCOTT T. Vice President-- Director, New York Life Investment 58 None
HARRINGTON Administration since Management LLC (including predecessor
2/8/59 2005 advisory organizations); Vice President--
Administration, MainStay VP Series Fund,
Inc., Eclipse Funds, and Eclipse Funds
Inc. (since June 2005).
------------------------------------------------------------------------------------------------------------------------
ALISON H. Vice President-- Managing Director and Chief Compliance 58 None
MICUCCI Compliance since 2004 Officer, New York Life Investment
12/16/65 Management LLC (June 2003 to present);
Chief Compliance Officer, New York Life
Investment Management Holdings LLC (June
2003 to present); Managing Director,
Compliance, NYLIFE Distributors LLC; Vice
President--Compliance, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.; 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 since 2004 Managing Director and Associate General 58 None
MORRISON Counsel, New York Life Investment
3/26/56 Management LLC (since June 2004);
Managing Director and Secretary, NYLIFE
Distributors LLC; Secretary, Eclipse
Funds, Eclipse Funds Inc., and MainStay
VP Series Fund, Inc.; Chief Legal
Officer--Mutual Funds and Vice President
and Corporate Counsel, The Prudential
Insurance Company of America (2000 to
June 2004).
------------------------------------------------------------------------------------------------------------------------
RICHARD W. Vice President--Tax Vice President, New York Life Insurance 58 None
ZUCCARO since 1991 Company; Vice President, New York Life
12/12/49 Insurance and Annuity Corporation, New
York Life Trust Company, FSB, NYLIFE
Insurance Company of Arizona, NYLIFE LLC,
and NYLIFE Securities Inc.; Vice
President, Tax, NYLIFE Distributors LLC;
Tax Vice President, New York Life
International, LLC, New York Life Trust
Company, and NYLIM Service Company LLC;
Vice President--Tax, Eclipse Funds,
Eclipse Funds Inc., and MainStay VP
Series Fund, Inc.
------------------------------------------------------------------------------------------------------------------------
</Table>
www.MAINSTAYfunds.com 27
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AND SUBADVISORY AGREEMENTS
In connection with the renewal of the Fund's Management Agreement and
Subadvisory Agreement, the Board of Trustees requested and received from the
Manager and Subadvisor, and reviewed, a wide variety of information. The
Trustees also requested and received information from outside data providers and
information and analysis from a third party consultant. The Trustees considered
various industry and regulatory trends in their deliberations. In considering
approval of these Agreements, and in evaluating the fairness of the compensation
to be paid by the Fund, the Trustees met a number of times as a full Board and
in executive sessions of only the Non-Interested Trustees to discuss the Board's
consideration of the approval of the Agreements, and took into account a number
of factors, as discussed below.
The Trustees considered the nature, extent and quality of the services to be
provided by the Manager and the Subadvisor. The Trustees reviewed the services
that the Manager has provided historically to the Fund, and also generally to
other series of the Trust, and the services provided over a shorter term by the
Subadvisor to the Fund. The Manager's services to the Trust have included
investment management services, including the selection and supervision of
portfolio managers or subadvisers, and administrative services, including
interacting with other service providers to the Trust, maintaining certain Fund
records, providing office space, performing clerical and bookkeeping services
for the Fund, preparing Fund filings, and other administrative services. The
Subadvisor's services have included, among other things, providing the day-to-
day management of the portfolio, providing reports to the Manager, and reviewing
certain aspects of Fund filings. The Trustees considered, among other things,
the Manager's and Subadvisor's management, personnel, resources, operations and
portfolio management capabilities. In considering the Manager's and Subadvisor's
practices relating to best execution of portfolio trades, the Board reviewed
reports of the Fund's Brokerage Committee including with respect to analysis
prepared by Plexus Group. The Trustees noted that the Fund's assets represented
a significant portion of the Subadvisor's assets under management. The Trustees
considered the Manager's supervision of the Fund's service providers and its
attention to the compliance program of the Trust, the Manager, the Subadvisor
and certain other service providers, as well as the Subadvisor's attention to
its compliance program. The Trustees noted the generally favorable conclusions
of financial services research firm DALBAR Inc. of the services, investor
complaint levels, and communications that NYLIM Service Company LLC ("NYLIM
Service"), an affiliate of the Manager, has provided to Trust shareholders. A
majority of the Trustees, including a majority of the Non-Interested Trustees,
concluded that, overall, the nature, extent and quality of the services expected
to be provided by the Manager and Subadvisor were such that, in the context of
the Board's overall review of various factors, the Agreements should be renewed.
The Trustees reviewed the investment performance of the Fund over various time
periods and compared that performance to that of multiple groups of funds the
Trustees concluded were comparable to the Fund. In conducting this review, the
Trustees relied in part on information provided by outside data providers and
were assisted in their analysis by a third party consultant. The Board's
decision took account of, among other things, the Fund's favorable recent
performance, and noted the Subadvisor's favorable performance as manager of FMI
Winslow Growth Fund before it was reorganized with and into the Fund.
The Trustees considered the cost to the Manager of the Agreements and the
profitability to the Manager and its affiliates of the relationship with the
Fund over various time periods; in assessing the cost the Trustees used the
services of a third party consultant, which, among other things, reviewed
allocations of various costs made by the Manager among the Fund and other
clients of the Manager. The information reviewed by the Board included
information about the general costs to the Manager and its affiliates of
subsidizing expenses for some smaller series of the Trust pending the growth of
their assets. The Trustees noted the Manager's agreement to limit the Fund's net
expenses to a certain level with respect to the Fund, with the expectation that
the Manager intended, over time, to implement measures designed to reduce the
Trust's transfer agency fees. The Trustees considered certain benefits expected
for, and risks borne by, the Manager and its affiliates, including benefits from
soft dollar arrangements. The Trustees considered the services provided to the
Fund by affiliates of the Manager, NYLIFE Distributors and NYLIM Service, under
other agreements, and the benefits to the Manager and its affiliates from those
relationships. The information provided to the Trustees indicated that the
profitability to the Manager and its affiliates arising directly from those
other agreements was not excessive. The Trustees acknowledged certain benefits
to the reputation of the Manager and its affiliates, as well to that of the
Trust, from their association with each other.
The Trustees discussed the extent to which economies of scale were projected by
the Manager to be realized as the Fund grows, or as the Trust grows overall,
noting in particular the Manager's plans for marketing and distributing shares
of various series of the Trust. They noted the Manager's willingness to
implement contractual breakpoints, and that the contractual breakpoints in place
for the management fee were intended to provide that the Fund's shareholders
would share in benefits from economies of scale arising from the growth of Fund
assets. The Trustees noted that the Fund's contractual management fee
28 MainStay Large Cap Growth Fund
had been reduced in accordance with the terms of the breakpoint schedule
applicable to the Fund. Acknowledging the difficulty of forecasting economies of
scale, the Trustees generally expressed an intention to monitor the Manager's
profitability and consider the application of fee breakpoints or other
appropriate measures as the Board may determine from time to time. The Trustees
reviewed historical information about changes in the Fund's expense and asset
levels over time, as well as information about certain Fund expenses that would
remain fixed even as Fund assets increase and, therefore, provide the Fund with
benefits from economies of scale as the Fund grows. The Trustees noted that, to
the extent the Fund's gross expenses currently are higher than its net expenses,
economies of scale achieved through an increase in the Fund's assets might not
directly benefit the Fund through lower net expenses. The Trustees considered
various information about transfer agency expenses, including information
showing that transfer agency fees of a significant number of series of the Trust
(although not every such series or with respect to every share class of each
series) tended to be high, when aggregated and expressed as a percentage of the
assets of certain series, compared to the mutual fund industry average according
to certain studies reviewed by the Board and, therefore, adversely affected
gross expense ratios. The Board received information about potential effects on
the Manager were it to subsidize certain portions of the Trust's transfer agency
fees. The Trustees noted that a significant number of shareholders of the
Trust's series had small amounts invested in the series, and have considered
measures intended to increase average shareholder account size and/or otherwise
reduce the Trust's transfer agency fees and expenses, including steps that the
Manager has taken to encourage shareholders to consolidate or close small
accounts.
The Trustees considered services provided by other advisers to funds having
investment objectives and policies similar to those of the Fund. The Board
received, among other things, comparative data with respect to various types of
fund expenses that third party data providers compiled using objective
methodologies and provided for use by the Trustees. The Trustees received
information regarding the combined advisory and administrative fees paid by
other clients of the Manager, including other registered funds and separate
institutional accounts, that had investment objectives similar to that of the
Fund. The Trustees took into account information provided by the Manager about
the relative scope of services provided to the Fund and to those accounts or
explanations about the accounts' histories. In considering the extent of the
fees received by the Manager for providing services to the Fund, the Trustees
evaluated factors such as the fees and expenses borne by other registered funds
in the market pursuing strategies generally similar to those followed by the
Fund. The Trustees considered the Fund's current and proposed contractual and
net management fees, its anticipated gross and net expense ratios, and various
components of that expense ratio, in comparison to other funds in comparison
groupings prepared by outside data providers using objective methodologies.
The Trustees acknowledged the historical relationship between the Manager and
the Trust and the likely difficulties in implementing an alternative to the
investment management arrangement between them. The Trustees also took account
of the results of their various discussions with the Manager concerning the
levels of the Fund's contractual and net management fees, the Fund's anticipated
net expense level, and the level of the subadvisory fee.
The materials and other information described above were considered by the
Trustees throughout the past year during in-person and telephonic meetings with
personnel of the Manager, fund counsel, third party consultants, and independent
counsel, and also were considered by the Non-Interested Trustees meeting
separately and with independent counsel. The Trustees considered these factors
in light of the recent reorganization of FMI Winslow Growth Fund, an
unaffiliated fund, with and into the Fund and the separate reorganization of the
Fund with the Blue Chip Growth Fund, another series of the Trust. The Trustees
did not identify any particular information or any single factor that was
controlling, or the particular weight any Trustee placed on any one factor for
purposes of determining whether to vote in approval of the Agreements. The
summary set out above describes the most important factors, but not all of the
matters considered by the Trustees in coming to their decision regarding the
Agreements. On the basis of their review, a majority of the Trustees and a
majority of the Non-Interested Trustees concluded that each factor they
considered, in the context of all of the other factors they considered, favored
renewal of the Agreements, and it was the judgment of a majority of the Trustees
and a majority of the Non-Interested Trustees that approval of these Agreements
was in the best interests of the Fund and its shareholders.
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;
or (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 the
12-month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 1-800-MAINSTAY
(1-800-624-6782), (ii) by visiting the Fund's website at www.mainstayfunds.com,
or (iii) 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 or 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.
30 MainStay Large Cap Growth 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 Capital Appreciation Fund
MainStay Common Stock Fund
MainStay Equity Index Fund(1)
MainStay Growth Equity Fund(2)
MainStay Large Cap Growth Fund
MainStay Large Cap Opportunity Fund(3)
MainStay MAP Fund
MainStay Mid Cap Growth Fund
MainStay Mid Cap Opportunity Fund
MainStay Mid Cap 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 Total Return Fund
INTERNATIONAL FUNDS
MainStay Global High Income Fund
MainStay International Equity Fund
ASSET ALLOCATION FUNDS
MainStay Conservative Allocation Fund
MainStay Growth Allocation Fund
MainStay Moderate Allocation Fund
MainStay Moderate Growth Allocation Fund
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
Parsippany, New Jersey
SUBADVISORS
MACKAY SHIELDS LLC(4)
New York, New York
JENNISON ASSOCIATES LLC
New York, New York
MARKSTON INTERNATIONAL LLC
White Plains, New York
WINSLOW CAPITAL MANAGEMENT, INC.
Minneapolis, Minnesota
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 1-800-MAINSTAY
(1-800-624-6782) FOR A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE
INVESTMENT OBJECTIVES, RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT
CAREFULLY BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION
ABOUT THE INVESTMENT COMPANY. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE
INVESTING.
1. Closed to new purchases as of January 1, 2002.
2. Commenced operations as of November 4, 2005. Offered only to residents of
Connecticut, New Jersey, and New York.
3. Offered only to residents of Connecticut, New Jersey, and New York.
4. An affiliate of New York Life Investment Management LLC.
www.MAINSTAYfunds.com 31
(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) 2005 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A08074 MS475-05 (RECYCLE LOGO) MSLG11-12/05
31
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
officer ("PEO") and principal financial officer ("PFO"). The Code was amended
during the period covered by the report to designate new individuals as the PEO
and PFO; a copy of the amended Code is filed herewith. 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 and Compliance 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 and
Compliance Committee Charter, the Audit and Compliance 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, 2005 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 $816,000. The aggregate fees billed for the fiscal year
ended October 31, 2004 for professional services rendered by KPMG for the audit
of the Registrant's annual financial statements or services that were normally
provided by the KPMG in connection with statutory and regulatory filings or
engagements for that fiscal year were $820,000.
(b) Audit Related Fees
The aggregate fees billed 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: (i)
$15,000 for the fiscal year ended October 31, 2005, and (ii) $7,500 for the
fiscal year ended October 31, 2004. The aggregate fees billed for assurance
and related services by the predecessor auditor 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: (i) $31,000 for the fiscal
year ended October 31, 2005, and (ii) $8,000 for the fiscal year ended October
31, 2004. These audit-related services include review of financial highlights
for Registrant's registration statements and issuance of consents to use of the
auditor's reports.
2
(c) Tax Fees
The aggregate fees billed for professional services rendered by KPMG for tax
compliance, tax advice, and tax planning were: (i) $95,700, during the fiscal
year ended October 31, 2005, and (ii) $116,000, during the fiscal year ended
October 31, 2004. 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 for products and services provided by KPMG, other than
the services reported in paragraphs (a) through (c) of this Item were: (i) $0,
during the fiscal year ended October 31, 2005, and (ii) $0, during the fiscal
year ended October 31, 2004.
(e) Pre-Approval Policies and Procedures
(1) The Registrant's Audit and Compliance 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 and Compliance 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 and Compliance 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 and
Compliance 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 and
Compliance Committee if it is to be provided by the independent accountant.
The Procedures also permit the Audit and Compliance 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
and Compliance Committee, subject to the ratification by the full Audit and
Compliance Committee no later than its next scheduled meeting. To date, the
Audit and Compliance Committee has not delegated such authority.
3
(2) With respect to the services described in paragraphs (b) through (d) of
this Item 4, no amount was approved by the Audit and Compliance 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 KPMG for services rendered to the Registrant
for the fiscal years ended October 31, 2005 and October 31, 2004 are disclosed
in 4(b)-(d) above.
The aggregate non-audit fees billed by KPMG 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: (i) $15,000, for the year ended October 31, 2005, and (ii) $0,
for the fiscal year ended October 31, 2004.
(h) The Registrant's Audit and Compliance Committee has determined that the
non-audit services rendered by KPMG for the fiscal year ended October 31, 2005
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 and Compliance 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 during the
relevant time period.
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. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
4
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Since the Registrant's last response to this Item, there have been no material
changes to the procedures by which shareholders may recommend nominees to the
Registrant's Board of Trustees.
ITEM 11. 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 12. 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 2002.
5
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/ Christopher O. Blunt
---------------------------------
CHRISTOPHER O. BLUNT
President
Date: January 6, 2006
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/ Christopher O. Blunt
---------------------------------
CHRISTOPHER O. BLUNT
President
Date: January 6, 2006
By: /s/ Arphiela Arizmendi
---------------------------------
ARPHIELA ARIZMENDI
Treasurer and Principal Financial and Accounting Officer
Date: January 6, 2006
6
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.
7